20814

DEFAULT SURCHARGE – Reasonable excuse – Taxable person’s understanding that it was in credit with HMRC at the due date – Appeal allowed

DEFAULT SURCHARGE – Surcharge liability notice – Whether served on taxable person – Yes 

LONDON TRIBUNAL CENTRE

	MELLER GROUP LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
						SUNIL DAS LLM, ACIS

Sitting in public in London on 17 September 2008

John McGrath, finance director, for the Appellant

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2008

DECISION

 1.	Meller Group Ltd (“Meller”) appeals against a 5% surcharge of £40,907 for the 03/07 period.

2.	Meller were represented by John McGrath, finance director, and the Commissioners by Pauline Crinnion.  Evidence was given by Sally Flere who, at the relevant time, had been finance controller of the Meller Group with responsibility for VAT compliance.  

3.	Meller has been on the payments on account regime.  The payments on account notification of 31 January 2006 required Meller to pay, in relation to the 03/07 period, £181,671 by 28 February 2007, the same amount by 30 March 2007 and the balance due by the end of April 2007.  The first payment on account was received late and is subject to a surcharge.  The second payment on account was received one day late and the surcharge was lifted in response to a reasonable excuse.  The balance due was paid one day late and is subject to the surcharge.

4.	Meller had incurred a 2% default surcharge, which is not under appeal, in respect of the balancing payment for the 12/06 period which had been paid late on 12 February 2008.  HMRC produced a Notice extending the surcharge liability period; this is dated 6 March 2007 but its receipt is denied by Meller.  

5.	The first payment on account for the 03/07 period (of £181,671) was due on 28 February 2007.  Meller paid nothing at the time.  Meller cleared this liability         following receipt of a default surcharge assessment showing a default for that first payment on account.  Meller say that there should have been no payment on account on either of two grounds.  First, they say, they had been in credit to HMRC for some £200,000 at the end of February 2007; and even if they had been mistaken about that, it was reasonable for them (so their second argument goes) to have assumed that they had been in credit for that amount.  Meller’s third argument, dealt with later, is that they had not received any in-time surcharge liability notice covering the 03/07 period.

6.	The “accounting interrogation print” provided by HMRC is hard to decipher.  It does however indicate that at the end of February 2007 Meller were not then in credit for £200,000.  The print is badly copied and was not supported by any evidence as to its proper interpretation.  Our impression is that Meller were in credit for an amount in the latter part of February, but not for as much as £181,671, being the payment on account due on 28 February.  Sally Flere’s evidence is that she had phoned the National Advice Service earlier in February.  She had pointed out that Meller had been in credit by over £200,000 and had received advice that this would be taken into account with no need to make the payment on account in February.  The £200,000 followed in part from a voluntary declaration made in mid-February showing some £155,000 as overpaid tax.  An assessment of 15 February 2007 had confirmed this.

7.	Mrs Crinnion representing HMRC said that there was no record of that telephone call although nowadays every phone call is noted.  

8.	We find that Meller believed that it was in credit at the end of February 2007 for an amount that covered the £181,671 payment on account due on 28 February.  In the first place we accept Sally Flere’s evidence that she had received the advice from the Advice Line that in the circumstances it would not be necessary to make the payment on account.  Second, Meller proceeded on the basis that all was in order.  They did not pay the February payment on account until receipt of the default surcharge assessment in June.  If Meller had thought that it had missed the 28 February payment date it would, we think, have reacted well before then.  Moreover, when the 28 February default was drawn to their attention in June 2007, HMRC’s notes show that Sally Flere had on 13 June, being the earliest possible occasion, informed HMRC over the telephone of the earlier advice from the Advice Line. 

9.	For those reasons we have concluded that, whatever the actual state of indebtedness between Meller and HMRC at the end of February 2007 (which is not clear), Meller had reasonable grounds for believing that it was then in credit for an amount to cover the £181.671 due on 28 February as the payment on account.  We think therefore that Meller have shown a reasonable excuse and that the default surcharge should be reduced accordingly.

10.	The balancing payment, due at the end of April 2007, was made one day late.  Meller have not argued that a reasonable excuse applies here.  They say that they were not then in the default surcharge regime because they had not received any surcharge liability notice that operated to extend any earlier liability period such that cover the 03/07 period.  We now turn to that point. 

11.	VAT Act 1994 section 59(2) makes it a condition for the imposition of a default surcharge on a taxable person that HMRC shall have served on that taxable person a surcharge liability notice “specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last date of the period [in respect of which the default has been made, i.e. 31 March 2007 in this case] and beginning … on the date of the notice”.  

12.	Here the default we are concerned with is Meller’s failure to pay its balance in amount due on the last day of April 2007.

13.	The papers put in evidence by HMRC show the surcharge liability notice issued on 22 August 2006 which states:

“PLEASE NOTE therefore that you may be liable to a surcharge if you are in default in respect of the prescribed accounting period ending within the surcharge period which runs from the date of this notice until 30 June 2007.”

An extension notice was issued on 6 March 2007 extending the default period to 31 December 2007; that related to Meller’s default for the 12/06 period.  The return forms sent to Meller all contained warnings of default surcharges if payment is received late.

14.	Sally Flere’s evidence was that Meller had not received the 22 August 2006 surcharge liability notice; it was not, she said, on Meller’s file.  We note however that she had started in her position as financial controller in October 2006.  Her predecessor in that position had then left Meller.  Earlier VAT correspondence had, we note, been addressed to her predecessor though the alleged surcharge liability notice had been addressed to Meller itself.  We recognise that proving a negative is difficult.  But all we have to go on is Sally Flere’s evidence and her own research against what appears to be Customs’ normal procedure which is to make due dispatch of surcharge liability notices.  Sally Flere’s predecessor might have cast light on the “missing” liability notices, but there was no evidence from him.

15.	The extension notice of 6 March 2007 was eight weeks before the due date of payment of the balance in amount.  We understand Meller’s case to have been that that notice also had not been served on them.

16.	We should mention that the non-service of surcharge liability notices and extension notices was first put forward by Meller on the day of the hearing.  HMRC has therefore had no opportunity to make its own checks.  Nonetheless we have concluded that the weight of evidence is against Meller.  The notices are both dated and formally completed by HMRC.  The surcharge liability notice sent on 22 August 2006 was, as noted, dated at a time when Sally Flere did not have responsibility for VAT compliance.  In the absence of any other evidence from Meller, we think that the notices were duly served.

17.	Meller also make the point that the default surcharge itself imposes extreme hardship on Meller  If their appeal is dismissed they will probably have to make a cut back on staff to repair the loss of cashflow.  We recognise that the default surcharge regime is tough and may have human consequences.  That is the consequence of the statute which we cannot displace.

18.	For all those reasons we have concluded that the default surcharge, to the extent that it relates to the balancing amount due at the end of April 2007, is properly payable.  We therefore allow the appeal so far as it relates to the payment on account at the end of February but dismiss the appeal so far as it relates to the balancing payment.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 3 October 2008

LON  2008/1477