20859

VAT – DEFAULT SURCHARGE – Marital difficulties reason for the late returns – reasonable excuse for the first quarter but not the following quarter – a prudent business person exercising reasonable foresight and due diligence would have taken steps to ensure that the return was submitted on time for the following quarter – Appeal allowed in part.

MANCHESTER TRIBUNAL CENTRE

	THE KINGS ARMS   	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ELIZABETH POLLARD            (Member)	  

Sitting in public in North Shields on 4 November 2008

Martin White partner appeared for the Appellant

Bernard Hayley of the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against a surcharge assessment dated 27 June 2008 in the sum of £822.31 imposed for the period ending 30 April 2008.
2.	The Respondents consented to the notice of appeal being amended to include the surcharge assessment dated 14 March 2008 for the period ending 31 January 2008.
3.	Mr White gave evidence for the Appellant. A bundle of documents was supplied to the Tribunal.
The Facts Found
4.	Mr and Mrs White traded as a partnership running The Kings Arms as a public house under a tenancy and franchise agreement with Scottish and Newcastle Breweries. 
5.	Mr and Mrs White commenced the business in January 2007 selling alcohol and bar meals. They achieved a turnover of £350,000 per annum and employed 15 members of staff part-time.
6.	Unfortunately Mr and Mrs White experienced marital difficulties. They decided to purchase a house to set up home away from the public house which was completed on 29 February 2008. Further they employed a manager to run the business. Sadly this did not work, and as a consequence the business encountered cash flow difficulties by taking on additional staff. 
7.	The Respondents accepted that the marital difficulties were the principal reason for the lateness with the return for the quarter ending 31 January 2008. Further the Respondents conceded that the marital difficulties constituted a reasonable excuse for the default leading to the surcharge assessment dated 14 March 2008. The penalty for that default was five per cent of the VAT due which was less than £400 with the result that no penalty was imposed and the surcharge liability notice was extended.
8.	Mr White explained that the continuation of the marital difficulties was the main cause of the late return for the quarter ending 30 April 2008. The Respondents received the return and payment for that quarter on the 13 June 2008 which was 13 days after the due date of 31 May 2008. Mr White also stated that the accountants for the brewery did not send back the completed VAT return for the business until 28 May 2008 which left him no time to submit the VAT return by the said date. Mr White, however, accepted that he gave the accountants a batch of weekly takings, rather than sending the takings at the end of each week. Further he acknowledged that he should have acted more promptly in submitting the return once it was received from the accountants.
9.	Mr and Mrs White separated in August 2008 and are living apart for a trial period. They surrendered the tenancy of the public house on 6 October 2008, amassing debts of around £8,000.
Reasons for Our Decision
10.	Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The Appellant failed to pay the VAT owing by the due date for the VAT periods ending 31 January 2008 and 30 April 2008 and was liable to pay a surcharge of 5 and 10 per cent of the tax due respectively for the VAT periods in question.
11.	The Appellant can avoid the default surcharge if it satisfies the Tribunal on a balance of probabilities that it has a reasonable excuse for not furnishing the VAT payment on time. The default surcharge regime, however, is a blunt instrument which only takes limited account of the blameworthiness of the trader. If the trader cannot establish a reasonable excuse, the legislation takes no account of the difference between the trader who has made a genuine effort to comply albeit without success and the trader who has made very little effort and it takes no account whatever of the extent of lateness. Either the trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability. 
12.	Reasonable excuse is strictly construed by the legislation. Insufficiency of funds and reliance on the default of others cannot in law constitute a reasonable excuse. An honest mistake is insufficient by itself to form a reasonable excuse. In order to establish a reasonable excuse the Appellant has to show that it exercised reasonable foresight and due diligence
13.	Lord Donaldson of Lymington MR in  Customs and Excise Commissioners v J B Steptoe  [1992] STC 757 explained the nature of a reasonable excuse at page 775 when he said
 “ …. if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds”.
14.	We find that the continuing marital difficulties did not constitute a reasonable excuse for the late return for the quarter ending 30 April 2008. This was the reason for the previous quarter’s default, and a prudent business person exercising reasonable foresight and due diligence would have taken steps to ensure that the return was made on time. The Appellant took no such steps. Further we consider that the accountants’ delay in  sending back  the completed VAT return until 28 May 2008 did not amount to a reasonable excuse because the Appellant was partly responsible for the delay and did not act promptly when  it was received. In any event the Appellant is prevented from relying on the default of others as a reasonable excuse by the provisions of section 71(1) (b) of the VAT Act 1994. 
Decision
15.	The Respondents conceded that the Appellant had a reasonable excuse for the surcharge assessment dated 14 March 2008. We, therefore, allow the Appeal by consent in respect of that assessment.
16.	We find that there is no reasonable excuse in respect of the surcharge assessment dated 27 June 2008. We, therefore, dismiss the Appeal in respect of that assessment. However, the effect of allowing the Appeal for the previous quarter means that the percentage penalty for the quarter ending 30 April 2008 is five per cent which reduces the surcharge from £822.31 to £411.15.
17.	Neither party applied for costs. We, therefore, make no order.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 7 November 2008

MAN/2008/1052