20932

VALUE ADDED TAX – default surcharge – reasonable excuse –  s 59(7)(b) VATA 1994 – cause of insufficiency of funds – effect of postal strike – whether reasonable excuse for late payment of VAT – no – change in banking electronic payment arrangements resulting in late payment – whether reasonable excuse for late payment of VAT – no – appeal dismissed

LONDON TRIBUNAL CENTRE

	UCS BUILDING DIVISION LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

Tribunal:	EDWARD SADLER (Chairman)
					J N BROWN CBE FCA ATII

Sitting in public in London on 7 January 2009

The Appellant did not appear and was not represented

Mr J Holl, advocate, from the office of the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

Appeal heard in the absence of the Appellant under Rule 26 (2) of the Value Added Tax Tribunals Rules 1986

© CROWN COPYRIGHT 2009

DECISION

Introduction and preliminary matters
1.	This is an appeal by UCS Building Division Limited (“the Appellant”) against two default surcharges imposed by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) under the default surcharge regime in relation to the late payment of VAT.  The Appellant, which carries on business in the building and construction industry, has received notice from the Commissioners of a liability to a surcharge (at the rate of 10 per cent) in the sum of £1,065.95 in respect of its VAT period 08/07 and (at the rate of 15 per cent) in the sum of £7,851.60 in respect of its VAT period 11/07.
2.	When the appeal was called for hearing the Appellant did not appear nor was it represented.  The court clerk telephoned the Appellant’s office, and the person there responsible for the matter said that she had received notice that the hearing was to take place, and had intended to represent the Appellant, but had forgotten about it.  She asked that the hearing should proceed in her absence.  Mr Holl, for the Commissioners, requested that we should hear the appeal under rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended) (“the VAT Tribunals Rules”), which, in a case such as the present, gives the tribunal the power to proceed to consider the appeal in the absence of the Appellant.  
3.	We decided to hear the appeal in the absence of the Appellant under rule 26(2) of the VAT Tribunals Rules, taking the Appellant’s case to be as set out in its Notice of Appeal and as appeared from the extensive correspondence between the Appellant and the Commissioners.  In that correspondence the Appellant had had full opportunity to set out the facts and the grounds for its appeal against the default surcharge assessments in question.
4.	The Appellant has the right, under rule 26(3) of the VAT Tribunals Rules, to apply to the tribunal to set aside our decision, provided such application is served at the London tribunal centre within 14 days after the date when our decision is released.
5.	The Appellant’s case, is summary, is that it had a reasonable excuse for the late payments of VAT in both periods where a default surcharge has been assessed.  In relation to the period 08/07 (where £45,000 of the total VAT liability of £55,659.43 was paid in due time), the Appellant claims that its business (and in particular, the receipt of payments of invoices it had issued) was affected by a postal strike so that it suffered cashflow problems such that it was unable to pay the balance of £10,659.43.  In relation to the period 11/07, the Appellant claims that a change in the Appellant’s bank’s facility for payment of funds electronically resulted in delay in the payment of that part of the VAT which the Appellant had intended to make on time – the Appellant accepts that it intended to pay part only of its liability, and argues that the default surcharge assessed for this period should be reduced to reflect the payment which would have been made on time but for the delay occasioned by the change in banking arrangements.
6.	For the reasons which we set out below we conclude from the evidence that the Appellant does not have a reasonable excuse for the late payment of its VAT in relation to either the period 08/07 or the period 11/07.  Accordingly the appeal is dismissed 
The evidence and the facts
7.	We had in evidence before us the Appellant’s notice of appeal dated 16 April 2008 setting out the grounds of appeal; the extensive correspondence between the Appellant and the Commissioners as to the default surcharges and the Appellant’s reasons why the relevant VAT had not been paid on the due date (including copies of letters from the Appellant’s bank); and a schedule prepared by the Commissioners showing the default surcharge “history” of the Appellant.
8.	We find the following facts from the evidence:
(1)	The Appellant is registered for VAT purposes and carries on business in the building and construction industry.
(2)	The Appellant was in default with payment of its VAT in the quarterly period 11/06, at which point the Appellant was served with a surcharge liability notice and became subject to the default surcharge regime.  By reason of late payments of VAT in subsequent VAT periods the Appellant  remained subject to the default surcharge regime up to and including the quarters 08/07 and 11/07.  
(3)	The Appellant paid VAT by electronic banking payments, and therefore, under the concession operated by the Commissioners for such payments, the due date for payment of its VAT was the seventh calendar day after the end of the month following the end of the quarterly accounting period.
(4)	In relation to the period 08/07 the Appellant was liable to pay VAT of £55,659.43 on or before 7 October 2007.  On 5 October 2007 the Appellant paid £45,000.  The balance, £10,659.43, was paid on 15 October 2007, and in relation to this late payment of the balance the Appellant was assessed to a default surcharge of £1,065.95 (that is, at the rate of 10 per cent).
(5)	Some time shortly before 7 October 2007 Mrs Melton, the employee of the Appellant responsible for its VAT matters, telephoned the VAT debt management office responsible for the Appellant to explain that a national postal strike could adversely affected the cashflow of the Appellant’s business.  The VAT office advised the Appellant to pay as much of its quarterly VAT due as it could on time, and the balance as soon as it was in a position to do so, and that the Appellant could appeal against any default surcharge which might be assessed on the late payment of the balance.
(6)	The national postal strike which affected the Appellant began on 4 October 2007.
(7)	In relation to the period 11/07 the Appellant was liable to pay VAT on £52,344.01 on or before 7 January 2008.  No part of this payment was made by the due date, and the Appellant was assessed to a default surcharge of £7,851.60 (that is, at the rate of 15 per cent).
(8)	Some weeks prior to the VAT payment due on 7 January 2008 the Appellant was advised by its bank that the bank was changing its facility available to the Appellant for electronic banking payments.  Prior to that change the bank accepted faxed CHAPS instructions from the Appellant to make its VAT payments.  The change in the facility required the Appellant to make on-line electronic banking payments by BACS, and there was a pre-sanctioned limit of £30,000 on payments made by this method.
(9)	On 7 January 2008 the Appellant attempted to make a payment of £34,000 to the Commissioners (as an instalment of the VAT due in respect of the period 11/07) by using the CHAPS arrangements no longer made available to the Appellant by the bank.  On discovering that these arrangements were no longer available, the Appellant endeavoured to make the payment by BACS, but could transfer only £30,000 by BACS because of the limit on payments, and the balance of £4,000 was paid by cheque.  Since the BACS payment (unlike a same day payment by CHAPS) took two banking days to reach the account of the Commissioners, it was not received until 9 January 2008, and the cheque for £4,000 was received on 10 January 2008.  (The balance of the 11/07 payment - £18,344.01 – was, the Appellant accepts, paid late, and the Appellant does not question a default surcharge assessed on this amount.)
Decision
9.	The provisions in the VAT legislation relating to default surcharges are found in section 59 Value Added Tax Act 1994 (“VATA 1994”) and can be summarised as follows to the extent they are relevant to this appeal.  A taxable person is regarded as being in default if he fails to made his VAT return for a VAT quarterly period by the due date for that quarter or if he makes his return by that due date, but does not pay by that due date the amount of VAT shown on the return as payable in respect of that period.  The Commissioners may then serve what is called a surcharge liability notice on the defaulting taxable person, which brings him within the default surcharge regime, so that any subsequent defaults within a specified period result in assessment to default surcharges at the prescribed percentage rates.
10.	A taxable person who is otherwise liable to a default surcharge may nevertheless escape that liability if he can establish that he has a reasonable excuse for the late payment which gave rise to the default surcharge.  This is provided for in subsection (7) of section 59 VATA 1994, which is in these terms:
“If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal, that, in the case of a default which is material to the surcharge – 
(a)	the return, or as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or
(b)	there is a reasonable excuse for the return or VAT not having been so despatched,
he shall not be liable to the surcharge….”
In the present appeal the Appellant, in relation to both the 08/07 late payment of VAT and the 11/07 late payment, claims the benefit of sub-section (7)(b) of section 59 VATA 1994.  It is clear from the language of sub-section (7) that the burden is on the Appellant to establish that it has a reasonable excuse for the late payments in question.
11.	In relation to the 08/07 late payment of VAT (but not the 11/07 late payment) the reasonable excuse provision in section 59 VATA 1994 must be applied subject to a limitation which is relevant in this appeal.  Section 71(1) VATA 1994 is in these terms:
“For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct – 
(a)	an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(b)	….”
It is well established by case law that although an insufficiency of funds to pay the VAT due cannot be a reasonable excuse for the failure to pay that VAT, the underlying cause of any insufficiency of funds may constitute a reasonable excuse.
12.	We deal first with the default surcharge assessed on the late payment of VAT in respect of the period 08/07.  The Appellant’s case, as appears from both the notice of appeal and the correspondence between the Appellant and the Commissioners, is that a national postal strike adversely affected the business of the Appellant in that it caused a delay in the receipt of payments from customers of the Appellant settling their accounts.  The question for us is whether this was an underlying cause for any insufficiency of funds to pay the Appellant’s VAT due on 7 October 2007, and if it was, whether that underlying cause is a reasonable excuse for the late payment.
13.	The postal strike began on 4 October 2007.  Between that date and 7 October the Appellant could have “lost” four days of receipts.  The Appellant did not, in its detailed correspondence on this matter with the Commissioners, indicate that this four day period resulted in the delayed payment of a large account or of a significant or disproportionately large number of accounts.  It is therefore reasonable to assume that any “loss” of receipts in this period was proportionate to the level of receipts the Appellant could expect over a four day period: since a period of four days is 4.4 per cent of a quarterly VAT period (6 per cent if week-ends are taken into account), it is reasonable to extrapolate that any “loss” of receipts suffered by the Appellant during the relevant period of the postal strike was not more than 6 per cent of its quarterly receipts.  That, in itself, is not a loss of a magnitude which reasonably excuses the Appellant from paying its VAT liability for a quarterly period which in any event ended more than a month before the postal strike took effect.
14.	Furthermore, any cheques which the Appellant would (but for the postal strike) have received would have taken several days to clear through the banking system before the funds they represented would have been available to the Appellant to make its VAT payment on 7 October 2007, and therefore it is difficult to see that the postal strike as a practical matter adversely affected the Appellant’s ability to pay the VAT due: the Appellant, had it been managing its affairs responsibly with regard to its VAT obligations, would have provided for its VAT payment from funds received before the postal strike began.
15.	We might perhaps have given more credence to the Appellant’s case were the late payment in October 2007 an isolated event, but the Appellant was late in making its VAT payments in relation to each of the three immediately preceding VAT periods.  The picture, therefore, is of a business which, for whatever reason, consistently failed to meet its VAT payment obligations throughout the year 2007: in this light the postal strike in early October 2007 is more likely a pretext for the late payment that month rather than the true reason.
16.	We need to deal with one final matter in relation to the October 2007 payment.  The Appellant spoke to the relevant Commissioners’ VAT debt management office in early October about the possible impact of a postal strike on the Appellant’s ability to pay its VAT (see paragraph 8(5) above).  We are satisfied, from the Appellant’s own record of this conversation (as set out in the Appellant’s correspondence with the Commissioners), that the Appellant was not misled or in any way prejudiced by the advice the Appellant received on that occasion: the advice was to pay as much as possible of the VAT due and to appeal, on the grounds of reasonable excuse, if a default surcharge were assessed on any part of the VAT paid late.  That seems to us to be sensible advice and a proper explanation of the procedure the Appellant should follow both to reduce the amount on which any default surcharge could be assessed, and to contest any default surcharge which might arise.  It did not amount to any confirmation that the circumstances, as explained by the Appellant, would amount to a reasonable excuse, but was merely advice that the Appellant might have grounds of reasonable excuse on which to appeal against any default surcharge assessed on it.  That conversation does not therefore influence our decision in any respect.
17.	For these reasons we do not consider that the Appellant has shown that there is reasonable excuse for its late payment of VAT in October 2007 and therefore we dismiss the Appellant’s appeal in relation to the default surcharge assessed for the period 08/07.
18.	We now deal with the default surcharge assessed on the late payment of VAT in respect of the period 11/07.  Here the Appellant’s case is not that it had an insufficiency of funds to make the payment (although even had things gone to the Appellant’s plan, it would still have paid only part of the VAT due), but that the change in its bank’s payment arrangements resulted in the late payment of £34,000 of the VAT due, and that constituted a reasonable excuse for such late payment.
19.	The facts as they were put on several occasions in correspondence by the Appellant to the Commissioners are set out in paragraph 8(8) and (9) above.  They are supported by a letter from the bank concerned to the Commissioners.  What is clear is that the Appellant knew that changes in the electronic payment arrangements available to the Appellant had been introduced by the bank some weeks before the January 2008 VAT payment was due to be made by the Appellant to the Commissioners.  What is equally clear is that the Appellant did not appreciate the implications of those changes, and in particular that the CHAPS same day payment facility was no longer available to it.  As a result the payment, instructions for which were given on 7 January 2008 (the last possible date), had to be made by BACS with the result that it did not arrive in the Commissioners’ account until 9 January 2008.  (The fact that there was a limit of £30,000 on instructions of this kind is not relevant, since had there been no such limit the full £34,000 which the Appellant instructed should be paid would still have arrived late with the Commissioners.)
20.	In his submissions to us Mr Holl argued that it is for the Appellant to be satisfied that its banking arrangements and facilities are appropriate for the transactions it wishes to conduct.  We agree with that.  In this case the Appellant was notified well in advance by its bank that there was to be a change in the electronic payment facilities available to the Appellant.  The Appellant did not produce to the Commissioners a copy of what it received to this effect from the bank (although the Commissioners asked for that evidence to see if it would help them conclude that the Appellant had a reasonable excuse).  In any event, once such a change was notified the Appellant should have satisfied itself as to what that meant for the Appellant, so that it could make any changes necessary to its own procedures to ensure that it could still remit funds to the Commissioners which they would receive by the due date.  Instead, the Appellant simply assumed that the previous arrangements, or arrangements comparable in their effect (and, in particular, a CHAPS payment facility) were in place and attempted to utilise them without allowing any leeway or protection (in terms of days’ grace) against the contingency that the new arrangements might be different or more restrictive in scope.  There was no evidence that the bank had misled the Appellant as to the nature of the changed facilities, and certainly the letter from the bank to the Commissioners does not suggest that this might have been the case.
21.	In these circumstances we do not consider that the Appellant has a reasonable excuse for the late payment of £34,000 of the VAT due for the period 11/07, and therefore in relation to the default surcharge assessed for this period also we dismiss the Appellant’s appeal.

22.	We make no order as to costs.

EDWARD SADLER

CHAIRMAN
RELEASE DATE: 21 January 2009

LON/2008/0943