20938

DEFAULT SURCHARGE – reasonable excuse – unaware that extension of time for electronic payments did not apply to payment on account businesses – IT failures – did the Appellant satisfy burden of proof – yes in case of IT failure, no otherwise –- VATA 1994 s 59(7)

LONDON TRIBUNAL CENTRE

	LVG LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	Nicholas Aleksander (Chairman)
					Mr J G Robinson

Sitting in public in London on 14 January 2009

David Downing, Managing Director of the Appellant for the Appellant

Jonathan Holl, Advocate, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

The appeal
1.	This appeal relates to a default surcharge levied for the period 06/07.  However, in the course of the hearing it became apparent that the Appellant (“LVG”) believed that it had not received the Default Surcharge Liability Notice issued in respect of the period 06/05, an Surcharge Liability Notice Extension for the period 09/05 and had a reasonable excuse for the default surcharge levied for the period 03/07.  We agreed to include these periods within the scope of the appeal and consented to these appeals being taken out of time. 
2.	LVG was represented by Mr Downing, its managing director.  Customs were represented by Mr Holl of the Solicitor’s Office of HM Revenue and Customs.  A bundle of documents was produced to the Tribunal by Customs.  In addition we heard evidence from Mandy Redford, Finance Director of LVG and from Anthony Wilders, Head of Finance at LVG.
The legislation
3.	Section 59 of the Value Added Tax Act 1994 provides that where a value added tax return, or the tax due, is not received by Customs by the due date the taxable person is in default. A surcharge is imposed for the second and subsequent defaults. The amount of the surcharge is a percentage of the tax paid late. However, section 59(7) provides that a taxable person is not liable to a surcharge if he satisfies the Tribunal either (a) that the return and tax was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by Customs within the appropriate time limit or (b) that there was a reasonable excuse for the delay.
The facts
4.	LVG became a large trader within the scope of the payment on accounts regime during the course of 2007.  Up until that time, it had filed VAT returns quarterly, and paid the VAT due via BACS (taking the benefit of the seven day extension allowed for electronic payments).  Latterly the company had also filed its VAT returns electronically and paid the VAT due by direct debit, giving it a further extension of a few days for payments to be made.
5.	The first period for which it was liable to make monthly payments on account was 06/07.  It made instalment payments via BACS for the months of April 2007 and May 2007.  On 7 August 2007, Mr Wilders attempted to file the VAT return for the period 06/07 online, and make the balancing payment by direct debit.  However the online filing system does not apply to payment on account businesses, did not recognise that payments on account had been made, and sought to collect by direct debit the whole of the VAT due for the quarter. Mr Wilders telephoned the VAT enquiry line and was advised to cancel the direct debit payment, and arrange to send the balancing amount of VAT due via BACS.  The balancing payment was only received by Customs on 10 August and a default surcharge was levied.  This surcharge is the original subject of this appeal.
6.	Mr Downing contends that LVG has a reasonable excuse for this default for the following reasons.  First, LVG was unaware that it was within the default surcharge regime, as it had never received any notification to that effect.  Secondly, it had never received a schedule of payments and due dates from Customs in respect of the payments on account regime.  Thirdly, the company had never been notified that companies within the payments on account regime are not entitled to the extension of time normally allowed for electronic payments.  Because of the centrality of the receipt of the Surcharge Liability Notice to the default surcharge regime, we agreed to extend the appeal to the defaults occurring since 06/05 (other than 06/06, which LVG agreed was subject to a surcharge).
7.	Ms Radford asserted in her evidence that LVG had never received the Surcharge Liability Notice dated 12 August 2005 nor the Surcharge Liability Notice Extension dated 11 November 2005.  She also stated that LVG had not received the Notice of Direction letter dated 31 January 2007 notifying LVG that it was within the payments on account regime nor schedule of payments on account enclosed.    Ms Radford told us that she had reviewed all of LVG’s VAT files, and could find no record of these documents having been received.  However we find that these documents had been received by LVG and been mislaid by them in the light of the following.  These letters and notices were all addressed to the managing director of LVG and gave the company’s correct address.  At the times these letters and notices were sent to LVG, Ms Radford confirmed that other correspondence from Customs (such as VAT returns) had been received.  Ms Radford confirmed in her evidence that she recalled having received some correspondence from Customs about the payment on account scheme,  even though that letter could not now be found in LVGs files.  The fact that LVG actually started making payments on account from May 2007 (although it calculated the payments itself) strongly suggests that LVG must have received notification that payments on account were to commence with the 06/07 return period. The only relevant correspondence notifying the company that it was subject to payments on account and giving 06/07 as the commencement period would have been the Notice of Direction letter of 31 January and the schedule of payments letter enclosed with it. Although the correspondence relating to the default surcharge and the payment on account scheme was addressed to LVG’s managing director, Ms Radford told us that it would have been dealt with by the Head of Finance, and Ms Radford acknowledged that the papers could have been mislaid when transferred in the internal post between the two.  Finally Ms Radford acknowledged that the Surcharge Liability Notice and the Surcharge Liability Notice Extension (as they did not give rise to any immediate liability to tax) might not have been retained.  Given all this, on the balance of probabilities we find that the Surcharge Liability Notice, the Surcharge Liability Notice Extension, the Notice of Direction letter and the schedule of payments had all been received by LVG and were subsequently mislaid.
8.	The Notice of Direction letter dated 31 January 2007 clearly states on its face that businesses in the payment on account scheme are not entitled to any extension of time for paying or filing electronically.  Accordingly, we consider that LVG had no reasonable excuse for its failure to file the VAT return for period 06/07 and pay the balancing amount of tax due by the due date.  However Mr Holl confirmed that the surcharge for the period would be calculated by reference to the amount of the balancing payment only, as LVG had made the correct instalment payments for the period.
9.	Finally we turn to the default for the period 03/07.  Mr Wilders told us that at around 4pm on 7 May 2007 he attempted to file the VAT return for the period electronically via the internet, and arrange for the VAT due to be collected by direct debit.  However he was unable to log onto Customs web site.  He contacted LVG’s IT department and they ascertained that there was a fault with the company’s internet connection.  Mr Wilders stayed late at the office, but the connection had not been repaired by the time he had to leave.  Mr Wilders came into the office at 7:30am the following morning, by which time the connection had been repaired, and filed the return online at that time, and payment of the VAT was made by direct debit.
10.	Mr Holl did not dispute that there had been a failure with the internet connection, but submitted that the company should not have left it until so late in the day to file its return.  Further, as soon as the failure had come to light, Mr Wilders should have telephoned the Customs enquiry line to seek advice and perhaps give the relevant amounts due by phone so that the direct debits could be raised promptly.  Mr Wilders said that the internet connection had previously been very reliable and had not failed before.  
11.	Given the previous reliability of LVG’s internet connection, we do not think that Mr Wilders can be criticised for filing VAT returns electronically at 4pm on the due date.  As soon as he discovered the fault, he arranged for it to be repaired, and filed the return at earliest opportunity.  We do not consider that LVG had any duty to call the VAT enquiry line when they discovered the failure – and we had no evidence that the enquiry line would be able to deal with the filing of the VAT return over the telephone in any event.  We therefore consider that LVG had a reasonable excuse for the late filing and payment of VAT for the period 03/07.  We note the fact that no surcharge is due for the period 03/07 will affect the percentage rate of surcharge applied to the balancing payment for the period 06/07.
Our decision
12.	Our decision on the issues for determination in the appeal is that 
(1)	LVG had a reasonable excuse for the late submission of the VAT return and for the late payment of the VAT due for the period 03/07, but
(2)	 LVG did not have a reasonable excuse either for the late submission of the VAT return or for the late payment of the balancing payment of VAT for the period 06/07, but that the calculation of the surcharge is to be made by reference solely to the amount of the balancing payment due on 31 July 2007.
13.	In the event that the parties are unable to agree the calculation of the amount of the surcharge, we give them liberty to apply to this Tribunal for determination of the amount.
14.	Mr Holl made no application for costs and we make no order.

Nicholas Aleksander

CHAIRMAN
RELEASE DATE: 27 January 2009

LON/07/1928