20971                                             

Default Surcharge – Reasonable excuse – due date extended for bank electronic payments – late payment due to a non-functioning of electronic equipment at source – whether Appellant should have taken other steps to ensure that payment was made on time – yes – appeal dismissed – VAT Act 1994, sections 59(7)b and 71(1)(b)

LONDON TRIBUNAL CENTRE

DATAPOINT GLOBAL SERVICES LIMITED
(Formerly Touchbase Communications Limited)	Appellant

and
		
THE COMMISSIONERS FOR HER MAJESTY’S  REVENUE AND CUSTOMS	Respondents	

Tribunal:  Rodney P Huggins (Chairman) 
                                                       Roberta Johnson

Sitting in public in London on 20 August and 12 December 2008 and 16 February 2009

Barrie Atkin, counsel, instructed by Finerty Brice, chartered accountants for the Appellant

Robert Wastall, counsel, instructed by the Solicitor of H M Revenue and Customs, for the Respondents

 CROWN COPYRIGHT 2009

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	DECISION

The appeal

1.1 Datapoint Global Services Limited (formerly Touchbase Communications Limited)  (herein called “the Appellant”) appeals against a default surcharge penalty of £32,365 which was imposed because the value added tax due for the accounting period ending 31 December 2006 which should have been paid by 7 February 2007 was not received until a day later.

1.2  In this decision, reference to the Appellant shall mean Touchbase Communications Limited (“Touchbase”) until 2 March 2007 when it became Datapoint Global Services Limited (Datapoint) under new ownership.   All the correspondence, communications and contacts relating to this appeal after     2 March 2007 continued to be dealt with under the name Touchbase and at its original offices.  This process was delegated by the new owners to  Touchbase although Datapoint accepted ultimate responsibility for the appeal proceedings.

2.   The legislation

Section 59 of the Value Added Tax Act 1994 (the 1994 Act) provides that where a value added tax return, or the tax due, is not received in time, the taxable person is in default.  A surcharge is imposed for the second and subsequent defaults within a period of twelve months.  This was the fifth default in the series.  Section 59(7)(b) provides that, if a taxable person satisfies the tribunal that there was a reasonable excuse for the return of tax not being sent in time, then he is not liable to the surcharge.  However, section 71(1)(b) provides that, where reliance is placed on any other  person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.

The issue

3.   Accordingly, the issue for determination in the appeal was whether there was a reasonable excuse for the late receipt by one day of the tax due for the accounting period ending 31 December 2006.

The evidence

4.   Oral evidence was given on behalf of the Appellant by Mr Jeffrey Richard Maynard (Mr J Maynard) who had been a Director and the Appellant’s Company Secretary, and Ms Shona Zaccaria  (Ms Zaccaria) who at the time of the default was the Accounts Payable Controller within the Appellant’s finance team.  Two bundles of documents were produced by the parties.

		

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	5.   From the evidence before us we find the following facts.

Background

6.   Touchbase was formed in January 1992 by three shareholders, Mr Riorden Maynard (Mr R Maynard), Mr J Maynard and a third person who has to all intents and purposes always been a sleeping shareholder.  Subsequently, some fourteen subsidiaries were created. One of these was Touchbase .

7.   The Touchbase Group of companies started by selling mobile phones and then in 1995 entered the fixed line market.  It expanded into the European telecoms market in 1997 and grew quickly expanding in different markets worldwide.  The Appellant Company was sold with four other companies to the Datapoint Group on 2 March 2007 and changed its name to Datapoint. All these companies were involved in European markets.

8.   Touchbase Group’s substantial business activities centred on the global communications convergent technologies market. This involved the sale, installation and subsequent servicing of leading products primarily to mult-national corporations in major countries worldwide.  Each major office in these countries was run by business leaders reporting direct to Mr R Maynard, the Group Chief Executive Officer.  Mr J Maynard had an active Group support role dealing with global corporate governance including  legal, insurance and tax issues including the VAT appeal before the tribunal.

The Appellant’s VAT record

9.   The Appellant sustained a series of defaults in payment of its VAT to the Commissioners commencing in the second half of 2005 (period 09/05). Even before 2005, the Appellant experienced difficulties in managing its VAT affairs and at one stage in 2004 entered into a Time to Pay agreement in respect of an outstanding debt of £268,909.58.

10.   There were further defaults for the periods 12/05 and 03/06.  By 30 June 2006 the rate of surcharge had reached 5%. Unfortunately, there was an error of £500 being overlooked in settlement of a VAT liability of £262,793,06 for period 06/06 and although no formal surcharge resulted, the rate increased to 10%.  Therefore, if a default resulted in the following  twelve months, the surcharge rate would be 15%.

11.   Both parties agreed and it is accepted by the tribunal that the Appellant had sufficient funds in its bank account in February 2007 to meet its VAT liability for the quarter ending 31 December 2006 in the sum of £215,769.58.

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	Lloydslink automated banking system

12.   Lloydslink is a product of Lloyds TSB Bank.  It is an automated banking system enabling payments to be made electronically by various methods including CHAPS, BACS, Pay Flow and Funds Flow.  This system enables a customer to make payments to suppliers and government departments (inter alia) and receive incoming sums from customers through Lloyds bank accounts.  Payments are made instantly.

13.   The Appellant began using the system in 2000 and found it normally effective and reliable.

14.   The process involves a dedicated data line rented from British Telecom with a Lloydslink data machine terminal (DMT) which is similar to a credit card processor.  The DMT is attached to the data line at the user’s premises to enable secure data to flow to the Lloydslink data service centre in Andover, Hampshire.

15.   The Lloydslink system DMT requires two types of plastic cards, one pinless and the other a personalized pincard (like a credit card) held by the user’s cheque signatories.  The Bank owned the DMT.

16.   The DMT is activated by a pinless card.  Anyone with a password and knowledge can feed information into the DMT such as items requiring payment through Lloydslink and analyse and print off information from the DMT including lists of payments and daily bank statements; but without two personal Lloyds cards, each with a unique pincard number, no payments can be authorised from the user’s bank account.  Once these pincards are initiated, payments take place.

17.   In the Appellant’s case, the two cheque signatories and also holders of the pincards were Mr R Maynard and Mr J Maynard.  As both were never available at the same time at the Appellant’s offices at Holborn Tower, 137 High Holborn, London WC1, their pincards with the pin numbers were kept in a locked cabinet.  The person who was responsible for  this cabinet and the DMT for the twelve months leading up to February 2007 was Ms Zaccaria.  Her position with the Appellant was Accounts Payable Controller within the Finance Control Team.  She and a colleague, Ms Mary Garcia were responsible for using the Lloydslink system to make elective payments.  Ms Garcia had left the Appellant’s employment by January 2007 and Ms Zaccaria was left to carry out the DMT function on her own.  In fact, she had already given her notice to the Appellant on 23 January 2007 to leave on 23 February 2007 as she had found other employment.  However, she did state in her notice, “I am conscious of the need to provide support to the Finance Department until my departure and I shall give my full commitment until then.”

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	18.  Most of the Appellant’s Finance Control Team had moved shortly before 6 February 2007 from the Holborn Tower offices to new offices at 
14 New Burlington Street, London W1.  Ms Zaccaria continued to look after the Lloydslink activities for the Appellant and two other associated companies, one of which was Touchbase Connectivity.

19.   To summarise, the Lloydslink system had been used by the Appellant and its associated companies for some six years without difficulty and had only failed to work on rare occasions.  It allowed the Appellant’s employees to initiate electronic payments which would be debited from its account with Lloyds TSB and credited on the same day in the recipient’s bank account, provided that the payment was initiated by 15.45 hours on the day in question.  The payment cycle is somewhat complicated in a case such as this because the recipient, the Respondent Commissioners, used the Bank of England as its banker.  The Bank of England therefore has two distinct functions:  first it is the central Bank and is, in effect, the banker for Lloyds TSB; secondly, it is the bank for the Respondents, just as Lloyds TSB is for the Appellant.  When using the Lloydslink system the Appellant knew that the transfer of a VAT payment took place instantaneously provided all the electronic mechanism was functioning normally.

20.  There was no evidence before the tribunal that there was any error or fault in the transfer of VAT by Lloydslink generally over the six year period.  The reasons for late payments were cash flow problems and other factors.  However, on 6 February 2007 there had been problems with the Lloydslink system but no details were forthcoming to the tribunal.

The events of 7 February 2007

21.  On 7 February 2007, Ms Zaccaria received on the telephone instructions from Ms Joanna Chin on behalf of Ms Lisa Wong, the Appellant’s Financial Controller, who were both working at the New Burlington Street office, to make certain payments via Lloydslink.  These payments included two VAT payments for the Appellant and its associated company, Touchbase Connectivity.  Both these companies had to make their VAT payments on 7 February 2007 which was the last date when payment of VAT by electronic transfer was valid as a concession by the Respondent Commissioners.

22.   Ms Wong had signed off the Appellant’s VAT Return on 29 January 2007 and it had been received at the Respondents’ Central office in Southend-on-Sea, Essex on 30 January 2007.

23.  Ms Zaccaria then attempted to make the batches of payments which had been given to her.  She went down to the basement where the DMT was securely situated.  She successfully logged on to the Lloydslink system using the pinless card and password at 13.58 hours.  Despite repeated 

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	attempts  to create and effect payments, she was unsuccessful,  The batches of payments entered by her were transmitted by the terminal at the Appellant’s offices to the Lloydslink server run by Lloyds TSB but were for some unknown reason rejected by that server.  Ms Zaccaria made repeated attempts to re-send the payments without success.  They were all rejected.

24.  She then made three telephone calls to the Lloydslink helpline in an endeavour to resolve the problem.  The first call was made at 14.41 to a person at Lloyds TSB called Gavin.  He suggested recreating the payments
as a cure for the problem.  The telephone call terminated at 15.02.  Ms Zaccaria recreated the payments again but they were rejected once more by the system at 15.11.  She made another unsuccessful attempt to speak to another adviser at the Bank but then succeeded at 15.18 when she spoke to a woman called Lyndsey C.

25.   Lyndsey’s potential solution to the difficulty which the Appellant had experienced involved the reinstalling of the Lloydslink software on the equipment.  Ms Zaccaria was unable to do this as neither the Appellant’s IT support staff nor the necessary backup system CD were immediately available.  The telephone conversation finished at 15.29.

26.   During the telephone conversation, Ms Zaccaria asked Lyndsey whether the VAT payment could be made in some other way and was advised to use a fax to the Appellant’s branch of Lloyds TSB.  It was however impossible for a manual payment to be processed through the Clearing House Automated Payment System (CHAPS) for same day transmission of funds as the deadline for the service expired at 15.00.

27.   Faxes authorising payment of £215,769.58 were sent immediately to the Appellant’s Lloyds TSB Bank Branch, Threadneedle Street, in the City of London, arriving at 16.21 on 7 February 2007.  The transfer was made by Lloyds TSB to the Bank of England (as the Respondents’ Bank) the following day.

Aftermath

28.  As the Appellant company was sold to Datapoint on 2 March 2007, a certain amount of confusion arose concerning the VAT payment of the sum of £215,769.58.  Initially, it was noticed by the Respondents that the VAT had been allocated to the account of Touchbase Connectivity in error as the VAT period of 12/06 applied to both that company and the Appellant.  On 23 February 2007 an E-mail was sent by Suzanne Rignall a Debt Management Officer of H M Revenue and Customs (HMRC) to Ms Lisa Wong asking for authority to be given for the transfer from Touchbase Connectivity’s VAT Account with HMRC to the Appellant’s VAT Account.

		

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	29.  A Notice of Assessment of the Surcharge of £32,365 calculated at 15% of £215,769 was issued by HMRC on 7 March 2007.  Ms Wong assumed that the reason for this was that the VAT had been inadvertently allocated against Connectivity’s VAT registration number and this was referred to in 
an internal E mail she sent to Mr J Maynard and Mr R Jennings, the Chief Finance Officer of Touchbase Group on 16 March 2007.  The next day Mr J Maynard faxed the letter of authority to Suzanne Rignall

30.  On 4 September 2007 the HMRC National Large Debt Unit at Northampton sent a final demand notice for the surcharge to the Appellant
and on 3 October 2007 Mr J Maynard replied again stating that they believed “that the VAT was paid over on a timely basis to HMRC and it is only the misallocation of funds to the wrong company account that has given rise to the surcharge …”

31.   On 24 October 2007, an explanation as to how the default surcharge arose was sent by Mrs J Stoffell of the HMRC Reconsideration Team at Poole Business Centre.  This was sent to Holborn Tower which was not the correct address of Touchbase Group as it had moved completely to 14 New Burlington Street by then.

32.   By 28 November 2007, the Appellant became aware of the reason for the issue of the surcharge.  Mr R Jennings sent an E mail to HMRC in which he said, “I have discussed this matter with Jeff Maynard (Founding Partner of Touchbase) and as an organisation we remain surprised and aggrieved by the position taken on the ‘late payment’ by HMRC.  It is difficult for us to quantify how a delay of less than 24 hours can be seen to result in such a substantial penalty …” He then indicated his Company wished to appeal.

33.   An Appeal was lodged with the London Tribunal Centre on 2 January 2008 by the Appellant’s Accountants Finerty Brice.

34.  Mrs R Wood of the HMRC Reconsideration Team at Poole wrote to the Appellant as Touchbase at 14 New Burlington Street on 21 April 2008 pointing out that her team’s role was to act as an independent reviewer and link between the Appellant and Departmental advocates.  She said she would review the case papers in full and then forward them to the Department’s legal branch.  She then explained the Default Surcharge process and how the Appellant’s grounds of appeal applied.

35.   After Finerty Brice had delivered a bundle of documents to support the appeal on 15 July 2008 and reviewed grounds of appeal, on  31 July 2008 another HMRC Officer Mrs W A James reviewed at length all the available information but concluded that there were not sufficient grounds for the Commissioners to withdraw the surcharge.

		

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	36.  Mr J Maynard took up with Lloyds TSB the difficulties experienced with the Lloydslink system on the afternoon of 7 February 2007.  Mrs Allison Duncan, the Manager of Corporate Banking of Lloyds TSB replied at length by letter on 13 July 2008.  She set out on the first page of her letter various possible explanations which had been provided by the Lloydslink Service Centre “regarding narrative on the audit log summary as 
there is  no real literature available to clarify exactly what each error means …”  She then wrote the following comments :

     “ In order for a CHAPS payment to be  processed and paid on
        the same day as it is actioned on Lloydslink, the requested payment
        must be received by 15.45 p.m.  In order for a manual CHAPS
       payment to be processed and paid on the same day as it is requested,
       the service centre based in Andover must receive the payment request
       before 15.00 p.m.

      In terms of the inaccuracy regarding the transactions occurring at 
      1.00 a.m. in the morning, this could be for two reasons :

        *    Computer settings are incorrect on the computer that is making the
               payment.

        *    The payment is being actioned abroad and the ‘unusual’ timing is
              a result of time differences.

        I have thus far been unable to ascertain a more specific reason for 
        these timing differences, but on the basis that Lloyds TSB Lloydslink
        system is used by the majority of our customers, and therefore
        perceived to be a good and robust system, I do not believe that the
        time on a specific terminal would alter itself at random.  Were that the
        case, it would be a common issue experienced by all our customers.

       Again, on my understanding that your people in Singapore access your
       Data Transmission Terminal to create  payment data, for later action by
       your authorised London employees :- I suggest it is more than likely to 
       be the latter reason above, for it is extremely unlikely that Lloydslink,
       or indeed your own DMT, will randomly change and then later correct
       its internal time …”

37.  Mrs Duncan then, in conclusion, set out a table of historic payments of VAT to HMRC starting on 6 May 2005 until 7 August 2006.  There were 8 payments and all were successfully completed timeously.

Cases referred to in the proceedings
[references to CCE is Commissioners of Customs and Excise and HMRC is Her Majesty’s Commissioners of Revenue and Customs]

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	Kwik Move UK Limited v HMRC [200] VTD 20842 (Kwik Move)

H Griffiths Engineering Limited v HMRC [2005] VTD 1998 
(H Griffiths Engineering)
HHT Limited v HMRC [2005] VTD 19169 (HHT Limited)

Swanstaff Recruitment Limited v HMRC [2007] VTD 20548 (SwanstaffI)
CCE v Steptoe [1992] STC 757 (Steptoe)
Stoke Park Limited v HMRC [2007] VTD 20603 (Stoke Park)
Profile Security Services (South) Limited and another v CCE [1995] VTD 13497
Viglen Limited v CCE [2001] VTD 17155
Magna Kansei v HMRC [2006] VTD 19905 (Magna Kansei)
Karakusevic Carson LLP v HMRC [2007] VTD 20550 (Karakusevic)
The seven day extension for electronic payment of VAT
39.   As from 31 May 2000 businesses paying their VAT electronically were given the opportunity to improve their cash flow because they were given by the Government an extra week to submit and pay their VAT returns.
40.  The following Notes (so far as relevant) to Press Notice 21/60 explained how this extension would work :
“ NOTES
1.   For VAT returns with a due date on or after 31 May 2000 use of     electronic means of payment will be made simpler.  Qualifying businesses will automatically receive the seven-calendar-day extension for the submission and payment of VAT returns, on a return-by-return basis.  Businesses will no longer have to request this concession and, as the extension will be applied automatically, they will not be advised whether or not they have been given it …
3.  The automatic application of the concession on a return-by-return basis gives businesses the freedom to change payment methods without having to notify Customs …
4.   If the VAT return and electronic payment are not received on or before the seventh calendar day following the normal due date, businesses may be liable to default surcharge, the penalty regime for late payment …
 
            .

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	41.   The seven day extension took effect under regulation 40(3) of the VAT Regulations 1995 by which the requirement to make a return and pay the tax by the last day on which the return is due “shall not apply where the Commissioners allow or direct otherwise.”

Submission of the parties

42.   In addition to their overall submissions each side lodged written skeleton arguments.

43.  Mr Barrie Atkin for the Appellant contended on the law, in outline :

(1)   The Appellant considered Ms Zaccaria to be a capable,
        hardworking and committed financial controller.  She had used the 
        Lloydslink electronic payment system for approximately twelve
        months and believed herself to be a competent user.  She was 
        aware of the need to process two VAT payments including one 
        from the Appellant on 7 February 2007 and attempted  to “set up” the
        payments on that day.

(2)   The Lloydslink system was believed to be reliable and difficulties with
        it were usually resolved quickly by the bank’s service centre staff 
        over the telephone and the Appellant was accordingly justified 
         in assuming that an instantaneous Lloydslink CHAPS payment 
         initiated by it would be successful.

(3)   The Lloydslink system required only three steps for payments to be
        effective.  Mc Zaccaria had been entrusted with all the necessary 
        “pin cards” and therefore could carry out the necessary actions 
        herself.

(4)   Once Ms Zaccaria encountered difficulty in effecting payment on 
        two occasions she contacted Lloydslink by telephone at 14.41 
        when there was just over an hour to go before the deadline for 
        Lloydslink payments was due to expire.  Mr Atkin submitted that 
        given her previous experience it was reasonable for her to 
        persevere with Lloydslink  even though the deadline for “manual” 
        CHAPS payments expired at 15.00.

(5)   The reason for the system’s failure was not immediately apparent, 
        but the Lloydslink representative offered a probable reason for it 
        and gave no indication that the difficulty could not be resolved
        promptly.   

(6)   Therefore, it was reasonable for Ms Zaccaria to expect that the
        difficulty could be cleared and to continue to persevere with 
         Lloydslink.  In support of this assertion, he relied on the two 

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	         tribunal decisions in H Griffiths Engineering and HHT Limited .  
         In the former case, where another bank had admitted an error and 
         had committed a similar error in relation to payment for a 
         previous period, HMRC inferred the Appellant should have taken 
         more active steps to ensure that the bank did not repeat its error.  
         However, no realistic alternative action was available and the 
         appeal succeeded.  In HHT Limited written instruction was given 
         to a bank for payments on the seventh day and there was an 
         unanticipated failure by the bank to process the instruction.

(7)   Computer problems were also found by tribunals to constitute a 
         reasonable excuse for the purposes of s59(7) of the 1994 Act in 
         Swanstaff Recruitment and Kwik Move.  Similarly, the computer 
         problem experienced by Ms Zaccaria could not be anticipated 
         either by the Appellant or its bank to be incapable of rapid 
         rectification.
     
(8)   In the circumstances, it was reasonable for the Appellant to rely  on 
        the Lloydslink system to effect payment on 7 February 2007 (rather 
        than to pay on some earlier date) and to continue to do so until it  
        became apparent that the system would not function on  that day. Mr 
        Atkin submitted this was not a case in which  unresolvable difficulties 
        in payment should or could   have been anticipated in advance. Given
        the Appellant’s previous experience with the Lloydslink system, its 
        continual failure was not reasonably foreseeable.  Ms Zaccaria, in his 
        view, exercised due diligence in making continued efforts to resolve 
        the difficulties encountered.
  
44.   Mr Robert Wastall, for the Respondents, contended on the law, in outline :

 (1)   He argued that the Appellant’s reliance on its computer problems as a
         reasonable excuse was misplaced for four particular reasons :

 (2)  First, he submitted it was not reasonable for a VAT payer to begin to 
        endeavour to transfer outstanding VAT by using the CHAPS method 
        starting at 13.58 when the deadlines for using the CHAPS systems are 
        62 minutes for paper transactions and by 15.45 for electronic means.  
        The Appellant left it until the last minute and should have been aware 
         it was in the 15% surcharge regime.

 (3)  Secondly, even if it was accepted there was a computer error (which 
       was in doubt), there was an alternative CHAPS method by faxed letter 
       which expired at 15.00.

 (4)  Third, there should have been a contingency plan bearing in mind the 
        critical nature of the surcharge situation.

 		

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	(5)   Fourth, a similar problem had arisen the day before with the same 
        computer system.

 (6)   The Appellant’s financial controller, Ms Lisa Wang was unaware of 
         whether or not the Appellant had previously defaulted or of the 
         percentage charge it faced. Although she had paid late on 7 February 
         2007 she did not tell Mr Maynard for quite some time.  In his view, 
         this showed lack of proper supervision and communication.

  (7)  Mr Wastall referred to two tribunal decisions Magna Kansei and 
        Karakusevic Carson where he inferred similar circumstances had 
        arisen and appeals had been dismissed because last minute problems 
        should have been foreseen and were not sufficient to amount to a 
        reasonable excuse.

Reasons for decision

45.  We can only allow the appeal if we are satisfied that the Appellant had a reasonable excuse for the default (Section 59(7)(b) of the 1994 Act so provides).  As tribunal chairman, Colin Bishopp stated in Magna Kansei at paragraph 6 “the expression ‘reasonable excuse’ has been interpreted, in many cases before this tribunal and the courts, to mean a circumstance which has led to the default despite the exercise of proper care and foresight by the taxpayer.  In essence, an unforeseeable event or one against which precautions could not realistically have been taken is required …”

46.  Therefore, the question we have to determine is whether any such circumstance is to be found here.  Unfortunately for the Appellant, we are not so persuaded on the balance of probabilities for the following reasons :-

47. Although it had become customary for payment of VAT by the Appellant to be left until the last day of the concessionary period and, indeed, until some two hours before the deadline, this did not allow for any problems to arise, whether or not the specific problem could be foreseen.

48.  The VAT Return for the relevant period had been signed off on          29 January 2007 by Ms Lisa Wang, the Appellant’s financial controller and received by the Respondents at their Southend Central Office the next day.  Therefore, it was really a week in advance and the first requirement of section 59 of the 1994 Act had been met.  We find as a fact that neither Ms Wang nor Ms Zaccaria were aware that the Appellant was facing a 15% default surcharge if it defaulted again.  In our view, the Appellant should have been put on guard to ensure that a late payment was not made and this did not occur.

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	49.  Ms Zaccaria did not begin the process of effecting payment until shortly before 2.00 p.m. on the final seventh day, that is 1 hour and 45 minutes before the 3.45 p.m. deadline for an electronic CHAPS payment and 1 hour before the other deadline for making a manual CHAPS payment via a bank branch.

50.  There was undisputed evidence before us that the Appellant through Ms Zaccaria had suffered problems in operating the Lloydslink DMT the previous day when certain payments (not VAT) as part of a batch were rejected by the Lloydslink system. No further evidence was forthcoming as to what happened to rectify the fault (if at all).  Ms Zaccaria experienced exactly the same fault the following day. She attempted to send the batch of payments including the outstanding VAT and the system rejected the payments at least twice.

51.  Three factors were crucial in this circumstance.  First, Ms Zaccaria did not contact Lloydslink Helpline until 2.41 p.m. some 41 minutes after she began to use her terminal.  Her telephone call to Gavin who was the bank employee dealing with her enquiry did not finish until 3.02 p.m. and by
that time she could not use the CHAPS manual method as the deadline expired at 3.00 p.m. In fact, she did not even know that the alternative system was available.  Gavin had suggested recreating the payments which Ms Zaccaria did.  As this was unsuccessful, she spoke to another bank employee who suggested she re-install the system but she could not do that as there were no IT support staff available nor did she have the necessary backup system CD. It was during this second telephone call that she was advised that the VAT payment could be made by faxing instructions to the branch of Lloyds TSB for a CHAPS transfer to the Bank of England to be made immediately. This occurred at 4.21 p.m. but was too late.

52.  The second factor was that there was no one to whom Ms Zaccaria could turn in her moment of need. She had been left to cope on her own.  Mr Atkin argued that as the system had worked satisfactorily for several years when VAT was to be paid then no backup was necessary. We do not agree with this argument.  As Lord Donaldson said in Steptoe at p.770f      “ …the question for the tribunal is whether in all the circumstances the inability to pay the VAT on time was “reasonably avoidable” ”

53. Finally, the letter from Mrs Duncan, the Manager of Corporate Banking of Lloyds TSB dated 13 July 2008 makes it quite clear from the Lloydslink service centre report that from their audit log summary of all transactions over 7 and 8 February 2007, the only two ‘error’ messages present came from the Appellant’s terminal.  She put forward several alternative explanations which were as follows :

     “     Security Manager failure
              This occurs when the customer is having problems with the
               reader/smartcard and occurs because of a number of reasons :  the 

    

		

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	               reader/smartcard and occurs because of a number of reasons :  the 
               reader may not be switched on at the time a payment is created, 
               the wrong smartcard could be being used or the original settings
               for the reader have been disabled and must be restored in order to
               function correctly.

             Response Verification failure
               Failure concerning the smartcard. The details being used have not
               been updated on the company’s Lloydslink or the company may
               be using the incorrect smartcard.  In order to identify the specific 
               error; the customer would need to contact the Lloydslink
               helpdesk.  I understand you did so on the day in question.

             Batch XXXXX transmitted but rejected by the bank
               The exact reason for a  batch being rejected is recorded on the
                transmission log that prints out when a payment is sent, but I
                understand this is the paperwork which you no longer have
                access to.
            
                Some examples, however, of reasons for rejection are :

             LRH Syntax : A header used in the file transmitted to the bank 
               contained incorrect data.  This may have been caused during the
               saving of the batch or by line noise corrupting the data sent down
               the phone line.

             MAC failure : Each Payment batch sent to the Bank is secured
               with a Message Authentication Code (MAC) when the Bank
               receives the batch the MAC is checked to ensure authenticity of 
               the payment instruction.  If the MAC checking fails the batch is
               rejected.

             Failed Spool File to Printer
               I can confirm that this is, indeed, a local problem caused by the
               printer settings being out of line with Lloydslink.”

53.   As the Lloydslink Service Centre did not experience any errors itself, it can be presumed it was working normally.  Our conclusion is that on the balance of probabilities there was no computer error attributable to Lloydslink.  There is no evidence of any repairs or new equipment (as was the case in Swanstaff for example) and the potential reason highlighted by Lloydslink, as well as circumstantial evidence, indicates it was probably user error.

54.   In our opinion, the attempts to resolve the problem by Ms Zaccaria highlighted her lack of urgency and therefore due diligence.    Not only might the computer problems have been resolved had Ms Zaccaria had 		

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	better training, possibly the correct login and the appropriate computer installation disc, but she should have been informed specifically about the deadlines of 3.00 p.m. and 3.45 p.m.  Additionally, she should have been made aware about the consequences of late payment in a VAT default surcharge regime and the manual CHAPS alternative method of payment.

55.   Someone in authority above her (probably Ms Wang, the financial controller) gave instructions for a faxed letter to be sent to the Lloyds TSB branch at Threadneedle Street to submit a CHAPS payment for the outstanding VAT to the Bank of England immediately.  This arrived at 16.21 on 7 February 2007.  Therefore, we find this alternative method of payment was known to the Appellant (but not Ms Zaccaria) and should have been readily available as a contingency plan for the situation confronting Ms Zaccaria.

56.   Both Counsel in this appeal referred to various tribunal decisions as examples to support their arguments. Clearly each case turned on its own facts and different situations arose in each situation.

57.  In the case of Swanstaff, for example, the circumstances were different.  There was a major computer malfunction such that the Appellant was not able to audit the return, or finalise the figures and it had no other
way of retrieving information in the return. The appellant did not know how much tax was owed and could not have paid an estimate. Further, the Appellant “was not then aware of the possibility of payment by BACS or CHAPS, although he was aware of that now ”(paragraph 12).

58.  The Appellant also relied  on the case of Kwik Move where the appeal was allowed.  In that case there were clear attempts to file the VAT return in good time, well before it was due, but by fault on the part of HMRC it was unable to do so.  The Appellants book-keeper had not encountered that problem previously.  He tried again later the same day but another different error prevented him from doing so.  The following day he did not try, but by the evening a third distinct computer problem arose.  The only person with authority to authorise CHAPS transfers was in hospital with a severely broken leg.

59. It was suggested in Kwik Move that the Appellant could have authorised a CHAPS payment, but any fault on the book-keeper’s part was excluded because the only signatory was in hospital.

60.  In Magna Kansei the Appellant had missed one previous payment when it made a subsequent payment 13 minutes late.  Due to pressures elsewhere the return was not completed until midday on the due date and keyed into the computer.  The Appellant then had to wait for it to be signed off by the appropriate signatory who arrived shortly after the 4.00 p.m. deadline.

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30	61.   In that case it was held that steps could have been taken to ensure that the VAT return was prepared in good time and not at the last minute. The tribunal said :

         “ we are bound to agree with Mr Morgan that the Appellant took the
         risk of leaving payment until the last day, and had made insufficient
         allowance for unforeseen problems.  It is unfortunate that a delay of
         less than 15 minutes has led to the imposition of a large penalty but
         that is the effect of any system which imposes a deadline for the 
         undertaking of a task.”

62.  In Karakusevic the Appellant had been left with a completed return but failed to action payment and the returns until the very last moment.  The Appellant had encountered computer problems some days earlier when it attempted to make the payment in good time. The Tribunal held that there was a genuine error, but that the efforts they made, particularly since the return had been prepared in good time, were not sufficient.  The last minute problems could have been foreseen and were not sufficient to amount to a reasonable excuse.

Decision summary

63.  The Appellant does not have a reasonable excuse for the late payment
of its VAT for the quarterly accounting period 12/06.  The large amount of the penalty is as a result of its previous defaults.  The system imposes a deadline for payment which it missed.

64.   It cannot be said that the Appellant exercised due diligence in seeking to effect the payments.  The default could have been avoided by not making the payments at the last minute, particularly in circumstances where the Appellant should have known that it faced a significant penalty and had no contingency plan.

65.   Accordingly we dismiss the appeal.  HMRC did not ask for costs.

Rodney P Huggins
Chairman

Release Date: 9 March 2009
LON/2008/0207