[2014] UKFTT 021 (TC)
TC03162
Appeal number:
TC/2012/11170
VAT default surcharge – insufficiency of funds –
payment one day late – whether reasonable excuse – no – whether penalty
disproportionate – no – Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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TAYLORS MORTGAGE
SERVICES LIMITED
t/a TAYLORS PROPERTY SERVICES
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE MICHAEL S CONNELL
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SUSAN STOTT
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Sitting in public at Nottingham MJC Carrington Street Nottingham on 6 August 2013
Ms Tessa Ward-Smith for the
Appellant
Mr Tom Eyre, Officer of HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
The Appeal
1. This an
appeal by Taylors Mortgage Services Limited, trading as Taylors Property
Services, (“the Appellant”) against a VAT default surcharge of £2,678.52, for
its failure to submit, in respect of its VAT period ended 31 August 2012, by
the due date, payment of the VAT due. The surcharge was calculated at 10% of
the VAT due of £26,785.20.
2. The point
at issue is whether or not the Appellant has a reasonable excuse for making
late payment.
Background
3. The
Appellant Company’s main business activity is that of an estate agency.
4. Prior to
the default for 08/12 the Appellant had previously defaulted on VAT payments in
period 08/11 when a VAT surcharge liability notice was issued and again on
02/12 and 05/12.
5. Section
59 Value Added Tax Act 1994 (“VATA”) sets out the provisions in relation to the
default surcharge regime. Section 59 of VATA requires a VAT return and payment
of VAT due on or before the end of the month following the relevant calendar
quarter. [Reg 25(1) and Reg 40(1) VAT Regulations 1995].
6. Under s
59(1) a taxable person is regarded as being in default if he fails to make his
return for a VAT quarterly period by the due date, 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. The Commissioners may then serve 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. The specified percentage
rates are determined by reference to the number of periods in respect of which
the taxable person is in default during the surcharge liability period. In
relation to the first default the specified percentage is 2%. The percentage
ascends to 5%, 10% and 15% for the second, third and fourth default.
7. HMRC have
discretion to allow extra time for both filing and payment when these are
carried out by electronic means. [VAT Regulations 1995 SI 1995/2518 regs 25A
(20), 40(2)]. Under that discretion, HMRC allow a further seven days for filing
and payment. The due date for the 08/12 period was 7 October 2012.
8. The
Appellant paid VAT on a quarterly basis. The Appellant’s return was received by
HMRC on 26 September 2012 and was therefore on time. Payment was made late by
one CHAPS payment on 8 October 2012.
9. 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(s). Section 59 (7) VATA sets
out the relevant provisions : -
‘(7) If a person who apart from this sub-section
would be liable to a surcharge under sub-section (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 then he shall not be liable to the surcharge
and for the purposes of the preceding provisions of this section he shall be
treated as not having been in default in respect of the prescribed accounting
period in question ..’
10. The burden falls on the
Appellant to establish that it has a reasonable excuse for the late payment in
question. It is s 59(7)(b) VATA on which the Appellant seeks to rely on the basis
that for reasons set out below the VAT was paid late because it was suffering
severe cash flow shortages.
11. Section 59(7) must be
applied subject to the limitation contained in s 71(1) VATA 1994 which provides
as follows : -
‘(1) For the purposes of any provision of section 59
which refers to a reasonable excuse for any conduct –
(a) any insufficiency of funds to pay any VAT is
not reasonable excuse.’
12. Although an insufficiency of
funds to pay any VAT due is not a reasonable excuse, precedent case law has
established the principle that the underlying cause of any insufficiency of
funds may constitute a reasonable excuse.
13. The onus of proof rests with
HMRC to show that the surcharges were correctly imposed. If so established, the
onus then rests with the Appellant to demonstrate that there was reasonable
excuse for late payment of the tax. The standard of proof is the ordinary civil
standard of a balance of probabilities.
Appellant’s Case
14. The Appellant does not
dispute that its VAT payment for the period 08/12 was due on 30 October 2012 or
that it was late making payment. It is agreed that the payment if made
electronically was due on 7 September 2012, but that payment was made late on 8
October 2012.
15. In its notice of appeal to
the Tribunal the Appellant’s stated grounds of appeal were that the business
was struggling because of the economic climate and cash flow problems. The
Appellant deals with re-possession sales and it often takes thirty days or more
for customers accounts to be paid.
16. The company’s financial
problems were so bad that it had made four people redundant and closed one of
its branches. Following the introduction of better credit control VAT was now
paid on time.
17. A 10% surcharge was
disproportionate and excessive taking into account the fact that the payment
was only one day late, the Appellant’s cash flow difficulties, and that it
would only add to the Appellant’s financial problems
HMRC’s Case
18. Mr Eyre for HMRC said that
the potential financial consequences attached to the risk of a default would
have been known to the Appellant after the issue of the Surcharge Liability
Notice in October 2011, given the information contained in the Notice. Included
within the notes on the reverse of the Surcharge Liability Notice, is the
following, standard, paragraph:
‘Please remember: Your VAT returns and any tax due
must reach HMRC by the due date. If you expect to have any difficulties contact
either your local VAT office, listed under HM Revenue & Customs in the
phone book as soon as possible, or the National Advice Service on 0845 010
9000.’
19. The requirements for
submitting timely electronic payments can also be found -
·
In notice 700 "the VAT guide" paragraph 21.3.1 which is
issued to every trader upon registration.
·
On the actual website www.hmrc,gov.uk
·
On the E-VAT return acknowledgement.
20. Also the reverse of each
default notice details how surcharges are calculated and the percentages used
in determining any financial surcharge in accordance with the VAT Act 1994 s
59(5).
21. Therefore HMRC say that the
surcharge has been correctly issued in accordance with the VAT Act 1994 s
59(4).
22. With regard to the
Appellant’s grounds of appeal, it is specifically stated in s 71(1) VATA that an insufficiency of funds to
pay any VAT is not a reasonable excuse.
23. Insofar as the Appellant
argues that the surcharge is entirely excessive or disproportionate to the
modest delay which occurred, the case of Total Technology (Engineering)
Limited v HMRC heard in the Upper Tribunal held that:
(1)
There is nothing in the architecture of the Default Surcharge system
which makes it fatally flawed.
(2)
In order to determine whether or not a penalty is disproportionate, the
Upper Tier Tribunal addressed the following factors:
(a) The number of days of the default
(b) The absolute amount of the penalty
(c) The ‘inexact correlation of turnover and
penalty’
(d) The ‘absence of any power to mitigate’
and decided that none of these leads to the conclusion
that the Default Surcharge regime infringes the principle of proportionality.
The penalty was therefore not disproportionate.
24. Mr Eyre for HMRC said that
the Appellant’s stated grounds of appeal in the notice of appeal to the
Tribunal were clearly not grounds of appeal. The company had been given time to
pay in respect of earlier VAT payments and there was no reason why could not
have requested time to pay in respect of the August 2012 VAT providing of
course that the arrangement was requested and agreed with HMRC before the due
date for payment. The VAT did not belong to the company; they were public funds
which should not have been used by the Appellant for ordinary everyday trading
purposes.
Conclusion
25. The Appellant was clearly
aware of the due date for payments of its VAT and the potential consequences of
late payment.
26. The Appellant’s main ground
of appeal is that it was suffering cash flow shortages caused by delays in
receiving payments from customers. In essence, the reason for the late payment
of VAT was insufficiency of funds.
27. In Customs & Excise Commissioners
–v- Steptoe [1992] STC 757 the tax-payer argued that although the proximate
cause of his default was insufficiency of funds, the underlying cause of that
insufficiency, namely the unexpected failure by a major customer to pay him on
time, amounted to a reasonable excuse. The Court determined on a majority that
the statutory exclusion of insufficiency of funds as an excuse did not preclude
consideration of the underlying cause of insufficiency and that a trader might
have a reasonable excuse if it were caused by an unforeseeable or inescapable
event or when, despite the exercise of reasonable forethought and due
diligence, it could not have been avoided. The Court nevertheless made it clear
that the test had to be applied strictly.
28. To decide whether a
reasonable excuse exists where insufficiency of funds causes the failure, the
Tribunal must take for comparison a person in a similar situation to that of
the actual tax-payer who is relying on the reasonable excuse defence. The
Tribunal should then ask itself, with that comparable person in mind, whether
notwithstanding that person’s exercise of reasonable foresight, due diligence
and a proper regard for the fact that the tax would become payable on the
particular dates, those factors would not have avoided the insufficiency of
funds which led to the failures.
29. Having considered the
Appellant Company’s circumstances and the background facts and circumstances
leading up to the default, the Tribunal accepts that the underlying cause of
the default was a general shortage of funds. However VAT was paid only one day
late and a prudent tax payer in circumstances similar to that of the Appellant
would have put in place appropriate precautionary measures to avoid that delay.
There was no evidence that the company applied to HMRC for time to pay prior to
the date of default and it does not appear to have made any attempts to raise
funds from other sources.
30. Ms Ward-Smith said that
following the default in August 2012 the Appellant had put in place more robust
credit control mechanisms and its VAT compliance record has now improved. It
had been late in making its VAT payments in three previous periods before the
default period under appeal. There had therefore been a pattern of the
Appellant failing to adhere to its VAT payment obligations. Had it improved its
systems earlier than it did, the VAT default of 08/12 could have been avoided.
31. The burden of proof is on
the Appellant to show that the underlying cause of its failure to meet its VAT
payment obligations was due to unforeseen circumstances or events beyond its
control. In the Tribunal’s view, for the reasons given above, that burden has
not been discharged and there was no reasonable excuse for the Appellant’s late
payment of VAT for the 08/12 period.
32. The appeal is accordingly
dismissed and the surcharge upheld.
33.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
MICHAEL S CONNELL
TRIBUNAL JUDGE
RELEASE DATE: 19 December 2013
