2009] UKFTT 144 (TC)

TC00112

Appeal number MAN/08/0738

Failure to submit VAT returns on time – default surcharge penalties – fraudulent employee – reasonable excise – Appeal allowed

FIRST-TIER TRIBUNAL

TAX 

	MANVIK PLANT & HIRE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL : IAN WILLIAM HUDDLESTON
						J. ADRAIN, FCA

Sitting in Belfast on 3rd April 2009

Mr. Geoff Tack, Ernst & Young, for the Appellant

Bernard Haley of HM Revenue and Customs

© CROWN COPYRIGHT 2009

DECISION

The Appeal
1.	Manvik Plant and Hire Limited (the Appellant) carries on business as a retailer and maintenance provider of vehicles and equipment which are deployed in the waste sector.  This Appeal concerns a number of default surcharge notices and attendant liability served on the Appellant for a period spanning from December 1998 through to June 2006.  A total of 16 default surcharge notices were served on the Appellant, but the ones which are in contention are for the periods 06/99, 12/99, 03/00, 06/00, 12/00, 06/01, 06/02, 06/04, 12/04, 06/05, 12/05 and 03/06.
The Facts
2.	The facts of the case are that the Appellant company was set up by a Mr. John Connor in September 1997.  He employed as his book keeper / office manager a colleague with whom he had worked in a previous business, Miss. X (the reason for keeping her name anonymous will become apparent later).
3.	Miss. X had no formal accountancy training, but had always worked as a general book keeper and had dealt with VAT matters for her previous employer.  Throughout the relevant periods to which this Appeal relates, Miss. X was the only permanent office based member of staff and, according to the evidence which Mr. Connor gave, essentially had control of the office and, more particularly, the accounting functions on a day to day basis.  She reported directly to Mr. Connor whose role, as the sales director within the Appellant company meant that he was often away from the office on business – sometimes for prolonged periods.
4.	A VAT control visit was carried out in 2004.  Mr. Connor was present during the initial stages of that visit but he gave evidence that no concerns were actually expressed.
5.	Indeed, it was not until the 19th September 2006 when a winding up petition brought by HMRC against the Appellant was advertised in the Belfast Gazette, that Mr. Connor said he first became aware of VAT irregularities. 
6.	As a result of that incident, he confronted Miss. X who confessed that she was aware of the VAT defaults, but that she had concealed the information from Mr. Connor.
7.	Shortly after that incident, Miss. X went on sick leave for approximately five weeks.  During that period some suppliers contacted Mr. Connor directly seeking payment of supply invoices but, when these were cross checked against the Appellant’s records, it appeared from the accounts that the supply invoices had in fact already been paid.
8.	Upon obtaining copies of the cleared cheques from the Appellant’s bank, Mr. Connor became aware that the cheques in fact had been made payable to Miss. X who, it was alleged, had been misappropriating the funds. 
9.	A criminal investigation was commenced.  It appeared that unfortunately the activities had been going on for some time and, indeed, the Tribunal were presented with copy cheques dating back to August 2002.  These were made payable to Miss. X and paid into a separate account in her name.  The cheque stubs to which the cheques related invariably were made out in the names of the suppliers of the business.
10.	The Tribunal did not get a clear picture as to how the alleged fraud was carried out, for it seemed that all debtors, including HMRC, had been paid by Miss. X on behalf of the business eventually.  Nevertheless payments were often made late and, in the case of HMRC, the late payments involved the late delivery of VAT returns and, therefore, the late discharge of the VAT liability due on foot of those returns and, as a result, prompted default surcharge notices and liabilities. 
11.	Mr. Connor gave evidence to the Tribunal that on an ongoing basis he inspected the VAT returns and signed cheques for VAT.  What happened to the VAT returns thereafter is not clear, but the Appellant’s case is that Miss. X did not submit the returns on time for some unknown reason.  Mr. Connor did acknowledge that his inspection of the VAT returns focused mainly on the larger items of plant and equipment, but in relation to the smaller items he relied entirely on Miss. X, who completed the return.
12.	Mr. Connor also gave evidence (and produced bank statements in support of his case) that the Appellant company always had sufficient funds to discharge the VAT due to HMRC as it fell due.  It was not the case, therefore, that the actions of Miss. X led to an insufficiency of funds.  It was simply the Appellant’s case that her fraudulent actions led to a series of events that resulted in VAT returns and VAT being submitted late, and that the Appellant, therefore, became subject to the default surcharge regime.
13.	The case against Miss. X was never fully investigated or clarified, because during the course of the criminal investigation she committed suicide. On the Appellant’s evidence, it was suggested that some £128,000 of the Appellant’s funds had been misappropriated.
14.	It was put to Mr. Connor that it seemed very strange that he had not been more aware of these issues at an earlier stage.  Mr. Connor, in response, stated that:
(a)	regardless of whether Mr. Connor was physically present in the business premises of the Appellant or not (which he conceded was rarely) Miss. X remained the first point of call both for incoming telephone calls and for mail received.  This position, therefore, enabled her to intercept correspondence from HMRC;
(b)	after the investigation, it appeared that Miss. X had been corresponding with HMRC in relation to the late delivery of both VAT returns and the tax payable on foot of them in Mr. Connor’s name, but without his knowledge;
(c)	in 2004-2005, Mr. Connor had employed the services of his sister to assist Miss. X, but that proposal to alleviate her work pressure had not met with favour and was short-lived;
(d)	it did seem to be the case that suppliers had been paid – even if it was after a period of delay;
(e)	the accountants, who were consulted after these series of incidents came to light, confirmed that the only VAT issue of which they had been aware related to the VAT period 03/00.  On that occasion two cheque stubs for the VAT payable had been dated (respectively) 27 April and 28 April 2000, but had not been presented at the year end for the Appellant, ie 30 June 2000.  When queried Miss. X indicated that the cheque had been lost in the post.  A new cheque was therefore drawn and it cleared through the Appellant’s accounts on the 5 September 2000.  The accountants reported that there were no other VAT irregularities of which they were aware and that in most cases cheques in respect of VAT appeared to clear through the account within a few days of the due date.
15.	The Tribunal had the benefit of a witness statement provided by Mr. Connor and oral evidence to further explain his case.  He appeared direct and highly credible. 
16.	HMRC had been invited to review the case, which resulted in a review decision, advised to the Appellant’s advisers, Ernst & Young, by way of a letter dated 18 January 2008 which confirmed HMRC’s decision to uphold the default surcharge liability notices.
The Appellant’s Case
17.	The Appellant, after becoming aware of the position, appointed Ernst & Young to act on his behalf. That firm wrote to HMRC on the 7th February 2007 and advanced a case on behalf of the Appellant in relation to both the late delivery of EC Trade Lists and in relation to the issue of default surcharge penalties that had been levied. 
18.	As an argument for a reasonable excuse for the latter, Ernst & Young advanced:
(a)	postal issues – in line with correspondence by Miss. X to both HMRC and Royal Mail, dating back to early 2000.  The Tribunal were presented with copy correspondence between Miss. X and Royal Mail in which Miss. X claimed that there had been delays and mis-delivery of post and, more particularly, delay in relation to the Appellant’s receipt of the earlier default surcharge notices;
(b)	employee fraud – dealing particularly with the effect on the operation of the business of the fraud allegedly perpetrated by Miss. X.
19.	The postal delays were not advanced before the Tribunal, and therefore the Appellant’s case before this Tribunal rests squarely on the actions of Miss. X and the fraud which she allegedly perpetrated and which the Appellant advanced as providing a reasonable excuse for the delays that occurred.
HMRC’s Case
20.	HMRC, in denying the Appellant’s case at an earlier stage, and in its formal review letter of the 18th January 2008, rejected the Appellant’s arguments on the basis that Section 59 of the Value Added Tax Act 1994 provided that late delivery of returns and/or payment of the VAT due on foot thereof constituted a default for the purposes of Section 59(2) and that on the facts of the case a “reasonable excuse” of the type envisaged by Section 59(7) had not been established and, indeed, was specifically excluded by the statutory provisions contained in Section 71:
Section 71(1)
“For the purpose of any provisions of Section 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;
(b)	where reliance is placed on another 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.”
	Case Law
21.	The Appellants, both in their correspondence and in the Appeal, made reference to a number of cases.
22.	The first was the case of AG Hurlstone v The Commissioners of Customs and Excise (1990) (Decision Number 6167) where the appeal was allowed because the work carried out by a dishonest bookkeeper resulted in cash deficiencies which the Chairman felt established a reasonable excuse for the default in respect of a number (but not all) of the default surcharges in question.
23.	The second was the case of Appropriate Technology Limited v The Commissioners of Customs and Excise (1991)(Decision Number 5696) which was a case which involved failures in a company’s accounting system which resulted in incorrect returns being made resulting in default surcharges being levied. In that case Judge Medd dealt with the issues thus:
“In the light of these various submission I must first ask myself what is it that the Company is putting forward as an excuse, ie as the reason why it says it should be excused from being liable to the very substantially penalty that it has incurred. …….  Having, as I hope, accurately set out the excuse put forward by the Company, I must ask myself whether it is a reasonable excuse.  ……… There can, in my view, be no doubt, as has been frequently pointed out by the Tribunal, that the test is an objective one and, as the Chairman, Mr. James Freeman, of the Tribunal in Lees Smith (East Anglia) said:
 ‘reasonableness is not an absolute concept, and there is no scientific way of saying whether any excuse if reasonable or not.  It must in the end be a matter of human judgement having regard to, and weighing all the circumstances of each particular case.’
If the tax payer satisfies the Tribunal on the balance of probabilities that he was unaware of the error in his return, then it seems to me that he should only be blamed if the Tribunal considers that he failed to act with reasonable care in the preparation of his return.  The converse is that he should be blamed, or should be held to have a reasonable excuse, if in all the circumstances the Tribunal considers that he has taken reasonable care in the preparation of his return.”
24.	On the facts of that case Judge Medd felt that reasonable excuse had been established and allowed the appeal. 
25.	The next case to which the Tribunal was refered is the case of MM Carew and Son Marble Company Limited (1993) (Decision Number 11681), the facts of which are not dissimilar to the instant case.  In that case there were 18 default surcharge notices, details of which only became apparent during a company audit when the accountants pointed out that 15 months VAT returns were outstanding.  The appeal was allowed in part, but specifically on the issue of reasonable excuse, and on the business owner’s supervisory role the Chairman in that case made the following helpful comment:
“I cannot accept that there was a reasonable excuse for the first four defaults ……… They were late simply because the bookkeeper failed to send them in and no-one else checked on his work.  It is the director’s responsibility to ensure that VAT returns are submitted, and Mr. Carew failed to do that.  It may be understandable that, with the business side to run, he left matters to an employee whom he considered reliable, but the reasonably conscientious business man would make sure that returns were sent in, even if he did not check the figures in detail.”
26.	The next case to which the Tribunal was referred is the case of CMS Peripherals Limited v HM Revenue and Customs (2005) (Decision Number 19234) in which a fraudulent bookkeeper through a complex series of fraudulent transactions embezzled approximately £1,000,000 from the Appellant company.  In that case the Chairman, Dr. A.N. Brice, decided the appeal in favour of the Appellant on the following basis:
“The real cause of the default was the dishonest acts of the finance director which resulted in a negative cash flow position.  This was an unforeseeable and inescapable misfortune, and so was a reasonable excuse for all the defaults.”
	Decision
27.	In closing arguments, HMRC accepted that on the basis of the evidence produced that there was a reasonable excuse in respect of the default surcharges levied after August 2002 – on the basis that evidence had been produced that there was fraudulent activity by the bookkeeper after that date, but that in relation to all of the earlier default surcharge notices, HMRC argued that there was no evidence of misdemeanour.
28.	Whilst that is true, in the sense that the Tribunal was only presented with fraudulent cheques dating back to August 2002, the Tribunal does have to have regard to the earlier “reasons” given by Miss. X in correspondence which passed between she and Royal Mail, dating as far back as 2000.  This clearly was not definitive proof that fraudulent activity had occurred, but it is certainly suggestive of irregularities – irregularities of which Mr. Connor, on his evidence, had not been aware.
29.	If I approach this case in the same way as Judge Medd in the case of Appropriate Technology Limited, I must ask myself what “reasonable excuse” is being advanced to explain the Company’s undoubted defaults.  The answer to that is quite simple.  The Appellant has advanced cogent evidence that there was fraudulent activity of which Mr. Connor, as the managing director, was not aware.  I must then ask myself if that is reasonable in the circumstances of this case.  The law imposes strict obligations on a trader, obligations which are enforced in particular by the terms of Section 71 (as cited above). 
30.	Mr. Connor gave evidence that he both checked the VAT returns – although he admitted that he did not do so in great detail – and signed the appropriate cheques.  Indeed, he would have had to as only he and his wife were signatories on the bank account.  He gave evidence that he was aware of the VAT return dates but, it would appear, having signed both the returns and the cheques he relied upon Miss. X to actually make the submissions.  It is abundantly clear that she did not always submit the VAT returns and cheques on time – although the exact rationale for her failing to do so is not entirely clear, unless the withholding of the presentation of those returns and cheques in some other way aided her alleged fraudulent purpose in terms of manipulating cash flow.  She herself, it would seem, derived no other personal benefit from the late delivery of the returns or the tax.  Given the comparatively small nature of this business, the fact that Mr. Connor relied on one employee, coupled with the fact that he was so often away from the office, and that he did undertake some checking of the actual returns, we do find that he acted as much as any other small business owner would do.  In other words his actions, in the context of this business, were reasonable.  Indeed, his accountant in conducting the audit had not detected the problem, therefore it is unlikely that he would.  To that extent, therefore, we find that the dishonest actions of Miss. X were of a nature that it was difficult for anyone, including the Company’s accountants, to actually establish that fraudulent activity had been occurring.  Certainly the actions of the bookkeeper we find were of such an extent that it takes it well beyond the “dilatoriness or inaccuracy” of a type referred to in Section 71(1)(b). 
31.	During the course of the case HMRC had accepted that the dishonest activities of the bookkeeper did constitute a reasonable excuse for the later default surcharges.  They suggested that there was no evidence for the earlier default surcharge penalties but, we find, that given the nature of the correspondence with Royal Mail and the fact that the Company’s accountants had alluded to late VAT returns as early as 2000 that there was very little to distinguish between the earlier and later periods. From Mr. Connor’s perspective, he was not aware of the activities that were being carried on and therefore we find that the reasonable excuse extends throughout the entire period and is sufficient to discharge the Appellant from its liability to all of the default surcharge penalties that have been levied against it.
32.	On that basis the appeal is therefore allowed.
33.	The Appellant made an application for costs in the event of it being successful.  I award the Appellant’s reasonable costs where they arise out of and are incidental to this appeal.  In the event that those costs are not agreed between the parties, then they are to be assessed by the Tribunal on the application of either party. 
TRIBUNAL JUDGE
RELEASE DATE:24 June 2009