[2009] UKFTT 293 (TC)

TC00237            
 Appeal number: TC/2009/11845

VALUE ADDED TAX – default surcharge – reasonable excuse –  s 59(7)(b) VATA 1994 – recruitment company – restructuring and pressure on senior staff  – whether reasonable excuse for late payment of VAT– no –- appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	BERESFORD BLAKE THOMAS LTD	Appellant

	- and -

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

				TRIBUNAL: 	TRIBUNAL JUDGE MANUELL
						MR G BARDWELL CBE

Sitting in public in London on 22 September 2009

Mr S Simons and Mr S Garda for the Appellant (in person) 
Mr J P Holl, presenting officer, from the office of the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction and preliminary matters
1. This is an appeal by Beresford Blake Thomas Ltd (“the Appellant”) against the default surcharge 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, a recruitment consultancy based in London SW1, received notice from the Commissioners of a liability to a surcharge in the sum of £91,393.60 in respect of its VAT period 12/08.  The surcharge was levied at the applicable rate of 5 per cent, the Appellant having been in the default surcharge regime since June 2007.
2. The Appellant does not dispute that it was late in its payment of VAT for the period in question, nor does it challenge the amount of the surcharge.  Its argument was that it is not liable to the surcharge because it has a reasonable excuse for the late payment of the VAT.  In summary, the grounds for arguing a reasonable excuse, and the basis of the appeal to the Tribunal, is that the Appellant had first entered the surcharge regime inadvertently in June 2007, when a balancing payment was made a few days late.  A Notice was issued, effective until 30 June 2008.  Payments were made when due, save that the instalment due on 30 June 2008 was late because of staff illness, resulting in the extension of the surcharge period until 30 June 2009.  While that surcharge period was current, the December 2008 return was submitted late.  This was because of a business reorganisation, relocation and restructuring.  The Appellant proposed that the penalty was excessive and offered an interest payment of £7358.29 in its place.
3. For the reasons given below, the Tribunal do not consider that the Appellant has a reasonable excuse for the late payment of its VAT, and therefore the appeal must be dismissed.
The evidence and the facts
4. The Tribunal received in evidence the correspondence between the Appellant and the Commissioners as to the default surcharge and the Appellant’s reasons why the relevant VAT had not been paid; a schedule prepared by the Commissioners showing the default surcharge “history” of the Appellant; and the oral evidence of Mr Steve Simon ("Mr Simon") and Mr Sandip Gadhia ("Mr Gadhia") respectively the Finance Director and the Financial Controller of the Appellant, who were cross-examined by Mr Holl for the Commissioners.
5. From the evidence, of which the Tribunal kept a detailed note, the Tribunal finds the following as the facts relevant to this appeal:
(1)	The Appellant is a substantial company which because of its turnover and large VAT output operates under the payment on account system.  
(2)	The Appellant admitted that it had become subject to the default surcharge regime at 5 per cent, in accordance with the default surcharge provisions, by the time its December 2008 return was due.
(3)	For the VAT quarter 12/08 the Appellant was liable to account for VAT in the sum of £2,643,954.02 on the due date which was 30 January 2009.  It failed to make that payment on the due date, and the Commissioners assessed the Appellant to a default surcharge of £91,393.
(4)	The Appellant subsequently paid the outstanding VAT in full.
(5)	The rate of VAT was reduced from 17.5% to 15% during the relevant quarter, which required the Appellant to install new computer software.
(6)	The Appellant’s financial year end required results to be ready by 9 January 2009, so the company auditors had many demands upon the accounts department.
(7)	The Appellant was simultaneously engaged in a restructuring and a physical office relocation, a decision taken in December 2008.
(8)	Mr Gadhia had been under particular personal pressure over the Christmas holiday period because his elderly mother had fallen ill, although she had recovered sufficiently to have returned to her own home before the end of January 2009.
(9)	Mr Simon accepted that he had not acquainted himself with the workings of the VAT surcharge regime. 
(10)	Mr Gadhia accepted that he had overlooked the necessary bank transfer required on 30 January 2009, mainly because his backlog of work meant he had not had time to check the figures in the draft VAT return for accuracy, although he had the necessary information.
Decision
6. 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 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.
7. The Appellant does not challenge the validity of the default surcharge assessments made in terms of the prescribed statutory processes.  The Notice of Appeal makes that admission, but claims the benefit of the “reasonable excuse” escape provision, which is found in subsection (7) of section 59 VATA 1994, as follows:
“(7) 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 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 (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).
It is, of course, sub-subsection (b) on which the Appellant seeks to rely.
The “reasonable excuse” escape 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 as follows:
(1) 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) 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. 
(2) In relation to a prescribed accounting period, any reference in sections 59 to 69 to credit for input tax includes a reference to any sum which, in a return for that period, is claimed as a deduction from VAT due.
8. It is well established in 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.  It was not claimed that “any other person”, that is, an outside professional firm, had any responsibility for the default in question.
9. It is clear from the terms of section 59(7) VATA 1994 that the burden rests on the Appellant to satisfy the Tribunal that there is a reasonable excuse for the failure to pay by the due date the VAT for the period in question.  The Appellant’s case is that the oversight was in essence due to pressure of work, coupled with a plea that the statutory penalty imposed is excessive.
10. Both Mr Simon and Mr Gadhia were frank and honest witnesses.  There was no submission to the contrary.  Mr Simon rightly accepted that the ultimate responsibility for compliance rested on him, notwithstanding the need for delegation which is essential in a large company with international recruitment activities.  It is the fact that the VAT return due on 30 January 2009 came on top of many other responsibilities which fall upon Mr Gadhia.  But only the corporate restructuring and relocation could fairly be described as unforeseen or exceptional, and even that required attention to all existing statutory duties and obligations.  The company year end had not changed.  The immediate family concerns had passed.  The VAT return was a regular and recurrent obligation, of special importance because (a) the Appellant had passed into the surcharge regime, which had unfortunately been extended so that the 5% rate of surcharge had become applicable in the event of further default and (b) the Appellant’s self evidently high output tax figure which rendered the prospect of any percentage based penalty a potentially serious matter.
11. The Tribunal has no power in law to reduce or otherwise mitigate VAT surcharge penalties.  It is all or nothing. 
12. The Appellant is a large operation, with experienced professional staff.  Its systems had been shown to be inadequate when it first entered the surcharge regime.  Then there was the second oversight, for which a penalty had been paid.  Fair and repeated warning had been given.  The Commissioners’ literature is clear and Mr Gadhia was under no illusions.  He took a snap judgement to the effect that the return could wait, and then overlooked it, although the necessary information was to hand.  That was not a reasonable excuse.  Mr Simons rightly accepted that he should have taken a close supervisory interest, especially after the surcharge regime had been extended.  The Tribunal agrees.  No more need be said save that the statutory review process was conducted in a scrupulous yet sympathetic manner.
13. For these reasons we dismiss the appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   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.

TRIBUNAL JUDGE MANUELL

CHAIRMAN
RELEASE DATE:  4 November 2009