[2011] UKFTT 30 (TC)

TC00907

Appeal number: TC/2010/05948

 VAT – default surcharge – reasonable excuse

FIRST-TIER TRIBUNAL

TAX 

	1st GLASS & MIRROR COMPANY LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	GUY BRANNAN (TRIBUNAL JUDGE)							ANTHONY HUGHES (TRIBUNAL MEMBER)		

Sitting in public at Holborn Bars, London EC1N 2NQ on 20 September 2010

Jo Martin for the Appellant

Bruce Robinson, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against a default surcharge assessment in respect of the late payment of VAT for the accounting period 1 December 2009 to 28 February 2010. The amount of VAT paid late was £5768.15 and the default surcharge (levied at 10% of the tax paid late) is £576.81.
2.	The Appellant did not dispute that the VAT had been paid late or that the correct rate for the surcharge in accordance with section 59 (4) Value Added Tax Act 1994 ("VATA") was 10% -- being the percentage for a third prescribed accounting period. Essentially, the first default by a taxpayer puts the taxpayer into the surcharge regime and a surcharge liability notice is issued. Subsequent defaults render the taxpayer liable to a surcharge. The second default results in the surcharge of 2%, the third default results in a surcharge of 5% and a fourth default (as in the case before us) results in a surcharge of 10% and further defaults are charged at 15%. There is a minimum surcharge of £30 for surcharges calculated at the 10% or 15% rates and HMRC does not issue a surcharge at the 2% and 5% rates if it calculates it to be less than £400.
3.	 In this case the due date of payment was Wednesday 31 March 2010. Electronic payments are required to be received within seven calendar days after the due date ie by Wednesday, 7 April 2010. Payment was received by HMRC on 23 April 2010.
4.	In a letter dated 5 May 2010 Ms Martin indicated that contact had been made by the Appellant with HMRC in early April 2010 in respect of making a payment by BACS. She said that HMRC had informed the Appellant that there were technical difficulties with their BACS payments and that payments were being received later than normal. Ms Martin indicated that she had followed this up with a telephone conversation to confirm the BACs payments had gone through the Appellant's system and HMRC confirmed that all was in order and that they would make a note on their system. However, Mr Robinson said that HMRC had no record of any contact made by the Appellant regarding the payments due earlier than 21 April 2010 and produced a document headed "Info Log Entry" recording telephone contacts between HMRC and the Appellant between 14 July 2004 and 12 May 2010, where no such conversations were recorded.
5.	A person is not liable to a surcharge if there is a reasonable excuse for the VAT being paid late: section 59 (7) VATA.
6.	Ms Martin drew attention to the fact that the Appellant was a small company struggling to cope with a difficult recession. She said that the Appellant was not defaulting on its VAT but simply needed a few days grace in order to pay it. She felt very strongly that the Government should be attempting to support small businesses in such difficult financial times rather than imposing further financial burdens upon them. In a letter dated 7 July 2010 Ms Martin refers to the Appellant having always liaised with HMRC to keep them fully informed of their situation. At the hearing she said that, at the relevant time, funds were not available to pay the VAT. A number of the Appellant's customers had gone into liquidation and many of their large customers were the slowest payers. However, she was unable to produce any evidence to substantiate this. She also noted that the Appellant had had to cut its prices to match larger competitors and that this had adversely affected cash flow. She also considered that HMRC should have been more proactive in telling the Appellant about alternative methods of payment.
7.	Ms Martin also argued that the amount of the surcharge was disproportionate when compared with the nature of the failure in question.
8.	Mr Robinson noted that there was no evidence that the Appellant had contacted HMRC before the due date for payment and considered that the position would have been different had such content been made.
9.	Mr Robinson drew attention to the history of previous defaults. He also stated that HMRC had no record of problems with BACS payments. He also drew attention to the fact that there was ample information on HMRC's website about how to avoid the default surcharge. 
10.	Mr Robinson also addressed the issue of proportionality. Mr Robinson referred to the decision in Enersys Holdings UK Ltd TC00335 in which the Tribunal found that a 5% penalty of £131,881 in respect of one day's delay in payment was, in the circumstances of that case, disproportionate. In those circumstances it discharged the penalty. We are aware that leave has been given to HMRC to appeal this decision to the Upper Tribunal. In the circumstances, Mr Robinson recognised that the Tribunal might wish to defer a decision on this issue until after the Upper Tribunal had given its decision.
11.	Initially, the approach suggested by Mr Robinson seemed the right course of action to take and at the end of the hearing when we announced our decision we thought that we should not decide the proportionality issue.
12.	On further reflection, however, we do not think that this is the correct approach.
13.	We have now reviewed the decision of this Tribunal in Crane Limited v HMRC [2010] UKFTT 378 (TC) where the Tribunal (Judge Hellier and Julian Stafford) considered the proportionality issue but, bearing in mind the relevance of the Enersys case, extended the time limit for an appeal until after the decision of the Upper Tribunal in that case. It seems to us that, rather than adjourn this case until after the Upper Tribunal's decision, this is a preferable approach.
Our decision

14.	Our decision is that the Appellant did not demonstrate that there was a reasonable excuse within the meaning of section 59 (7) VATA for the late payment of VAT. There is no statutory definition of "reasonable excuse" but it is generally taken to mean an event which is outside the taxpayer's control and which was not reasonably avoidable. Although an insufficiency of funds is not generally a reasonable excuse the underlying causes of such an insufficiency can constitute a reasonable excuse.
15.	However, in this case the Appellant did not produce sufficient evidence to convince us of the underlying cause for the failure to pay the VAT on time. Accordingly, whilst recognising the difficulties faced by small businesses in the current economic climate, we concluded that this appeal should be dismissed.
16.	As indicated above, we consider that we should address the proportionality issue. We do not consider that a 10% penalty on a fourth default is disproportionate bearing in mind the purpose of the penalty which is undoubtedly to encourage taxpayers to pay their VAT on time. Moreover, no surcharge is imposed on the first default and no surcharge is imposed on subsequent defaults under £400. In addition, taxpayers who have a reasonable excuse for the failure to pay VAT on the due date or excused the default surcharge under section 59 (7) VATA. In the circumstances, we do not consider the surcharge imposed in this case to be disproportionate.
17.	Accordingly, our decision is that this appeal should be dismissed.
Leave to appeal

18.	The Appellant may, of course, apply for permission to appeal against this decision. The procedure for so doing is set out in the notice which accompanies this decision and which to that extent, but save as noted below, forms part of it. 
19.	Following the approach in the Crane Limited case, since we recognise that the Upper Tribunal's decision could have a bearing upon the question of what is disproportionate and the approach to be adopted by a Tribunal in a case where it is alleged that the surcharge is disproportionate, we consider that the time limit in which the Appellant can appeal this decision should be extended. We therefore direct in accordance with Rule 5(3) (a) of the Tribunal's Rules that the period in which the Appellant is permitted to bring an application for leave to appeal against this decision be extended from the normal 56 days given by Rule 39(2) until 28 days after the release of the decision of the Upper Tribunal in Enersys. If following the release of that decision the appellant sought leave to appeal within that extended period, and it was satisfied that the Enersys decision would affect the conclusion this Tribunal should have reached, then it would be open to the Tribunal, if satisfied that there was an error of law in the decision, to review this decision in the light of that case and (possibly after a further hearing) to provide a new decision if such were necessary in the circumstances, rather than remitting the appeal to the Upper Tribunal.
20.	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.

GUY BRANNAN

TRIBUNAL JUDGE
RELEASE DATE: 29 OCTOBER 2010