[2011] UKFTT 153 (TC)

TC01027

Appeal number:  TC/2010/08461

VAT –default surcharge – Company unable to receive post – whether reasonable excuse - no

FIRST-TIER TRIBUNAL

TAX 

ROCCO MANA LTD
	T/A SPEARMINT RHINO ROUGE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: 	Mrs B Mosedale (TRIBUNAL JUDGE)
						Mrs E Bridge (TRIBUNAL MEMBER)

					

Sitting in public at 68 Lombard Street, London  on 18 January 2011

Mr  S Gordon, accountant, for the Appellant

Mr P Rowe, officer of HMRC, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	Rocco Mana Limited (“the Company”) appeals against three default surcharges levied on it imposed on it in respect of its late payment of VAT.
2.	The surcharges were levied under s59 of the Value Added Tax Act 1994 (“VATA”) and the full provisions of that section are set out in the appendix to this Decision Notice.  
3.	The Company’s VAT default surcharge history is as follows:
Default No.	Period	Return type 	Method of payment 	Rate of surcharge	Amount of surcharge	
1	09/08	Paper	Cheque	0%	nil	
2	12/08	Paper	Cheque	2%	£518.39	
3	03/09	Paper	Cheque	5%	£942.28	
4	06/09	Paper	Cheque	10%	£2,601.04	
5	12/09	Electronic return 	BACS	15%	£4,154.95	
6	03/10	Electronic return 	BACS	15%	£4,026.42	

4.	In its Notice of Appeal, the Company only appealed against defaults 4-6 inclusive as set out in the table above, but this Tribunal considered the entire default surcharge history as a reasonable excuse for the earlier defaults would affect the percentage of the penalty for the later defaults (if upheld). We note that Mr Gordon’s letter to HMRC of 5 October had in fact appealed all the default surcharges and HMRC considered penalties 3-6 inclusive to be under appeal in their review letter of 11 October 2010 and discharged a penalty for 06/10.
Facts
5.	Mr Gordon was the in-house accountant to the Company.  It was Mr Gordon’s evidence that the defaults 1-4 inclusive were caused by shortage of funds due to trading at a loss.
6.	The Company’s explanation of the reason for the later defaults was that it was impossible for it to receive a blank VAT return.  The Company ran a night club.  Its business premises had no letter box.  For security reasons, it had to have a shutter at the front without a letter box.
7.	The facts were not in dispute and we find them to be as follows.
8.	When the Company started to trade in 2007, it had a postal redirection in place to its premises at the Spearmint Rhino club in London.  However, there was a business re-organisation and sale in July 2009 which meant that the Brighton and London clubs were no longer owned by the same company and this mail re-direct was cancelled.
9.	Mr Gordon did not put in place another postal redirection service.  He says at the time he thought it was not necessary as long as he wrote to all suppliers to notify them of the new address for mail.
10.	So after July 2009, Mr Gordon wrote to all suppliers and they agreed to send post to another address.  The branch of HMRC which dealt with PAYE was also prepared to accept this alternative correspondence address.   It was Mr Gordon’s evidence that he did not actually apply to register a different correspondence address for VAT purposes with HMRC.  This was because he had done this in respect of two other companies in similar circumstances and been refused and he knew HMRC would refuse again for the Company.  This was because of HMRC’s rules which would not  allow HMRC to accept as a VAT registered person’s correspondence address an address other than its trading address.
11.	We note that the 1995 VAT Regulations prescribe the form of the VAT Registration form and require a taxpayer to state its business address which is the “principal place where most of the day to day running of the business is carried out.”  By Regulation 5 a business is required to give this information and is required to keep the information up to date.  It is not so clear to the Tribunal why HMRC would not accept another address as a correspondence address but that this is their interpretation of the rules is clear as we were shown a letter from HMRC dated 9 April 2010 to the Company in which HMRC stated HMRC required the trading address.  Mr Rowe for HMRC also accepted that Mr Gordon was correct to state that HMRC would not have accepted a home address or serviced office accommodation as a correspondence address. 
12.	HMRC accept that the return for 03/10 was returned to them by the post office as it could not deliver it.
13.	Occasionally, the company would actually receive post from HMRC:  this was a matter of chance.  Mr Gordon surmised that a cleaner might accept post if they were on the premises when the postman called but normally (being a night club) the premises were not open when the post was delivered.  For instance, period 09/09 was not paid late and Mr Gordon believes this was because he did receive the return on time.
14.	Mr Gordon attempted to circumvent these problems by registering to file VAT returns online.  This was not immediately successful as it required him to enter an activation code which HMRC sent out by post.  He did not get the post.  Eventually he did manage to get the activation code and registered for online returns on by April 2010.
15.	Mr Gordon accepts that the Company was aware that it was in the default surcharge regime but points out that it would only received some of the notification letters and then only received them late.
16.	He says although he would have known how much VAT was due each quarter he did not know how to pay this without submitting a return.  He points out that the HMRC VAT helpline is not helpful:  he finds it is almost impossible to get through to them and for that reason he would not have called it.
17.	Mr Gordon feels aggrieved because it took HMRC 2½ months in 2007 to repay the Company a substantial refund it was owed by HMRC which caused the Company financial hardship, yet the Company is being penalised for late payments of VAT.
18.	He also feels aggrieved because he considers it to be HMRC’s fault that the Company did not receive its post from HMRC because HMRC had such inflexible rules that he was unable to register a different correspondence address for the Company.
Decision
19.	We find in respect of the first four defaults that the Company had no reasonable excuse in respect of them.  S71 VATA (as set out in the appendix) provides that an insufficiency of funds by itself is not a reasonable excuse.  We recognise that a sudden and unanticipated event which leads to a shortage of funds might be a reasonable excuse but find no evidence of such an event in this case.  It was Mr Gordon’s evidence (which we accept) that the first four defaults were caused by cash flow problems as the business had run at a loss since it opened.  We also note that  Mr Gordon said did not want to dispute the liability to them.  
20.	In respect of period 12/09 we find that Mr Gordon filed an electronic return very late, on 8 April  2010 although it was due on 7 February 2010 (as payment was also electronic).  The reason he gave was that he did not have a paper return and was unable to file online as explained above.
21.	We find that the Company ought to have known its VAT liability and the date on which it was due to be paid.  We think that the Company, knowing as it clearly did the problems it had with receiving post from HMRC, ought to have paid the VAT that was due without waiting for a VAT return it knew it was unlikely to receive.  The receipt of a blank VAT return is not a prerequisite to liability to pay the VAT.  In any event, even if it were, the Company should put in place an effective system for receiving its post.  Knowing that it could not have a letter box at its trading address and knowing that HMRC would not accept a different correspondence address, it should have maintained (but did not) a mail redirection or made other suitable arrangements.
22.	We note that in any event, even though the electronic VAT return was filed on 8 April 2010 the BACS payment was not made until 21 April.  No explanation was given for this further delay but it was clearly not the non-receipt of the paper return.  We find the company has no reasonable excuse for its late payment of VAT in respect of period 12/09.
23.	In respect of period 3/10 we find that the Company filed the electronic return 3 days late (on 10 May instead of 7 May).  We note that this happened in the following quarter and it seems possible the cause was a misunderstanding as to the due date of an electronic return.  Putting aside the issue of whether such a misunderstanding could be a reasonable excuse, we note that the VAT was not paid for another 11 days (21 May).  No explanation was given for this.   The Appellant had been on electronic returns since the previous month and actually filed the return only 3 days late.  Having no explanation of why it took another 11 days to pay the tax, we find that there was no reasonable excuse for the late payment.
24.	The appeal was dismissed.
25.	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.

TRIBUNAL JUDGE
RELEASE DATE: 2 MARCH 2011

The Value Added Tax Act 1994
S59 Default Surcharge

59 The default surcharge
(1)     Subject to subsection (1A) below If, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period—

(a)     the Commissioners have not received that return, or

(b)     the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period,

then that person shall be regarded for the purposes of this section as being in default in respect of that period.

(1A)     A person shall not be regarded for the purposes of this section as being in default in respect of any prescribed accounting period if that period is one in respect of which he is required by virtue of any order under section 28 to make any payment on account of VAT.

(2)     Subject to subsections (9) and (10) below, subsection (4) below applies in any case where—

(a)     a taxable person is in default in respect of a prescribed accounting period; and

(b)     the Commissioners serve notice on the taxable person (a “surcharge liability notice”) specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.

(3)     If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.

(4)     Subject to subsections (7) to (10) below, if a taxable person on whom a surcharge liability notice has been served—

(a)     is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and

(b)     has outstanding VAT for that prescribed accounting period,

he shall be liable to a surcharge equal to whichever is the greater of the following, namely, the specified percentage of his outstanding VAT for that prescribed accounting period and £30.

(5)     Subject to subsections (7) to (10) below, the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT, so that—

(a)     in relation to the first such prescribed accounting period, the specified percentage is 2 per cent;

(b)     in relation to the second such period, the specified percentage is 5 per cent;

(c)     in relation to the third such period, the specified percentage is 10 per cent; and

(d)     in relation to each such period after the third, the specified percentage is 15 per cent.

(6)     For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference in subsection (4) above to a person's outstanding VAT for a prescribed accounting period is to so much of the VAT for which he is so liable as has not been paid by that day.

(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).

(8)     For the purposes of subsection (7) above, a default is material to a surcharge if—

(a)     it is the default which, by virtue of subsection (4) above, gives rise to the surcharge; or

(b)     it is a default which was taken into account in the service of the surcharge liability notice upon which the surcharge depends and the person concerned has not previously been liable to a surcharge in respect of a prescribed accounting period ending within the surcharge period specified in or extended by that notice.

(9)     In any case where—

(a)     the conduct by virtue of which a person is in default in respect of a prescribed accounting period is also conduct falling within section 69(1), and

(b)     by reason of that conduct, the person concerned is assessed to a penalty under that section,

the default shall be left out of account for the purposes of subsections (2) to (5) above.

(10) 	If the Commissioners, after consultation with the Treasury, so direct, a default in respect of a prescribed accounting period specified in the direction shall be left out of account for the purposes of subsections (2) to (5) above.

(11)     For the purposes of this section references to a thing's being done by any day include references to its being done on that day.

S71 Construction of sections 59 to 70

(1)	For the purposes 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  reasonable excuse; and
(b)	where reliance is place 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)	…..