[2011] UKFTT 274 (TC)

TC01136

Appeal number:  TC/2011/01932

Value Added Tax – Value Added Tax Act 1994, Sections 59 and 71 – default surcharge - whether insufficiency of funds to pay tax amounted to a reasonable excuse – Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX 

	MTS RECOVERY & REPAIRS LIMITED	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE:	W Ruthven Gemmell, WS	

Sitting in public in Edinburgh on Monday 11 April 2011

Andrew McCormack for the Appellants

Alan Donnachie, for the Respondents 

© CROWN COPYRIGHT 2011

DECISION
The Appeal
1.	This is an appeal against the imposition of a default surcharge penalty in an amount of £5,018.23 being 15% of the £33,454.39 due for the period ending on 30 November 2010 (11/10) which was imposed due to the late payment of the liability shown on the return.
2.	The return was due for submission on 7 January 2011 and was received on time.  The payment was due electronically on or before 7 January 2011 and was received in two parts on 17 January 2011 and 18 January 2011.
3.	Mr McCormack gave evidence for the Appellants and Mr Donnachie for the Respondents and both were credible.
Legislation
4.	Value Added Tax Act 1994 provides:- 
Section 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).

Section 71 Construction of sections 59 to 70.
(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.

The Facts and Submissions
5.	The Appellants were in a default position for the period 08/08 which had a payment due date of 30 September 2009.  This was the first default and was caused by the late payment of the return liability.
6.	A Notice of Assessment of Tax Surcharge Liability Notice Extension was issued on 16 January 2009 setting out the details of the default stating that the Appellants may be liable for a surcharge if there was a default in respect of the prescribed accounting period ending within the surcharge period which ran from the date of the Notice until 30 November 2009.
7.	The notice then goes on to explain what a default is, what would happen if there was a further default and how the surcharge was calculated.  In particular, it stated that the rate of surcharge would increase progressively starting at 2% for the first payment default, increasing to 5%, 10% and 15% for further defaults in a surcharge period.
8.	Further defaults took place for the periods ended 11/08, 02/09, 08/09, 02/10, 05/10 and similar Notices to 16 January 2009 were issued.
9.	In addition to there being no actual surcharge made in respect of the 08/08 payment, no charge was made for the default in the period 11/08 where the rate was 2% and, following an internal appeal, the 02/09 and the 08/09 surcharges were reduced.
10.	In respect of the period 02/10, a Notice of Assessment of Surcharge and Surcharge Liability Notice Extension was sent on 16 April 2010 extending the surcharge period at a rate of 15% until 28 February 2011.  It was this Notice therefore, that was applicable to the payment for 11/10 being the payment under appeal.
11.	During the series of defaults a Time to Payment Agreement had been agreed between the Appellants and the Respondents but this had been cancelled prior to January 2011 as the Respondents do not allow Time to Pay Agreements to be of a continuous nature.
12.	The Respondents carried out a review on 9 February 2011 stating that they did not accept that the Appellants had a reasonable excuse for the defaults and that the Appellants knew they were in the surcharge regime in light of six previous periods for which Default Surcharge Liability Notices had been issued.
13.	The Respondents say that these items were sent by post and had not been returned by Royal Mail and so they had no reason to suppose they had not reached the Appellants.
14.	The review letter of 9 February referred to the reverse side of each notice setting out an explanation of the default surcharge system and stated that section 71(1)(a) of the VAT Act 1994 specifically excluded insufficiency of funds from being a reasonable excuse for the late payment of VAT.
15.	A letter dated 6 April 2011 was sent to the Appellants setting out the facts that would be presented by the Respondents at the tribunal hearing.
16.	In that letter the Respondents having reviewed the default surcharges for the periods 02/09 and 05/10, removed them and, accordingly, credited the amounts against sums due to the Respondents.
17.	The payment for 02/09 was removed because it related to the fact the payment was received on time and, in relation to the payment due for the period 05/10, because a Time to Pay Agreement was in place prior to the due date for payment.  
18.	The Respondents say that it is the legal responsibility of directors to ensure that VAT returns and full payment of tax due are received by the Respondents on or before the relevant date and that having been in default in earlier periods the Appellants were aware that they were in the surcharge regime.  The Respondents say that lack of funds is not a reasonable excuse for late payment.
19.	The Appellants say that they had had great difficulty in obtaining funds to make payment and although their business had picked up now they had been badly affected by not receiving timeous payments themselves due to the weather and other circumstances at the time the default appealed about arose.
20.	The Appellants say the amount of surcharge is severe and unreasonable.
Findings
21.	The Tribunal, based on the evidence, found that, notwithstanding the difficult circumstances the Appellants found themselves in because of the weather and other reasons, Section 71(1)(a) of the VAT Act 1994 does not allow the insufficiency of funds to be considered as a reasonable excuse.
22.	Similarly, the law does not allow the amount of the default surcharge to be appealed and the applicable rate was well known to the Appellants from, amongst others, the latter three default surcharges notices.
23.	The Appeal is accordingly dismissed. 
24.	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.

W RUTHVEN GEMMELL
TRIBUNAL JUDGE

RELEASE DATE:  27 APRIL 2011