18862
VALUE ADDED TAX – Default surcharges – failure to despatch returns and payments of VAT by the due dates – whether reasonable excuse within s.59(7) VATA 1994 – taxpayer suffering prolonged illness involving absence from work – taxpayer offered in advance to submit estimated returns but told not to do so by the Commissioners’ National Advice Service – reliance on this advice was the cause of the defaults – held that amounted to a reasonable excuse – Bowen v C&E Comrs [1987] VATTR 255 and C&E Comrs. v Steptoe [1992] STC 757 considered – appeal allowed

LONDON TRIBUNAL CENTRE

	MICHAEL READMAN	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	JOHN WALTERS, Q.C.  (Chairman)
						 ANGELA WEST, F.C.A.

Sitting in public in Plymouth on 30 September 2004

The Appellant in person

Caroline Neenan, of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	The Appellant, Mr. Readman, is a partner in a business trading under the name “Ace Hire and Sales” at Newton Abbot, Devon.  He appeals against the Commissioners’ decision to impose default surcharge penalties for the periods 10/02, 01/03, 04/03 and 07/03.
2.	Originally the Appellant was issued with a Surcharge Liability Notice in relation to period 07/02. However by a decision communicated to him by a letter dated 14 January 2004 that default was cancelled.  Following that cancellation the surcharge amounts were recalculated and, at the hearing, we were told that the surcharges in issue were £232.70 in respect of the period 04/03 and £346.00 in respect of the period 07/03.  These total £578.70, but we understood that £15.10 of this amount had already been paid, leaving £563.60 outstanding and in issue.  We observe that it is difficult (if not impossible) to relate the detail of these figures to the paperwork before the Tribunal.
3.	The issue before us was whether or not the Appellant had a reasonable excuse for the late despatch and late payment of the returns and tax relative to the periods 10/02, 01/03, 04/03 and 07/03 within the meaning of section 59(7) VAT Act 1994 (“VATA”), and having regard to the provisions of section 71(1) VATA.
4.	Section 59(7) VATA is in the following terms (so far as relevant to this case):
“(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfied 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 …”
5.	Section 71(1) VATA is in the following terms:
“(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 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.”
6.	The Appellant’s excuse for the late submission of returns and the late payment of VAT is based on the serious health problems he has been suffering since 2002.  He summarised the situation in a letter dated 20 October 2003 to the Regional Surcharge Appeals office of the Commissioners as follows:
“I was off work totally from 5/8/02 until 6/11/02 due to a detached retina in my right eye and torn retina in my left eye.  On my return to work in November 2002 I was still unable to do the paperwork because of my limited vision.  At the beginning of April 2003 I had further laser treatment and was off work for two weeks, and eight weeks later (4/06/03) had further surgery to my right eye; this resulted in being unable to go into work for six weeks, due to the risk of dust and dirt causing infection.  Sutures from this operation were removed on 1/10/03.  Unfortunately last week I had to return to hospital due to an infection and ulcerated cornea, causing me to have further time off work.
From August 2002 to date I have had a total of four laser treatments and three surgical procedures on my eyes, and this is the reason for my late VAT returns.  I have kept Debt Management informed of the situation from the outset and hope to get up to date within the next twelve weeks.”
7.	As we have stated above, the Commissioners (through their officer, Mrs. Maxted) sent the Appellant a letter dated 14 January 2004 informing him that in the circumstances the default imposed for the period 07/02 would be cancelled but the defaults for the periods 10/02, 01/03, 04/03 and 07/03 would be maintained.  The reason for maintaining these defaults was stated to be: “it is reasonable to expect your business partner to have prepared the returns and payments themselves or to have made alternative arrangements to ensure that this was done”.
8.	The Appellant requested a review of the decision to maintain the defaults for the periods 10/02, 01/03, 04/03 and 07/03 in a letter dated 14 February 2004.  In that letter he explained as follows:
“When the problem with my eyes first started, I informed the VAT office explaining the situation that I was solely responsible for the accounts of the business.  I was advised to keep them informed, which I did.  I was also told not to worry because my problems were totally related to my health.  I offered to estimate the returns but I was told not to do this, but to catch up the backlog as quickly as I possibly could.  I was never told to concentrate on the current returns as a priority which would have cut down the surcharge liability.  I made payments during the period so I did not fall too far behind with the financial situation.
As far as having somebody to take over my job while off sick, that would have been the ideal solution to the situation.  Unfortunately, the business only had four people working in it, including myself, so it was impossible to have one of the others cover my work load.  I received no assistance from the benefits office, not even sick pay while I was off, so there was no way the business or I could afford to pay anybody else to carry out the work.”  
9.	The review officer, Mrs. Duggan, confirmed the surcharges by a letter dated 19 February 2004.  In that letter she confirmed “the telephone conversation you mention in your letter with the National Advice Service on 20 August 2002 informing HMC&E of your problems with your eyesight.”  She gave her reasons for confirming the surcharges as follows:
“You would have been aware that your health problems would be ongoing for a while but there appears to have been no alternative arrangements put in place to oversee your affairs.  As this would have been classed as a prolonged illness there was nothing to show that you had taken reasonable steps to get someone else to do the return for you.
Furthermore the business is registered as a partnership and therefore each partner is equally responsible for the VAT and needs to comply with the VAT requirements.  There is a legal obligation on every registered trader to render a VAT return and pay any tax due by the due date.
In response to your letter I can find no record of a conversation whereby you made reference to, or were told not to render estimated returns and payments.  If you can supply written evidence to this effect then I will be happy to reconsider this part of your appeal.”
10.	The matter was reconsidered again within the Commissioners’ organisation by the Poole Business Centre Reconsiderations Team.  Mrs. Thomas of that team wrote to the Appellant on 28 June 2004 asking for further information, viz: “the name of the person who dealt with the banking and general administration work for the business during your absence, and why they were unable to complete the VAT return and cheque for your signature”; and “evidence to show that your VAT return and payment were given a high priority when someone was able to work on the partnership books and records”.
11.	This elicited the following response from the Appellant, in a letter dated 11 July 2004:
“Myself and [name given] (my business partner) dealt with the banking and administration while I was signed off sick.  The reason why the VAT returns were not completed on time was that these require the quarterly accounts to be finished, and these are my sole responsibility.  Due to my sight problems I could not complete the quarterly accounts and hence the VAT returns.  My business partner is not capable of completing the quarterly accounts or VAT returns.
As far as giving the VAT returns and payments a high priority, the evidence is the returns 7/02, 10/02, 1/03, 4/03 and 10/03 were all submitted while I was signed off sick, and 7/03 and 1/04 were submitted within 2 months of my return to work.  I should also like to draw your attention to 10/03 and 1/04 returns and payments were on time, even though I only returned to work on 12/1/04, and within 10 weeks of my return all payments were to date.” 
12.	The Reconsiderations Team maintained their stance, however, and considered that the withdrawal of the surcharge for 07/02 adequately recognised the Appellant’s health problems.  With respect to the surcharges for the subsequent periods, the Team considered that as the Appellant was aware that his recovery would be prolonged, alternative arrangements should have been made to ensure that future returns were submitted and paid on time, and that the Appellant’s failure to do this meant that he could not show a reasonable excuse within section 59(7) VATA.
13.	This was the content of the submissions made to us by Miss Neenan on behalf of the Commissioners.  At the appeal she cited and relied on the Tribunal decision in Bowen v Commissioners of Customs and Excise [1987] VATTR 255(Chairman: Lord Grantchester CBE QC) in which it was held on the facts of that case (which involved the illness of a secretary who dealt with VAT returns for the appellant) that the illness provided a reasonable excuse for the first default, but that it was exhausted in relation to the subsequent defaults, because the appellant should have obtained a replacement for the secretary in time to ensure timely submission of the subsequent returns and VAT payments.
14.	So far as guidance to us in what constitutes a reasonable excuse for these purposes is concerned, we had regard to the decision of the Court of Appeal in Customs and Excise Commissioners v Steptoe [1992] STC 757, in which the predecessor provisions to sections 59(7) and 71(1) VATA were considered.  In that case the statutory concept of reasonable excuse was explained by Lord Donaldson of Lymington MR as follows:
“[I]f the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse for non-payment, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds.”
15.	 In agreement with the approach of the Tribunal in Bowen, we would have regarded the Appellant’s prolonged illness by itself as not constituting a reasonable excuse in relation to the periods in issue, 10/02, 01/03, 04/03 and 07/03.  However we accepted his evidence that in his telephone conversation with the National Advice Service on 20 August 2002 (before the due date for the submission of the return for the period 07/02) he offered to submit estimated tax returns and was told not to do so.  His system was that he prepared quarterly accounts for his business preparatory to extracting from them the figures necessary to fill in the VAT returns.  By offering to submit estimated returns he was proposing to estimate the figures in the VAT returns from the invoices to hand, rather than go through the preliminary work of preparing quarterly accounts. 
16.	If he had done this, it was accepted that the defaults would have been avoided.  But the National Advice Service gave him specific instruction not to submit estimated returns.
17.	We note that the Contact Centre Enquiry record of the telephone call (made by the agent who took the call, Kathryn Martin) does not make any reference to the query about submitting estimated returns, or the alleged reply given to the Appellant.  That record is in the following terms:
“Caller has returned from holiday with a detached retina and may need surgery, he is seeing a consultant today, if he does he will not be able to submit the 07/02 rtn on time, what should he do.
I told caller that if the rtn is not submitted on time they will receive a DS [default surcharge], this can be appealed against on medical grounds, so I told caller once the DS is received to appeal in writing supplying proof of the medical condition/operation.”
18.	Notwithstanding the fact that the record does not contain reference to the Appellant’s offer to submit estimated returns and the advice that he should not, we have (as we have said) accepted his evidence on this point. On this basis, taking fully into account the proper requirements of the Commissioners that all reasonable efforts should be made to comply with VAT obligations, even in difficult circumstances, we find that the Appellant’s protracted ill health, coupled with the advice he had received from the National Advice Service, is a reasonable excuse within section 59(7) VATA for his failure to submit the returns in issue and associated VAT payments on time.  In terms of the formulation in Steptoe, his conduct showed the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date, notwithstanding that defaults resulted.  The reasonable excuse was in our judgment exhausted when the reply to his letter dated 20 October 2003 (a letter from the Poole Business Centre Reconsiderations Team dated 24 October 2003) was received.  This letter made clear that the Appellant’s continuing illness by itself would not cause the default surcharges to be withdrawn, and so it can be said that from that time “such foresight, diligence and regard would have overcome” the continuing defaults.  
19.	The default surcharge penalties in issue, for the periods 10/02, 01/03. 04/03 and 07/03 relate to defaults before that date in October 2003 and therefore we find that in relation to those defaults the Appellant has shown a reasonable excuse within the meaning of section 59(7) VATA.
20.	For these reasons we announced at the conclusion of the appeal hearing that we would allow the appeal.  The Appellant made no application for costs and so we make no costs order.  Miss Neenan, for the Commissioners, asked that we put the reasons for our decision in writing, which we have done herein.

JOHN WALTERS, Q.C.
CHAIRMAN

RELEASED: 8 December 2004

LON/04/208