19178
DEFAULT SURCHARGE – Calculations of surcharge – Returns submitted late – Whether payments should be treated as made in time on account of excess payments in response to assessments – No – Whether payments on account should be treated as made where there was underclaimed input tax to which trader was entitled – No – Appeals dismissed

LONDON TRIBUNAL CENTRE

	EURO-LACKE LTD	Appellant

-	and –

	HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						ROSALIND RUDD 

Sitting in public in London on 8 June 2005

P M McNamara of Riordan O’Sullivan & Co, accountants, for the Appellant 

Jonathan Holl for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Euro-Lacke Ltd (“EL”) appeals against 14 default surcharge assessments for periods starting with 3/00 and ending with 3/03.  The aggregate amount of those surcharges is said to be £25,744.07.

2.	We were told nothing of EL’s business or how this disastrous state of affairs came about.  Indeed it was no part of EL’s case that any reasonable excuse existed for any of the defaults.  The case was based entirely on an arithmetical exercise.

3.	EL’s case is that over the four years covering the prescribed accounting periods for which the default surcharges under appeal were imposed it had overpaid, by £25,416.92, its VAT and had overpaid the assessed default surcharges.  The case was based on a schedule of quarterly figures and payments in chronological order covering the four years; this schedule, it was said showed “a moving balance of arrears and overpayments” and demonstrated that default surcharges should not have been assessed for some periods “because of  excess payments and payments on account that were made” by EL.

4.	A trader is liable to default surcharge if he fails to furnish a VAT return for a prescribed accounting period (falling within a “surcharge period” notified to him in a surcharge liability notice) or fails to pay any tax shown on the return as payable by him in respect of that period.  See section 59(1)-(3) of VAT Act 1994.  By section 59(4) default surcharge is the greater of £30 and a percentage of “outstanding tax” as defined in section 59(6). By that definition, a person has outstanding tax for a prescribed accounting period –

“… if some or all of the VAT for which he is liable for that period has not been paid by the last day on which he is required to make a return for that period; and the reference in subsection (4) to a person’s outstanding tax for a prescribed accounting period is to so much of the VAT for which he is so liable and has not been paid by that day.”

5.	There is no dispute that EL’s returns for the relevant periods were all late and that all those periods fell within a surcharge period.  The dispute lies as to the amount of each surcharge.  That in turn depends on the answer to the question, asked in relation to each prescribed accounting period – What was the VAT for which EL was liable that it had not paid by the due date?  In the answer to this question two points are relevant to the present issues.  First, a trader who fails to put in a return may have the VAT due from him assessed and notified to him:  see section 73(1).  Section 73(9) goes on to say that when a person has been assessed to a notified of an amount under section 73(1) that amount shall be deemed to be an amount of VAT due from him and may be recovered accordingly. The second point is that relief for input tax for a prescribed accounting period will be available when the amount claimed is shown in the trader’s return and the requirements in the VAT General Regulations are satisfied as regards the particular amount claimed: see sections 25 and 26. In essence, no credit is available for any amount of input tax until that amount is shown in a return.

The appeal against the default surcharge for the 3/00 period

6.	The return was due by 30 April 2000.  EL was assessed to £18,094 of VAT plus a surcharge of £2,714.  The return, received on 26 March 2001, showed tax due of £17,994 and the default surcharge (which was 15% for all periods) was adjusted to £2,699.  

7.	EL say that the net VAT payable for the period should have been £629.  This followed from the fact that £17,365.41 of unclaimed input tax existed at the due date for payment.  The Commissioners accepted that that amount was unclaimed at the relevant time; but when it was claimed it had, by means of an officers’ assessment made in August 2002, been allocated to the VAT periods to which it related, i.e. £7,253 to the 6/99 period and £10,113 to the 12/99 period.  As a result no payment of that unclaimed amount fell to be credited to the 3/00 period.

8.	The VAT for which EL was liable on 30 April 2002 was £17,994.  How much of that had been paid by that date?  It appears that at some time, well after 30 April 2000, EL made a claim for credit for input tax in the amount of £17,364.41.  But that amount was not moneys due to EL from the Commissioners at 30 April 2000 which could have been treated as offsetting EL’s liability to pay £17,994 to the Commissioners.  It follows that EL had not paid the outstanding tax by the due date and the surcharge, adjusted by reference to the VAT shown due in the return, was correctly assessed.  

9.	We dismiss the appeal in relation to the 3/00 period.

The appeal against the default surcharge for the 6/00 period

10.	The return due by 31 July 2000 was eight months late.  The Commissioners assessed EL to £19,152 of VAT and a default surcharge on that amount.  The return showed £13,012 as due and the default surcharge was adjusted to £1,952.  On 19 June 2000, the Commissioners had received a payment of £23,697 from EL.

11.	That payment of £23,697, say EL, had (more than) paid the amount shown due on the return for the period.  The default surcharge should therefore be reduced to nil.  The Commissioners disagree.  They say that the £23,697 covers the £2,888 unpaid surcharge for the 12/99 period, the £18,098 due under the assessment for the 3/00 period and the £2,714 surcharge for that period.  (There is no dispute about the existence of those debts arising from the assessments.)

12.	It seems to us that the £23,697 cannot on any basis be treated as payment in respect of EL’s liability for the 6/00 period.  When it was paid to the Commissioners (on 19 June 2000) there were three outstanding debts due from EL to the Commissioners; the liability to the 6/00 period had not arisen because, by then, EL had made no return for the period and had received no assessment for the period.  A debtor who owes two or more debts to a single creditor may, when he makes a payment to that creditor, appropriate the payment to one or more of those debts; the payment cannot however be appropriated to debts that arise after the payment has been made.  Here EL’s right to appropriate when the £23,697 was made did not exist in relation to the tax due for the 6/00 period.  The tax for the period had not become a debt by then.  It could not therefore have been discharged by appropriation.

13.	We therefore dismiss the appeal in relation to the 6/00 period.

The appeal against the default surcharge for the 9/00 period 

14.	EL’s return, due at the end of October 2000, was five months late.  An assessment for £21,107 (and a default surcharge of £3,166) was issued on 17 November 2000.  The return, when made, showed £11,428 of tax due and a default surcharge on that amount was recalculated as £1,714.  

15.	£22,025 was paid by EL to the Commissioners on 22 November 2000.  

16.	The £22,022 payment paid on 22 November 2002 was too late to rank as a payment of the tax due for the 9/00 period.  In fact, it exactly covered the assessed amounts for the 6/00 period, i.e. £19,152 plus £2,878 default surcharge which, as explained above, were immediate liabilities due to the Commissioners by virtue of section 73(9).  When payment of the £22,025 was made there was another debt in existence, i.e. the debt for £21,107 (plus £3,166 of default surcharge) arising from the assessment for the 9/00 period.  Even if EL had appropriated the £22,025 to the latter debt, payment would have been too late to meet the 31 October deadline for the 9/00 payment.  

17.	At this stage it is relevant to mention that when, as here, assessments get out of line with returns and consequently assessed amounts are greater than the amounts eventually returned, there is bound to be a risk that a taxpayer attracts liabilities that turn out, when the returns have eventually been put in, to be greater than the tax that should have been due from him.  But the scheme of the compliance part of the VAT code does not admit of an ex post facto recalculation for the purpose of determining whether and when an amount of tax due from a trader has been paid. Liability to a default surcharge depends on the single question – How much of the VAT for which the trader is liable for the prescribed accounting period in question has by operation of law been paid by the due date?  There may be a reasonable excuse somewhere; it could even be caused by the operation of the default surcharge system.  But this was not, apparently, EL’s case.  

18.	We dismiss the appeal for the 9/00 period.

The appeal against the default surcharge assessment for the 12/00 period

19.	The return due on 31 January 2001 was received late (on 26 March 2001).  On 16 February a central assessment for £25,022 and a default surcharge assessment for £3,753 were issued. When the return was eventually submitted it showed £9,993 as the amount due (on which a default surcharge of £1,499 was charged).

20.	EL’s case is that it had a credit with the Commissioners for earlier periods and that should have been brought forward and treated as a payment, within time, of the liability for the 12/00 period.  As we see it, however, there was no credit to be brought forward at the time.  EL’s liabilities and their discharge had to be determined by reference to the assessed amounts and not to the amounts subsequently shown as due in the out of time returns (and the returns for all the prescribed accounting periods of the year 2000 were not submitted until March 2001).  The payments made during 2000 by EL were fully consumed in meeting the liabilities due from EL arising from the assessments.  

21.	As no payment was made by 31 January 2001 in respect of the 12/00 liability, the surcharge as based on the tax eventually shown in the return is correct.  

22.	We dismiss the appeal for the 12/00 period.

The appeal against the default surcharge for the 3/01 period

23.	The return, due on 30 April 2001, was not received until 30 April 2002.  On 18 May 2001 EL was assessed to £9,286 of tax (and a default surcharge of £1,366).  The return showed £11,011 as due (resulting in a default surcharge of £1,624).  

24.	EL contended that a payment of £17,638 made on 19 April 2001 discharged its liability for the period: that payment should, EL say, have been allocated to the nearest quarter, i.e. 3/01. The Commissioners say that that payment related to outstanding debts up to the 12/00 return.

25.	In our view the £17,638 could not have been treated as a payment of EL’s VAT liability for the 3/01 period.  At the time of  payment EL owed that amount for earlier periods.  There could have been no appropriation of the payment to EL’s liability for the 3/01 period because no liability had (or could have) arisen by 19 April 2001 when payment was made.  

26.	We dismiss the appeal for the 3/01 period.

The appeals against default surcharges for the 6/01 and the 9/01 periods

27.	The return for the 6/01 period was ten months late (30 May 2002).  EL was consequently assessed to £9,757 of tax and £1,464 of penalty in June 2002.  When the return was made it showed a liability of £11,050 of tax; and £1,658 of surcharge arose on that. 

28.	The return for the 9/01 period was seven months late.  £10,832 was assessed (with default surcharge of £1,625).  The return showed £12,828 of tax as due (the surcharge being calculated as £1,927).

29.	EL paid nothing on either occasion but claims that payment had been made in advance; the “advance” payments comprised input tax that EL could have claimed, but did not claim, until the 3/03 return.  Moreover the Commissioners had actually received payments of £22,025 on 22 November 2000 and £17,628 on 19 April 2001 and these could have be appropriated at least to the 6/01 period.   

30.	We conclude that payments for both these periods were late.  There were no advance payments held to the credit of EL that could have been applied in discharging tax due to the Commissioners on those due dates.  The payment of £22,025 when received on 22 November 2000 had properly been applied in discharging current assessed liabilities of EL for the 6/00 period; the £17,628 payment had been applied to discharge the then current assessed liabilities of EL up to the 12/00 period.  No claims for input tax had been made and, as explained above, until they were made, the input tax in question did not reduce the tax due.

31.	We therefore dismiss the appeals for both periods.

The 12/01 default surcharge appeal

32.	EL agree the assessed figure for default surcharge of £1,139.55.  We therefore dismiss the appeal.

The appeal for the default surcharge imposed in respect of the 3/03 period

33.	The return and payment were due at the end of April 2002.  The return was received on 30 May 2003 (one month later).  EL was assessed to £9,958 of tax and a default surcharge of £1,494.  The return showed £9,216 as due; the default surcharge on that basis was worked out at £1,082.

34.	On 30 May 2003 the Commissioners received a payment from Euro Lacke of £31,525.  

35.	The £31,525 payment was received a month later and could not therefore have covered the £9,216 of tax due for the 3/012 period. The Commissioners used the £31,525 to discharge in part the debt of £57,160.97 outstanding at the time. The latter figure had been built up of assessed amounts. Those assessed amounts were, we recognize, at variance with the amounts shown due on the returns. But they were real debts due from EL to the Commissioners and, even if the £31,525, or part of it, had been appropriated by EL to its VAT liability for 3/02, this would not have altered the fact that EL was 30 days late in paying that liability.

36.	We dismiss the appeal for the 3/02 period.

The appeals against default surcharges for the 6/02, the 9/02 and the 12/02 periods

37.	The returns were all late (i.e. received on 23 December 2002, 23 December 2002 and 15 September 2003 respectively).  EL was assessed to tax of £7,685, £8,415 and £10,586 respectively.

38.	EL point  two features in relation to these three default surcharge assessments.  The first was that they paid £10,982 to the Commissioners on 27 January 2003.  Why should this not have discharged the payment due for the 12/02 period?  The answer, as we see it, is that the 12/02 liability had not accrued by then.  There had, by then, been no return for that period and no assessment.  Thus, when received by the Commissioners, the £10,982 could only have been allocated to outstanding liabilities.  The second feature is that EL, throughout those three periods, had had unclaimed input tax.  We quote from their letter of 22 December 2003:

“During 6/02, 9/02 and 12/02 the company only recovered some of its input tax – note inputs of £2,496, £2,348 and £6,804 respectively where the average input VAT per quarter for that year was £9,077 (£36,307 ÷ 4).  The input VAT balance of £24,659 was subsequently recovered in the 3/03 return.  Therefore, default surcharge is – if they applied, for quarters 6/02, 9/02 and 12/02 should be re-assessed and reduced accordingly.”

The Commissioners accept that the unclaimed input tax was claimed back by the 3/03 return and that this resulted in a repayment return being submitted.  We cannot accept that the outstanding tax on the due dates for each of those periods should have been reduced by the credit for input tax.  EL’s failure to put in returns on time meant that it had failed to claim relief for the input tax and the consequence was that relief was not due to them on the dates for payments (i.e. 31 July and 30 November 2002 and 31 January 2003).  

39.	For those reasons we dismiss the appeals for those three periods.

The appeals against the default surcharges for the 6/03 and the 9/03 periods

40.	The 6/03 return showing £12,117 of tax due was submitted 1½  months late.  A default surcharge of £639 was assessed.  

41.	The 9/03 return was submitted in time and the tax shown due was £4,355.50, but payment was not made in time.  A £653 default surcharge was assessed for that period.

42.	The case for EL, as we understand it and which is applicable to all default surcharge appeals for all periods, is found in the schedule of figures produced by it.  These, as noted earlier, show the amounts due and the payments made quarter by quarter and in chronological order; the balances of arrears and overpayments changed from quarter to quarter. Overall, say EL, the surcharges of £23,744 are calculated on a total liability of £137,300; on any reckoning the amount at 15% should have been £20,595. 

43.	The Commissioners in response contend that EL’s payments of assessed amounts (being assessments made in default of in-time returns) cannot in law be treated as pre-payments of further VAT liabilities arising when the returns for the periods in question are eventually made. The payments made in respect of the assessments are payments of debts actually due at the time on account of the assessments; the assessed surcharges were likewise debts due at the time.

44.	The only conclusion that we can reach in relation to the 6/03 and the 9/03 periods is that EL was late in payment of the amounts due at the relevant dates for payment. This conclusion cannot be displaced by a global recalculation of the sort suggested by EL’s representation in the course of the present hearing.  It can only be answered by a systematic application of the rules contained in section 59.

45.	We therefore dismiss the appeals for the 6/03 and the 9/03 periods.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 19 July 2005

LON/05/193