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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Cardiologic Ltd v Revenue & Customs [2007] UKVAT V20058 (08 March 2007) URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20058.html Cite as: [2007] UKVAT V20058

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20058

VAT DEFAULT SURCHARGE - Reasonable Excuse for not paying VAT on time for period ending 30 September 2006 – Appellant experienced temporary cash flow difficulties because of increased sales – took calculated risk in not paying the full amount due in the mistaken belief that it would not incur a surcharge – not the actions of a prudent business person acting with due diligence and reasonable foresight – no reasonable excuse – Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

CARDIOLOGIC LTD Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

ROLAND PRESHO FCMA (Member)

Sitting in public in York on 15 February 2007

Robert Smith, accountant for the Appellant

Richard Mansell, of the Solicitor's Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

The Appeal

1. The Appellant was appealing against the imposition of a default surcharge in the sum of £1,231.12 for the period 1 July 2006 to 30 September 2006.

The Dispute

2. The Appellant company supplied hospitals with surgical equipment. It has an annual turnover of £1 million and employed six full-time staff. The Appellant operated from business premises at Cowesby in North Yorkshire.
3. The directors of the Appellant company delegated the keeping of accounts and the submission of VAT returns to an employed book-keeper and the companies' accountant, Mr Smith.
4. The Appellant did not make full payment of the VAT due in the sum of £29,622 by the due date of 31 October 2006 for the period ending 30 September 2006. A part-payment of £5,000 was made instead. This resulted in a default surcharge at the rate of five per cent of the outstanding tax in the sum of £1,231.12. The rate of five per cent applied because it was the second default by the Appellant in a period of 12 months.
5. The dispute concerned whether the Appellant had a reasonable excuse for not making the payment by the due date. The Appellant's reason for not paying was that it had a temporary cash flow difficulty because of unexpectedly high sales during the period in the question. The Respondents contended that cash flow difficulties did not amount to a reasonable excuse because the legislation specifically precluded insufficiency of funds from being a reasonable excuse.

The Hearing

6. Mr Smith gave evidence upon oath for the Appellant. The Respondents submitted a bundle of documents.
7. We announced our decision to dismiss the Appeal at the hearing. The Appellant requested the decision to be recorded in writing in accordance with rule 30 of the Tribunal Rules 1986.

The Appellant's Evidence

8. Following the quarter end of 30 September 2006 Mr Smith visited the Appellant's premises to complete the quarterly VAT return. He discovered that the turnover for that quarter had increased by 40 per cent. During the previous week the Appellant's book-keeper who started her employment in May 2006 paid the suppliers' invoices which meant that the Appellant did not have the cash flow to meet the VAT bill for that quarter.
9. Mr Smith was under the impression that the Appellant company had always paid its VAT on time and not subject to the default surcharge regime. He advised the directors of the Appellant company to make a part payment of the VAT as the Appellant would not incur a surcharge for an isolated default. Mr Smith would then make a determined effort to collect the outstanding debts owed to the Appellant so that the remaining VAT could be discharged quickly.
10. Mr Smith was, therefore, surprised to receive on behalf of the Appellant company the default surcharge. Prior to the quarter under Appeal the previous book-keeper recorded that VAT payments had been made by the due date in the accounts. Mr Smith then carried out an investigation and discovered that the actual payments for the quarters ending 30 September 2004 and 2005 had been submitted by instalments. The bank placed an upper limit on the value that could be transferred electronically in any one transfer. This resulted in the Respondents receiving late the VAT due, which in turn put the Appellant company in the default surcharge regime.
11. Had he known of the true position regarding the previous defaults, Mr Smith would have arranged for the bank to extend the Appellant's overdraft to pay the VAT due.
12. Mr Smith contended it was an honest mistake. He explained the position to the Respondents who advised him to send in a letter which he did.

Reasons for Our Decision

13. Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period. The Appellant failed to pay the VAT due within one month for the accounting period ending 30 September 2006 and was liable to pay a surcharge of five per cent of the tax due amounting to £1,231.12
14. The Appellant can avoid the default surcharge if it satisfies the Tribunal on a balance of probabilities that it had a reasonable excuse for not furnishing the VAT payments on time.
15. Reasonable excuse, however, is strictly construed by the legislation. Insufficiency of funds and reliance on the default on others cannot in law constitute a reasonable excuse. An honest mistake is insufficient by itself to form a reasonable excuse. In order to establish a reasonable excuse the Appellant has to show that it exercised reasonable foresight and due diligence and a proper regard for the fact that tax would become due on a particular date.
16. The Appellant in this instance failed to exercise proper control of its income and expenditure during the quarter. A prudent business person would have anticipated the problem by setting aside a sum for the VAT due by either regulating the payments to the suppliers or obtaining funds from the debtors earlier and or the bank. The Appellant compounded the problem by taking a calculated risk of not making the full payment of VAT due in the mistaken belief that it would not incur a surcharge by settling the debt late. The Appellant's action did not demonstrate a proper regard for the fact that tax would be due at the end of the quarter, particularly as the Appellant had other options, such as an extension to its overdraft, by which it could discharge the debt. The Appellant cannot escape liability for the surcharge by relying on the defaults of its accountant and employed staff. This excuse is specifically excluded by Section 71(1)(b) of the VAT Act 1994 which provides that

"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".

Decision

17. For the reasons above we are satisfied that the Appellant did not have a reasonable excuse for not making the payment of VAT due for the period ending 30 September 2006 by the requisite date. We, therefore, dismiss the Appeal and make no order for costs. We complimented Mr Smith for his honesty and the manner in which he presented the case on behalf of the Appellant.

MICHAEL TILDESLEY OBE

CHAIRMAN

RELEASE DATE: 8 March 2007

MAN/07/0003