20204
Default surcharge – Section 59(7)(a) – Does it provide exemption if either limb is satisfied or does it depend on the default – Will prompt despatch of VAT mean that there is no default if the return is late? Held: it depends on the default – Reasonable excuse – Difficulties with landlord – Held: No reasonable excuse
LONDON TRIBUNAL CENTRE
CLUB KAEDE LIMITED Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: CHARLES HELLIER (Chairman)
RACHEL ADAMS FCA, FTII
Sitting in public in London on 25 April 2007
Tony Ezedum, the company secretary of the Appellant, for the Appellant
Pauline Crinnion instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- Club Kaede appeals against a default surcharge in respect of the 08/06 VAT period (the period ending on31 August 2006). The surcharge was 15 per cent of the VAT paid late for that quarter of £10,000.
- Tony Ezedum presented the Appellant's case and gave evidence before us. We found him a capable advocate and a believable witness of fact. We find the following facts on the basis of that evidence and the copy documents before us.
- The Appellant's business is the operation of a Japanese Style bar and restaurant. It runs the business from the basement of 61 Brewer Street London W1. These premises are let to it by KKTK Ltd which occupies other parts of that building. Mrs Kuzoko Quinn is the sole director of the Appellant; a Mr Kimura is a director of KKTK Ltd.
- The Appellant's annual turnover in the relevant period was between about £400K and £450K. Approximately 90 per cent of its customers paid by credit or debit card. The Appellant's understanding of the claims of the card facility providers is that cleared funds in respect of sales paid for by such cards should normally be received some five days after the use of the card. In practice they generally receive them within eight days. There was an occasion in 2005 when the terminal used by the Appellant broke down and there were some further delays in receipt of funds, but in that case it appears that funds were received within a month after the use of the card. Some customers, mainly those attached to the larger Japanese corporations such as Nomura or Toyota are invoiced and pay sometime after the receive of the invoice.
- The business is profitable. It made a net profit of £13K and £25K in the years ended 30 June 2005 and 2006 respectively.
- Mrs Quinn took charge of the business (and we assume beneficial ownership of the Appellant's share capital) in 1999. She agreed at that time to a tenancy of the premises from KKTK Ltd at a rent of £4,000 per month. The business thrived.
- At a later time Mr Kimura suggested to Mrs Quinn that he should take an interest in the company. Mrs Quinn said no. Mr Kimura then sought on behalf of KKTK Ltd an increased rent. The rent paid changed over time from £4K to £5K, £5.5K, £6K, and back to £5.5K per month. Mrs Quinn apparently felt obliged to pay the rent demanded because the topography of the premises meant that KKTK Ltd could lock Club Kaede out.
- Apparently KKTK's correspondence with the local valuation office had caused some difficulties in the determination of the business rate attributable to the premises. It seems that there may have been some discrepancy between the rent paid and that disclosed to the valuation office.
- Mr Ezedum was appointed in about 2003. On taking up his appointment he realised that the company had a number of problems. The books had not been kept properly. He appointed accountants to investigate. They reported unpaid PAYE and NI liabilities. Mr Ezedum organised their payment during 2004. He has been investigating the position in relation to the rent the Appellant should pay and its business rates liability. He is endeavouring to ensure that these are put on a sound footing for the future.
- The management of the Appellant's cash flow was at material times disturbed by the effects of varying rentals payments and the occasional slow receipt of funds from credit or debit card transactions.
- In respect of the quarterly VAT periods 02/00, 05/03 and 11/03, and each of the quarterly VAT periods from 05/04 to 05/06 the Appellant had either failed to secure that its VAT return reached the Respondents in time or failed to secure that payment of all the VAT payable in respect of the period reached the Respondents in time. The Respondents served surcharge liability notices, or surcharge liability extension notices in respect of each of these periods.
- For the period 08/06 (the period under appeal) the VAT return was received on 12 September 2006, 18 days before the due date, but of the VAT shown as due on that return, only £3,618.73 was paid before the due date and the balance of £10,000 was paid after the due date.
The Applicable Provisions of the VAT Act 1994
- Section 59 VATA 1994 provides so far as is relevant to this appeal:-
"59(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 …
[Subsection (2) and (3) concern the service of a surcharge liability notice or an extension of such a notice.]
(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.
[Subsections (5) and (6) concern the quantum of the surcharge liability.]
(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 …
In this decision we use the phrase "despatched promptly" to paraphrase the words in subsection (7)(a): "dispatched at such time and in such a manner that it was reasonable to expect that it would be received … within the … time limit."
Section 71(1)VATA 1994 provides that for the purposes of section 59:-
(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.
The Parties' Arguments
- Mr Ezedum advanced two arguments on behalf of the Appellant. First he said that properly construed the effect of section 59(7)(a) was that if the VAT return had been received in time there was no default. Second, he said that in any event the Appellant had a reasonable excuse for late payment.
(a) the Construction argument
- Mr Ezedum notes that section 59(7)(a) effectively exempts a person from liability in respect of what would otherwise be a default if (with our emphasis):
"the return OR, as the case may be the VAT shown as due on the return was despatched [promptly]".
He says that the proper construction of these words means that if either the return or the VAT was promptly despatched then what would otherwise be a default is ignored. In relation to the words "as the case may be", he says that these refer to the circumstances of the case. If the case – the circumstances of the case – is such that they justify a conclusion that either the return was despatched promptly or that the VAT was despatched promptly then there is a no default.
- The Respondents dispute this construction. In a letter written to the Appellant on 23 April 2007 and received by the Appellant after the hearing they say:
"It has been explained that not every return submitted to the Commissioners will be a payment return (as the case may be), it may be a repayment return and will not therefore be accompanied by payment. However, if it is a payment return that shows an amount of Value Added Tax (VAT) due, as such both the return and the payment must be received by the Commissioners by the due date."
- Mr Ezedum says that the Respondents in this letter are saying that "as the case may be" is referring to a repayment return (ie a return which discloses an amount payable by the Commissioners rather than to them). But he says that the section is not that specific: it does not say:
"(a) as the case may be the repayment return, or as the case may be the VAT shown on the return was despatched …";
or even:
"(a) the repayment return or, as the case may be, the VAT return was despatched …".
The phrase in the section was "return" not "repayment return". And in any event in the case of a repayment return no surcharge could be exigible since any surcharge was computed by reference to the VAT due which had not been paid – which would be nil.
Discussion – (a) the construction argument
- It seems to us that the words "as the case may be" in paragraph 59(7)(a) do not refer to the general factual circumstance of the taxpayer, but to the alternative modes in which the surcharge may arise. They refer back to the two cases mentioned in section 59(1) in which a default may arise, namely if, by the relevant due date:
"(a) the Commissioners [do] not receive [the] return, or
(b) the Commissioners have received [the] return but have not received the amount of VAT shown on the return as payable …"
- Section 59(1) sets out two separate cases in which there is a default. Section 59(4) imposes a surcharge if there is a default – i.e. if one or more of those cases exists. Section 59(7) provides that what would otherwise be a default may not be one if certain conditions are satisfied. Those conditions depend on the nature – the "case" – of the default: because the default could be either the late delivery of the return or the late payment of VAT. If the fault is the late delivery of the return then paragraph (a) provides that there is not a default if it was despatched promptly; if the default is the late payment of VAT then paragraph (a) provides that there is no default if the VAT was despatched promptly. The words "as the case may be" serve in our view to point to the applicable type of default.
- But subparagraph 59(7)(b) does not contain these words. Omitting paragraph (a), subsection 59(7) reads:
"If a person … satisfies … a tribunal … that in the case of a default …:
… (b) there is a reasonable excuse for the return or the VAT not having been … despatched [on time].
he shall not be liable …".
- But if the words "as the case may be" are needed and mean what we indicate they mean in paragraph (a), why are they not needed in paragraph (b)? Suppose that both the VAT return and the VAT were received late so that there was a default under both limbs of section 57(1), and suppose that there was a reasonable excuse for the delay in the receipt of the VAT return but not a reasonable excuse for the delay in the receipt of the VAT. Does the absence of the words "as the case may be" in paragraph (b) mean that both defaults are cured by that single excuse because without those words the use of "or" in paragraph (b) permits one excuse to cure the default? And if that is not the case then what does that say about our approach to the words in paragraph (a)?
- We do not believe that paragraph (b) has that effect. Paragraph (b) is concerned with an excuse. An excuse can only exist in relation to a transgression. One has to have the transgression in mind in considering whether or not there is an excuse for it. Thus paragraph (b) carries within it the correspondence of the late return and the excuse for the late return, or the late VAT and the excuse for the late VAT without the need for the express words "as the case may be". There is not inherent in the words in paragraph (a): "the return or the VAT … was despatched [promptly] "the same semantic correspondence of transgression and excuse; thus without the additional words "as the case may be" prompt despatch of the return could avoid a default by reason of late payment of VAT. The addition of "as the case may be" produces the correspondence which negatives that possibility, but is not needed in (b) because of the nature of the word excuse.
- The issue of whether or not a return is a repayment return does not seem to us to be relevant to the construction of section 59(7). If it was there could only be default in relation to its delivery. Both paragraphs of section 59(7) could potentially afford an escape from a default.
- We conclude that the prompt despatch of the VAT return for the 08/06 quarter does not mean that there was not a default for the purposes of section 59 in that quarter.
(b) A reasonable excuse
- Mr Ezedum puts the Appellant's case thus: the difficulties encountered over the rent and with KKTK were outside the Appellant's control. They were akin to the dishonest acts of employees. Such difficulties could support a reasonable excuse. Further the delays in the receipt of credit and debit card funds meant that the Appellant may not have received all the moneys from its customers in respect of which VAT was due in a quarter before that VAT became payable.
- Mr Ezedum referred us to the tribunal decisions in CMS Peripherals Ltd (VAT Decision 19234), Longstone Ltd (VAT Decision 17132), and Cardio-Analytics Ltd (VAT Decision 19703). Since the hearing the report of the High Court judgment in the appeal of CMS Peripherals Ltd has been published.
- Mrs Crinnion says that the problems faced by the Appellant were part of the normal vicissitudes of business with which it was reasonable to expect the Appellant to be able to cope and to take into account in bearing in mind its obligation to pay VAT. The landlord had been awkward but that was quite different from the dishonest act of an employee. Lack of funds on its own was incapable, by reason of section 71, of being a reasonable excuse. On the facts the Appellant did not have a reasonable excuse for the delays in its payments.
Discussion – (b) reasonable excuse
- In our opinion the difficulties faced by the Appellant did not singly or together constitute a reasonable excuse for the late payment of its VAT for the 08/06 quarter.
- In so far as the late payment was due to an insufficiency of funds, section 71 prevents that from being a reasonable excuse. But we are permitted to consider the reasons for any such insufficiency and whether they constitute a reasonable excuse.
- We do not find that the unexpected fluctuations of the rents were a reasonable excuse for this delay. In one quarter the rent might have been £3K higher than expected, but with a quarterly income of some £100K, it does not seem to us that such an increase in costs is outside the range that the Appellant can reasonably be expected to cater for in the management of its business, having due regard to its obligation to pay VAT.
- Neither do we find that the delay in the receipt of card payment monies can support a reasonable excuse for the failure to fulfil its statutory obligation. These payments were almost all received by the end of the month at the end of which the VAT should have been paid.
- Nor by 2006 do we find that the 2004 PAYE arrears payment and associated problems constituted circumstances which were a reasonable excuse for the late payment of VAT.
- The balance sheet of the Appellant for the year ended 30 June 2005 shows the Appellant to have very little in the way of shareholders' funds. Its financing is thus principally amounts owing to creditors. It is therefore exposed, in meeting its obligations to its creditors, to fluctuations in its fortunes which bear on it to a greater extent than if it had been more heavily capitalised. Such undercapitalisation is not in our view a reasonable excuse.
- Taken together we do not find the Appellant's circumstances support a finding that they had a reasonable excuse for the late VAT payment.
- We dismiss the appeal. Our decision was unanimous.
- We were not asked by either side for costs, and we have decided not to award them to either side.
CHARLES HELLIER
CHAIRMAN
RELEASED: 25 June 2007
LON 2007/169
