20440
DEFAULT SURCHARGE — several accounting periods and out-of-time applications considered — payment on account scheme — roles of staff and senior management reviewed — email from Customs officer relied on — reasonable excuse — appeal allowed in part
MANCHESTER TRIBUNAL CENTRE
SPECIALIST COMPUTER HOLDINGS LTD Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Elsie Gilliland (Chairman)
John Lapthorne
Sitting in public in Birmingham on 3 September 2007
David Scorey, counsel, for the Appellant
Richard Mansell, Advocate, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2007
DECISION
The appeal
- The appeal before the tribunal was that of Specialist Computer Holdings PLC (the Appellant) against a default surcharge penalty assessed by Customs on 26 May 2006 in the sum of £442,675.00 in respect of the accounting period 03/06. This penalty was stated by them to be at five per cent of the total value of the default. A letter from the Appellant's accountants (Deloitte) addressed to Customs dated 22 June 2006 with an accompanying detailed report prepared by the Appellant and subsequent correspondence led to a reconsideration which resulted in a review letter dated 9 October 2006 which upheld the decisions taken for 09/04, 12/04, 03/05 and 03/06 and the assessment. A Notice of Appeal setting out the grounds of appeal was submitted on 27 October 2006. There was a further letter from Customs on 20 December 2006 rejecting any cancellation of the defaults for the four named periods.
- In determining this case we shall consider these periods within the VAT regime applicable to the Appellant. Counsel for the Appellant accepted that in respect of the accounting period 03/06 the Appellant had no reasonable excuse for the default. Arising from this counsel made two alternative submissions. The first that there was a reasonable excuse in respect of the accounting period 03/05, as a result of which there would be no default penalty, and thus for 03/06 no surcharge penalty. Secondly and in the alternative that the default for 12/04 should be excused and as a consequence the surcharge would be reduced from five per cent to two per cent.
- The Appellant is one of a group of companies engaged in the sale and distribution of computer systems together with technical services and solutions. The group operates in a high volume low margin market. The Appellant is the taxpayer as the representative member of the VAT group registration and under a duty to make payments on account ("POA") under section 28 of the Value Added Tax Act 1994 ("the Act"). It is provided by Customs each year with a notice of direction with a schedule which calculates the VAT amounts to be paid and the last date by which the same become due. These for the years 2004, 2005 and 2006 were in the bundle of documents provided for the tribunal. Failure to make a payment on account in full by such date constitutes a default material to a default surcharge. The balancing amounts are paid with the VAT returns. It is provided that payments on account and balancing payments are to be made by electronic means (s.28(2)(A) of the Act and Reg. 40(A) VAT Regulations 1995).
The legislation
- We would look at the various legal provisions at this stage. A taxpayer required to make payments on account will become liable to a default surcharge where within s.59(A) (4) of the Act it:
(1) has been served with a surcharge liability notice;
(2) is in default in respect of a prescribed accounting period;
(3) that prescribed accounting period falls within the surcharge liability period specified in the notice; and
(4) the aggregate value of defaults within that prescribed accounting period is more than nil.
- The taxpayer is in default within s.59(A)(1) where it:
(1) fails to submit its return by the due date;
(2) having submitted its return, it fails to make payment in respect of that return by the due date; or
(3) fails to make a payment due under the payment on account scheme.
- The procedure is that if within any prescribed accounting period a taxpayer defaults once or more it will be served with a surcharge liability notice (SLN) specifying a surcharge liability period. This period begins on the date of the notice and ends one year after the end of the prescribed accounting period in which the default occurs. The surcharge liability period is extended by each subsequent default.
- The circumstances where a default is left out of account are when:
(1) there is a reasonable excuse for the default;
(2) the return or payment was despatched in reasonable time and in a manner expected to reach the Commissioners by the due date; or
(3) the taxpayer is assessed to a penalty for a breach of the regulatory provisions.
- If a default is to be left out of account the taxpayer cannot be liable to a surcharge in respect of that prescribed accounting period and any SLN issued which depended on that default is treated as not having been served.
- The default surcharge is the greater of [£30] and a specified percentage of the aggregate value of the defaults in respect of that prescribed accounting period (s.59(4) of the Act). That percentage is determined by the number of prescribed accounting periods for which the taxpayer is in default within a surcharge liability period. For the first default within a surcharge liability period the percentage is two per cent; a second default is five per cent; a third default 10 per cent; a fourth or later default is 15 per cent.
- The calculation of the aggregate value of defaults within a prescribed accounting period is done by aggregating :
(1) the value of payments on account not received by the due date even if they are received before the due date of the return to which they relate; and
(2) the value of any outstanding VAT which is the amount of VAT shown on the return as being due less all payments not made by the due date of the return.
Accounting periods
- We shall look at four accounting periods namely 09/04, 12/04, 03/05 and 03/06 in turn. It should be noted that any appeals in respect of defaults in the first three of these periods were out of time. Although only an appeal for 03/06 was in time the tribunal determined to proceed to hear argument and evidence for all four periods as the out-of-time defaults even where technical only were relevant to the financial penalties imposed. The Advocate for Customs did not object to these periods being considered by the tribunal.
- The first period we would refer to is that of 09/04 in respect of which both the VAT return and the balancing payment were received by Customs late. Both were due on 29 October 2004; the return was received on 3 November and the payment on 1 November 2004. A notice of default under s.59A(2) was issued on 23 November 2004. The SLN arose because of the late payment. The lateness of the return alone would not have put the Appellant within the surcharge system. The Appellant does not seek to contend that there was any reasonable excuse for this period. No explanation was given for the late return; reliance on another person was given for the late balancing payment. However evidence was presented that there had been an exchange of emails between Keith Drury then the Appellant's Group Financial Accountant (who appeared as a witness before the tribunal) and an identified officer of Customs (who did not appear) as a result of which Mr Drury had understood that the late submission of a VAT return would not cause a problem.
13. In the second period that of 12/04 the return was on time but there was a late submission of the second payment on account and late receipt of the balancing payment. The second instalment was due on 31 December 2004 but was not received until 11 January 2005. The return and the balancing payment were due on 31 January 2005. The return was received on 27 January but the payment was not received until February 2005. A notice of assessment of surcharge and an SLN extension were issued on 22 February 2005 and the surcharge period was extended to 3 December 2005. A default surcharge penalty was assessed at two per cent of the value of the total default. The Appellant established that there had been a banking error and Customs amended the default surcharge and issued a revised default surcharge penalty of £19421.34 at two per cent of the revised default which was paid by the Appellant. The Appellant sought to contend that there was a reasonable excuse for this period due to the unexpected absence of a key employee. This was rejected by Customs who had argued that any application for an extension of time to appeal should be dismissed.
- The third period is that of 03/05 where there was a late submission and a late receipt of the return. The payments were on time. An SLN extension to 31 March 2006 was notified on 20 May 2005. In respect of this period the Appellant put forward that it had a reasonable excuse having understood from contact with a Customs officer as outlined in Clause 12 above that the late submission of a VAT return would not lead to the issue of an SLN or an SLN extension so long as the VAT payments reached Customs by the due date. Further the Appellant had decided on and from 03/05 to use on-line filing for its VAT returns and had been led to understand from the Customs brochure that an extra seven day period was available for a return. Customs disputed that the Appellant had been misled and had argued that any extension of time application should be dismissed.
- The fourth period is 03/06 in respect of which there was a late submission and receipt of the balancing payment which was not received until 2 May 2006 though the return was on time. The notice of assessment of surcharge and an SLN extension were issued on 26 May 2006. The surcharge period was extended to 31 March 2007. A penalty was assessed at five per cent of the value of the total default in the sum of £442,675.00. The Appellant does not contend that there is a reasonable excuse for this period but relies on the alternative submissions set out in Clause 2 above to remove or reduce the penalty as the tribunal should determine.
Case law
- A number of authorities were listed and copied for our assistance with reference made in the course of argument to the judgment of the High Court in Profile Security Services Ltd v Customs and Excise Commissioners [1996] STC 808 (Profile Security Systems Ltd.), a tribunal decision in Birchall Blackburn (No. 9547) and a tribunal decision of 15 March 2006 in the case of Promanex Group Limited (Promanex).
Consideration of evidence 12/04
- We look first at the accounting period 12/04 in respect of which the Appellant has submitted that there is a reasonable excuse for the reduced amount of the default also. We were informed by the Appellant's counsel that Linda Wallis designated as the Appellant's management accountant had encountered family difficulties which had required her to cease to work virtually overnight on 30 November 2004. She had indicated on 2 December 2004 that she would be resigning and had given formal two months notice on 17 December 2004. She did not give evidence to the tribunal although other witnesses for the Appellant referred to her role in their evidence as important in the Appellant's VAT procedure as the person responsible for making the payments and it is clear that she drew up the mandate for payment (on figures supplied by Mr Drury) which always had to be signed by the managing director. It appears to us that during the month of December there was a period of confusion with a re-allocation effectively on an ad hoc basis of the duties which it had been for Ms Wallis to fulfil. This was compounded by the departure of the Appellant's UK Finance director on 16 December 2004 at the expiration of his period of redundancy notice. In addition the Appellant's business was closed between the Christmas and New Year period with only a skeleton staff operating and many from senior management on holiday.
Conclusion 12/04
- We do not accept that there was a reasonable excuse for this period. Reliance on a third-party does not constitute a reasonable excuse for a taxpayer. It is for the taxpayer to manage its affairs to ensure that systems are in place for VAT obligations to be met. In our opinion it was apparent that from 30 November, Ms. Wallis's attendance to do her job could not be relied on. Absences had been covered in the past when the employee had been on holiday. Margaret Kenning who gave evidence confirmed that she had stood in for Ms Wallis on occasion but had not been requested to deal with the VAT payment in December. We were told that normally the UK Finance director would have been involved in these circumstances but we would point out that it was known since the previous August when he would be leaving and some structure would be expected to be in place to cover his more senior responsibilities. Whilst the departure of Ms Wallis was sudden there was still sufficient time before the end of the month to arrange for the VAT payment to be made even allowing for the holiday break. John Andrew Kendall the Group Treasurer in the Group finance team in his evidence suggested that for several months it was assumed that Ms Wallis would remain as an employee with the Appellant even if on a part-time basis. Our view is that though she hoped to undertake some duties at home the commitment was limited and no reference was made to dealing with the VAT payment. The reality was that no one was given responsibility for the VAT payment due at the end of December 2004 and it was not until Mrs Kenning noticed that there was no indication of an expected Vat payment out that the matter was pursued. We would however express some surprise that this situation arose as we would have expected that a person in the finance or Treasury team would have had a schedule on which VAT due to be paid at this time would have shown up on a daily cash forecast and that it would be noted against the same that it had not been paid.
Consideration of evidence 03/05
- Mr Drury gave evidence. He explained his day-to-day role within the financial team dealing with the Appellant's VAT. His function was the preparation of the returns and ascertaining the amounts due and payable. He calculated the balancing payments. He notified Ms Wallis and subsequently Mrs Kenning of the figures for payment. There was no dispute that in this period the VAT payments due had been made and received on time. The problem was with the return which was submitted and received late. Mr Drury told us that it had been decided that the Appellant's VAT returns should on and from March 2005 be submitted on line. This facility was beneficial to a taxpayer; Customs had pointed out in their literature that an online return with payment by way of a Bank Chaps procedure would mean that the VAT liability of a taxpayer could be left to the end of a relevant accounting period. Mr Drury explained to us that he had taken steps to set up the procedure and had received the eBrochure from Customs. He stated in evidence and this was not challenged in cross-examination that it was his understanding from the material in question that he had the benefit of an additional seven days for the submission of the return. It became clear to him as he continued with the process that there was a time delay in setting up the password and meeting the requirements of Customs and that the return would therefore be submitted late. Had he known this earlier he would not have started and the return would have been on time. He had no concern as to the payment of VAT which would be on time.
- Mr Drury also relied on the email correspondence referred to in Clause 12 which he had had with an officer of Customs with whom he was in contact from time to time and with whom he had a good working relationship. This makes the accounting period 09/04 relevant. Mr Drury had found that the return for that period would be submitted out of time (it was received on 3 November 2004 though due on 29 October 2004). The balancing payment was also due on 29 October but paid on 1 November 2004. Whilst getting his paperwork together he sent an email to the officer (named as Tony Williams) explaining that the return would be late and would this cause a problem. The query and the reply are on record and the reply is "…Shouldn't be a problem". Mr Drury chose to use this in the subsequent period 03/05 interpreting it as a general statement that could be applied on any occasion that there would not be a problem when a return was submitted late. In cross-examination Mr Drury was taken through also the substantial amount of material produced by Customs for those intending to use email facilities.
- Counsel for the Appellant referred to the misleading nature of the material for those entering the scheme which emphasised the importance of ensuring that payments were on time without on the face of it making it clear that the same was required in the case of the return itself. He referred the tribunal also to the specific position relating to the POA procedure and the section dealing with the exclusion of the seven day period.
Conclusion 03/05
- The question so far as this period is concerned is whether there was a reasonable excuse for the late submission of the return on the basis that in one way or another Mr Drury who was operating the VAT procedure for the Appellant was misled by Customs own explanatory paperwork and by the email of Mr Williams dated 26 October 2004 in respect of the earlier period. On this point we are satisfied that when an officer gives a reply which is likely to be acted on, Customs must abide by it until it is corrected or the circumstances no longer apply. We have considered however what parameters if any there are to be imposed. We did not have the benefit of the attendance of Mr Williams and objection was taken to his witness statement. It is clear however from the evidence of Mr Drury that he thought even a few months later that the email was a confirmation that returns did not have to be on time. Mr Drury had not yet had any warning that this advice could be wrong and no telephone calls or direct personal contact as to procedures.
- Against this reliance placed on the response of Mr Williams we have to put the explanations in the paperwork from Customs. We have carefully examined this and are of the view that there is ambiguity as to the position of a POA so far as a seven-day extension is concerned. Whilst we accept that its exclusion is clear re payments this is not so in relation to returns. We accept that in conjunction with the earlier advice by email from Mr Williams, Mr Drury was misled to an extent to permit a reasonable excuse to have been established for this period. We do not accept that Customs can in the circumstances rely on the statement in the VAT returns for the periods 09/04 and 12/04 that a person may be liable to a financial penalty if the completed return is not received by the due date. Mr Drury said that the warning on the return and the notes on the back of the SLN did not highlight the possibility that the funds could be on time but the return late. It is clear from his email dated 26 October 2004 that Mr Drury was querying whether there would be a problem if a return were submitted late. The response of Mr Williams was that there should not be a problem. The evidence Mr Drury gave was that he thought that "Tony's words" were sufficient.
- The judgment in Profile Security Systems was relied on by Customs but that decision does not deal with misleading statements made by Customs. The decision in Promanex does and whilst Customs would not appear to object to the principle that case does make it clear that the reasonableness of such an excuse can be used up. We are satisfied that Mr Drury who was responsible for the submission of the VAT return for the period 03/05 did rely on the email from Mr Williams and reasonably believed that the late submission of the return for the period 03/05 would not cause a problem. We are satisfied that the Appellant has a reasonable excuse in relation to the period 03/05. We are satisfied also that he was acting for and on behalf of the Appellant in the steps he took and with authority to do so.
Conclusion 03/06
- It was not argued that there was a reasonable excuse for this period. It was however put to the tribunal particularly by Mr Kendall in his evidence that there is now a much tighter system in place to ensure the timely submission of payments and returns. It was emphasised that management was unaware of the full facts and the problems which were occurring. He expressed his surprise in respect of the 12/04 return that the Appellant was in a default period. It is nevertheless the Appellant's responsibility to ensure that the procedures work and that staff are aware of their specific duties. We do not have a power to mitigate but would in any event see no mitigating circumstances. Nor is it of relevance that the loss to the Revenue may have been small; that is not a factor to be taken into account in default surcharge situations.
Extension of time applications
- We allow a late appeal extension of time in respect of the defaults initially imposed in the periods 09/04, 12/04 and 03/05. To exclude them would not be satisfactory. In respect of the periods 09/04 and 03/05 there was no financial penalty as a result of the defaults and no assessments. For the period 12/04 there was a default and a two per cent surcharge imposed. We understand the view of Customs in general to be that whilst there may be some reason for not appealing when there is no immediate penalty, when some actual surcharge might arise an appeal should be made within the statutory time period. We had the evidence of Mr Kendall that due to a lack of awareness of the situation a decision to appeal was not appreciated as necessary. However as the grounds of appeal in respect of 03/06 are dependent on 03/05 and the earlier periods are relevant and as we heard argument and evidence in respect of all 4 periods the applications of the Appellant in this regard succeed.
- As we accept that there is a reasonable excuse in respect of the default for the accounting period 03/05, accordingly the appeal is allowed in part and the default surcharge of £442,675.00 is discharged.
- Customs have succeeded in part but have not sought costs. The Appellant has sought costs. The Appellant has not succeeded on all the issues raised. It has however succeeded in reducing the amount of the surcharge to nil. In the circumstances we direct that that the Appellant shall be entitled to 2/3 (two thirds) of its costs of and relating to this appeal. If the amount cannot be agreed either party may apply to a Chairman sitting alone.
ELSIE GILLILAND
CHAIRMAN
Release Date: 7 November 2007
MAN/06/0762
