18941
Late and instalment payment of VAT – Default surcharge – Whether 10% rate of surcharge triggered by any lack of clarity on the part of the Commissioners

LONDON TRIBUNAL CENTRE

	FLEUR DE PROVENCE	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						SUNIL K DAS

Sitting in public in London on 12 January 2005

Guy Weller and Marcel Bouchenga in person 

Alistair Dougal for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.      This was a relatively simple appeal by Fleur de Provence against the imposition of default surcharge in respect of Fleur de Provence’s VAT liability for the period ending 30 April 2004.

2.      It was undisputed that Fleur de Province, a restaurant business, had defaulted either in filing its return on time, or in paying its VAT on time for the two periods ended 31 July 2003 and 31 January 2004. Since for those periods the rate of surcharge was only 2% and 5% respectively and the amount of VAT owed was relatively low the amount of surcharge fell below the £400 de minimis level, with the result that the liability for surcharge was waived. 

3.      It had been argued that the business had a reasonable excuse for its late payment of VAT for the period ending 31 January 2005, since the restaurant had been closed in January and the pick up of business in February had been slower than expected.   Since section 71(1)(a) Value Added Tax Act 1994 specifically states that an insufficiency of funds to pay VAT cannot rank as a reasonable excuse for the late filing of a return or the late payment of VAT, and the only exception to this rule arises where some extraneous factor outside the control of the trader (such as a major and unexpected default on the part of a very material debtor) leads to that insufficiency of funds, we agree with the Commissioners that there was no reasonable excuse for the late payment of VAT for the period ending 31 January 2004.

4.      For the period ending 30 April 2004 the Appellant’s return was late, and the payment of VAT was also late. More significantly, when the VAT was due for payment on  31 May 2005, it was not until 16 June that the Appellant wrote to inform the Commissioners that it had not proved possible to pay the VAT for the relevant period by electronic transfer on 7 June as it had intended (which would in any event have been late) so that it proposed payment in instalments on 21 June and 16 July.  As a result, a surcharge notice was issued by the Commissioners and since this was the third default within the surcharge period, the higher surcharge rate of 10% meant that the amount of surcharge (at £709) was no longer lower than the de minimis limit. 

5.      The only two grounds advanced for demonstrating reasonable excuse for the late payment of the VAT were “a drop in trade in the restaurant”, and a complaint that it had not been appreciated that the rate of surcharge would be 10%.

6.       It is clear that the argument relating to the drop in trade cannot excuse the late payment of VAT, particularly for a business paying its VAT in relation to cash receipts, on account of the terms of section 71(1)(a) VAT Act 1994, already referred to. We chose to defer our decision in relation to the Appellant’s second argument concerning its surprise that the rate of potential surcharge had reached 10% in case we were to conclude that there was anything in the decision in the case of  MHC (Michael Hammond Partnership) v Commissioners of Customs and Excise [2004] V&DR 1 that supported the Appellant’s case. 

7.      We  have decided that there is nothing in the relevant case that supports the   Appellant’s argument, and that the circumstances prevailing in that case were virtually the reverse of those in the present case. 

8.      In MHC (Michael Hammond Partnership) v Commissioners of Customs and Excise, the alleged “reasonable excuse” for the late payment was not that the trader had insufficient funds to pay but the belief on the part of the trader (occasioned by discussions with the Commissioners before the due date for the payment of VAT) that if the trader and the Commissioners agreed on a profile for payment of the VAT in instalments, this would involve no disadvantage (such as a liability for surcharge) on the part of the trader. The trader contended that it could have paid the VAT on the due date and certainly would have done, had it realised that a pre agreed profile of payment by instalments would involve a liability for surcharge. It was also held that a paragraph in a standard letter sent by the Commissioners when agreeing to an instalment basis of payment (to the effect that “acceptance of this arrangement does not prevent or cancel the recording of defaults, liability to surcharge, and interest where applicable”) was not sufficiently clear to disabuse the trader of its expectation that an agreement made before the due date for the payment of VAT to pay in instalments would involve no disadvantage. 

9.      In the present case, the Appellant  was hardly misled by the Commissioners in advance of  its suggestion that it would pay the VAT due on 31 May 2004 by instalments, into believing that that procedure would involve no disadvantage. After all the Appellant had already defaulted in paying its VAT on the due date and it only suggested that it would pay the VAT by instalments 16 days after the VAT should have been paid, and at that point without the agreement of the Commissioners. The Appellant was furthermore not claiming that but for some misapprehension about the consequences of instalment payment of VAT it could and would have paid the VAT on the due date. The Appellant was simply arguing that through insufficiency of funds it had been unable to pay the VAT on the due date. Finally the Commissioners had notified the Appellant on 12 March 2004 that whilst its last default would involve no payment of surcharge because the surcharge fell below the de minimis level, it was clearly stated that any further default in the extended surcharge period would involve surcharge calculated at the rate of 10%. Once the Appellant had been notified of this, we find it impossible to understand how the Appellant might have a reasonable excuse for late payment of VAT if it was late in filing its return, only telling the Commissioners on 16 May that it had proved impossible to pay its VAT by the date that it had intended (which was anyway late) and suggesting that it be paid in instalments on even later dates.  

10.     We accordingly dismiss the Appellant’s appeal. 

11.     The Commissioners made no request for an award of costs.

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 17 February 2005

LON/04/1483