19464
VAT - default surcharge - company believing it had been told that it had 5 additional business days to pay VAT - bank error further delaying receipt of VAT by Commissioners - section 59(7) VAT Act 1994 - reasonable excuse - reasonable expectation of receipt on time.

LONDON TRIBUNAL CENTRE

                                   Alto Digital Networks Limited	Appellant

-  and  –

	Her Majesty’s Commissioners for Revenue and Customs	  Respondents

Tribunal: Charles Hellier	(Chairman)
				     Tym Marsh

Sitting in public in London on 11 January 2006

Jeremy Tarrant a director of the Appellant - for the Appellant 

Simon Chambers instructed by the Acting solicitor for HMRC for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	The Appellant appeals against a default surcharge for the period 03/05 ending on 31 March 2005. In summary it contends that it has a reasonable excuse for late payment of VAT for that period on two grounds. First the company had been previously informed by one of the Respondents’ officers that the due date for electronic payment was 5 business days after the end of the month following the end of the VAT period (rather than 7 calendar days), and second that instructions given to the bank which would normally, and should have, resulted in payment being received by the Commissioners on that 5th business day, did not, for an unknown reason, result in the receipt of funds by the Commissioners until the following day.

Legislation

2.	Section 59 VAT Act 1994 makes a taxpayer liable to a default surcharge in specified circumstances. Those circumstances are, so far as relevant to the appeal, broadly that: following default by the taxpayer in respect of a VAT period, the Commissioners serve a surcharge liability notice on the taxpayer and that within 12 months of the end of the period in which the taxpayer defaulted another VAT period ends in relation to which the taxpayer defaults again. The surcharge is of a percentage of the tax outstanding (i.e. that declared on the return but not paid on time) for that period, and the percentage is set depending upon whether the default in question was the first, second, third or subsequent default in the period.

3.	The Appellant does not dispute that there was an earlier default, that a surcharge liability notice was served on it, or the amount of the surcharge penalty which would, if there was a default for the period 03/05 apply.

4.	Section 59(7) provides that what would otherwise be treated as a default for those purposes shall not be so treated if:

“(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).”

5.	Section 71(1) provides that:

“(1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct –

(a)	any 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.”

6.	The Appellant submits that the facts are such as to enable it to take advantage of section 59(7) in relation to the payment of VAT for the period 03/05. The Respondents accept that the return for this period was submitted within the appropriate time limit; the issue before us relates solely to the VAT payment. Its turnover was about £25m per year.

The Evidence

7.	Mr Tarrant described to us the business of the company (which was principally servicing photocopiers) and its recent history. Its turnover was about £25m per year.

8.	Mr Tarrant is, and at the relevant times was, the finance director of the Appellant. He explained that the company had had an office in Dudley. In this office until 2004 had worked a lady who was his second in command. She was experienced and well qualified, and could have been described as precise (or conscientious) in her approach. He described her as “very much on the side of the rule book”. She was responsible for the VAT affairs of the company.

9.	Some years ago in 2002 or 2004 Mr Tarrant had been rung by this lady and was told by her that she had had a conversation with the company’s VAT office in which she had been told that if the company paid its VAT electronically it would be allowed an extra 5 business days beyond the normal time limit (the end of the month following the applicable VAT quarter) to pay its VAT. No written record of this communication had been found in the company’s records despite several hours searching. No records of the conversation had been found by the Commissioners, although Mr Chambers admitted that records were not made by VAT officers of all telephone conversations.

10.	In accordance with that advice the company had in the period January 2003 to September 2005 paid its VAT bill electronically on the 5th business day after the end of the relevant month except in months where it did not have the funds to pay on time. (Mr Tarrant freely admitted that in relation to those months the company was in default).

11.	In general payment in this manner resulted in the VAT being received by the 7th calendar day after the end of the relevant month. However for the quarter ending 31 March 2004 (a year before the payment which is the subject of this appeal) the incidence of public holidays meant that it was received on the 10th calendar day after the end of the relevant month.  Even though this was after the 7th calendar day no default surcharge was made by the Commissioners.

12.	Mr Tarrant said that had a default been notified to them at that stage they would have changed their practice, but it was not.

13.	For the period 03/05 the company readied itself to pay the VAT on 5th business day after Saturday 30 April 2005 in its usual way. The 5th business day after 30 April 2005 was Monday 9 May 2005 (because two weekends and the May Day bank holiday fell between 30 April 2005 and 9 May 2005).

14.	The company customarily made its payments by CHAPS. It sent instructions to its bank by fax at 10.05 am on 9 May 2005. Mr Tarrant told us that a call was received from the bank acknowledging receipt, and that there were funds in the account sufficient to make payment.

15.	Unfortunately the CHAPS payment was not made on 9 May, but instead on 10 May. Mr Tarrant told us that the Appellant’s  experience with its bankers had been that if, following the faxed instructions to make CHAPS payment, the bank rang to acknowledge the instructions, then the CHAPS payment was made on that day. He told us that whilst an officer of the bank had acknowledged the receipt of the instructions to pay, payment had been made on the day after it received the instructions. Although he had spoken to the bank about the failure to pay on time, and the bank had had no correspondence from the bank to show us because the bank was unwilling formally to admit fault he said that the company’s account at the bank was on 9 May sufficiently funded to make the CHAPS payment requested.

Discussion

16.	There are two issues raised by Mr Tarrant’s submissions. We shall deal first with the payment on 10 May rather than 9 May.

17.	As noted above section 59(7) provides two alternative escapes from the default surcharge. The first relates to the situation in which the circumstances of despatch were such that it was reasonable to expect the money or the return to be received in time; the second to the situation in which the taxpayer has a reasonable excuse for the delay. The restriction in section 71 (insufficiency of funds or reliance on another not to be a reasonable excuse) applies only to the second of these escape routes. That is because it deals only with the issue of whether there is a reasonable excuse and not with the question of what may reasonably be expected.  As a result, although the bar in section 71 from relying upon another person to perform a task may prevent the Appellant relying on the bank’s failure to make payment in accordance with its instructions as being a reasonable excuse for any delay, it does not prevent the Appellant advancing that failure as a reason why it should escape a default under the first limb - (reasonable expectation that the money would arrive in time).

18.	Section 59(7) requires the Appellant to satisfy the tribunal of the relevant circumstances. The burden is put on the taxpayer to convince the tribunal. The better the evidence, the easier it should be to achieve that task. Mr Tarrant’s evidence of the circumstances of the delay were copies of his faxed instructions and transmission report, and his oral evidence of the bank’s practice in the past and its response to his discussion with the bank’s officer about the failure. He did not present any written acknowledgement by the bank because he said the bank would not give it.

19.	We found Mr Tarrant’s explanation of the absence of any acknowledgement from the bank believable, and accept his evidence that in the past CHAPS’ payment had been made on the same day as the instructions were given.

20.	In the circumstances and on the evidence before us we were satisfied that it was reasonable to expect that the CHAPS payment should have been received on 9 May.

21.	But 9 May 2005 was not, said Mr Chambers, the due date: it was, he said, 7 May 2005. And the first limb of section 59(7) applies to provide an escape only if:

“it was reasonable to expect that [the VAT] would be received within the appropriate time limit”.

22.	The next question for us is therefore: what was the appropriate time limit. We note that this is not a question to which any question of reasonable expectation or excuse is relevant, but, as will appear, a question of law and its application to the actions of the Commissioners.

23.	Regulation 40(2) taken with regulation 25(1) provides that the VAT shown on a return is payable must be paid not later than the last day of the month following the end of a return period. But regulation 40(3) provides:

“(3) the requirement of paragraphs (1) or (2) above shall not apply where the Commissioners allow or direct otherwise.”

24.	Accordingly if the Commissioners have directed or allowed a date other than 30 days after the end of the relevant month, that date takes effect as the due date.

25.	Regulation 4 provides:

“any…direction…or permission by the Commissioners, under or for the purposes of these Regulations, may be made or given by a notice in writing or otherwise.”

26.	On the back of the VAT returns it is stated:

“if you pay [by CHAPS] you may be entitled to an extra 7 days in which to submit your return and make payment. Further information can be obtained by telephoning the VAT enquiry helpline number shown overleaf.”

27.	In the VAT Guide it is stated:

“If you choose to pay the VAT shown as due on your return by Bankers Automated Clearing System (BACS), bank Giro Credit Transfer or Clearing House Automated Payment System (CHAPS), you may receive up to 7 extra calendar days for the return and payment to reach us. Here are some important facts you need to know if you want to benefit from this concession -

•	The 7 day extension to the due date will be applied automatically every time you pay your VAT return using BACS Direct Credit or Bank Giro Credit Transfer. You may also pay by CHAPS but please note that this may be the most expensive payment method for you. Payment cannot be made via Girobank.

•	Payment must be in our bank account on or before the 7th calendar day. If the 7th day falls on a weekend, we must receive payment by the Friday. When the 7th day falls on a bank holiday, payment must be in our bank account by the last working day beforehand.

•	To make sure that your payment reaches us in time, you should check with your bank how many days they need to complete the transaction.
•	…
•	If your return or payment is received late, you will be in default and may be surcharges.

•	If your bank may charge you for using any of these payment methods. Check with them for details.

•	If you have any general questions about how the concession operates, please contact our National Advice Service.”

28.	From these we conclude that in the case of electronic payments the Commissioners have allowed the due date to be extended by 7 days. That is 7 calendar days. As a result, if that was all the Commissioners had allowed or directed, the due date would have been 7 May 2005, and the Appellant’s payment could not reasonably have been expected to arrive by that time.

29.	However, the Appellant indicated that the lady in Dudley had been told that the Commissioners had allowed 5 business days extra rather than 7 calendar days. If the Commissioners had so directed or allowed in communication with the appellant then the due date would, as a result of Regulation 40(3), indeed have been 9 May. Were that the case we would therefore find that the Appellant would escape under the first limb of section 59(7).

30.	We are not satisfied however that we should treat the statements made by the VAT officer in the telephone conversation with the lady in Dudley, as a direction or allowance for the purposes of regulation 40. In coming to this conclusion we accept that Regulation 4 permits a direction or permission to be made in writing “or otherwise”, but it seems to us that second hand evidence of what a VAT officer said without the ability to question the hearer on the precise nature of the exchange is insufficient for us to conclude that the VAT officer was formally indicating to the company that 5 business days extra were to be allowed to it until further notice to the contrary. And, even if we could hold that the officer used such words or words substantially the same effect, we are not convinced that he would have been intending an exercise of the Commissioners’ powers under regulation 40 rather than describing the effect of an exercise of those powers already made by another person. If he had been indicating that he was exercising the Commissioners’ powers we would have expected some formal written communication.

31.	As a result we have concluded that the Commissioners did not direct or allow in the Appellant’s case 5 extra business days for electronic payment.

32.	The consequence of this is that the Appellant cannot succeed in relying on the first limb of section 59(7) because even the reasonably expected time of payment (9 May) would have been after the due date (7 May).

33.	That leaves the second limb of section 59(7). Have we been satisfied that the Appellant has a reasonable excuse for the delay? There were two reasons for the period of the delay. The first was the Appellant’s understanding that they had 5 business days rather than 7 calendar days in which to deliver their return. The second was the bank’s failure to pay on time.

34.	It seems to us that if we were satisfied that the appellant had received a clear assurance (falling short of a direction or allowance under Regulation 40) from the Commissioners that 5 business days would be allowed until further express notice, then notwithstanding the statements in the VAT Guide and on the back of the VAT return, the Appellant would have a reasonable excuse for the delay in a payment beyond the 7 calendar days but within the 5 business days.

35.	Although we accept that Mr Tarrant was told by the lady in Dudley that 5 business days were allowed, we know nothing about the specific details of her conversation with the VAT officer. Could, for example, the VAT officer have simply agreed that the 7 calendar day extension was the same as a 5 business day extension? Had he intended something different from the Commissioners’ established practice we would have expected him to confirm the position in writing. Could their conversation have overlooked the possibility of bank holidays affecting the calculation? Could the lady in Dudley have misheard or slightly glossed the VAT officer’s comments in reporting the conversation to Mr Tarrant? The lack of any written evidence before us on the issue suggests to us that it would not be reasonable to exclude the possibility that the officer merely said that the effect of the 7 calendar day extension was 5 business days. These doubts leave us in the position that we are not satisfied that the VAT officer gave a clear 5 business day ruling.

36.	Was it reasonable for the company to rely on the oral report of this conversation? Mr Tarrant relies on the fact that the Commissioners did not allege a default in relation to the period 03/04. Had they done so the position would have been clarified. Mr Chambers pointed out that the back of the VAT return made the position clear, and that the company would have received leaflets which included material referring to the 7 day period. This, he says,  should at least have alerted the company to the issue.

37.	Had we been able to hear evidence from the lady in Dudley, and had she been clear and precise in her recollection, or had she made a clear comprehensive note of the conversation which had been retained and relied upon by the company, we believe we may have found that the company had a reasonable excuse. Mr Tarrant described her as well qualified and on the side of the rulebook, but we were unable to see for ourselves what her attitude and approach were. On an issue of this importance we would have expected such a person to make a written note or report and for the company to have required such a record before relying on the report. As a result, on balance, we were not satisfied in this case that the company’s excuse was reasonable. Had there been no failure to charge a surcharge for 03/04 we would have been clear about this: a recollection of a phone call about a phone call is not reasonably sufficient to rely upon. The 03/04 surcharge failure made us pause in pursuing that conclusion, but it is not, in our view, reasonable to treat a failure by the Commissioners to make a surcharge as confirmation of a practice. Had the company wanted confirmation it could have written expressly to seek it. As a result therefore we concluded that the circumstances did not satisfy us that the Appellant had a reasonable excuse on the basis of the reported 5 business day telephone conversation.

38.	The failure by the bank to make the CHAPS payment on time cannot affect this conclusion. The Appellant was relying on the bank to perform a task - namely to make the CHAPS payment on time. Section 71(b) provides that such reliance cannot constitute a reasonable excuse. Even if it could constitute a reasonable excuse, it would not on its own help the Appellant because the Appellant would also need a reasonable excuse for the delay between 7 May and 9 May, and we have not been satisfied that it had such an excuse on the evidence before us.

39.	We therefore dismiss this appeal.

40.	Our decision was unanimous.

CHARLES HELLIER 
CHAIRMAN

RELEASED: 21 February 2006

LON/05/940