VAT – Default surcharge – Whether a reasonable excuse was shown for the defaults when a negotiated time to pay agreement had been complied with – ss. 59 and 71 VATA – Officer at C & E Debt Management Unit not verbally warning the Appellant that compliance with a time to pay agreement would not prevent defaults occurring – Surcharge liability notices and correspondence from the Debt Management Unit making this clear – C & E Commissioners v Steptoe [1992] STC 757 considered – Held no reasonable excuse shown – appeal dismissed

LONDON TRIBUNAL CENTRE

	BEAUTY DIRECT LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR JOHN WALTERS QC   (Chairman)
						MRS LYNNETH SALISBURY

Sitting in public in London on 23 July 2003

Mrs Caroline Hoey, Director, for the Appellant

Mr J P Holl, Advocate of HM Customs and ExciseSolivitor’s Office, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal against a default surcharge of £567.53 issued on 14th February 2003 in respect of the Appellant’s VAT prescribed accounting period of three months ending 31st December 2002 (period 12/02).  The Appellant’s VAT return for that period was received by the Commissioners on 29th January 2003.  It showed VAT payable of £5,675.36.  That VAT was paid after the due date (31st January 2003) in circumstances which we relate below.  The surcharge is calculated at 10% of the VAT unpaid on the due date.
2.	The surcharge is raised under section 59 VAT Act 1994 (“VATA”) – see: section 59(4) and, particularly, section 59(5)(c), which specifies a rate of 10% “in relation to the third .. period” in respect of which a taxable person has been in default during a surcharge period.  Generally, a surcharge period is a period (of – unless it is extended – slightly less than 12 months) specified by the Commissioners in a surcharge liability notice (and beginning on the date of the notice).  The Commissioners serve such a notice on a taxable person who is late with either their VAT return or the amount of VAT shown as payable in the return. Where a rate of 10% is specified in a surcharge notice, the relevant default is the fourth default within the period starting with the default which prompts the issue of the original surcharge liability notice and including the resultant surcharge period.
3.	Section 59(7) VATA provides as follows:
“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 (and, accordingly, any surcharge liability notice the service of which depended upon the default shall be deemed not to have been served).”
4.	Mrs. Hoey submits for the purposes of section 59(7)(b) VATA that there is a reasonable excuse for the VAT relative to period 12/02 not having been 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.
5.	The appeal is brought pursuant to section 83(n) VATA.
The circumstances of the default

6.	A bundle of documents was produced to the Tribunal and this evidence was supplemented by the oral evidence of Mrs. Hoey.  The material facts were not disputed.
7.	The Appellant’s VAT return for the period 03/02 (due date 30th April 2002) showed VAT due of £7,262.95 and was received on the due date. No VAT was received by the due date.
8.	A surcharge liability notice in respect of the period 03/02 was accordingly issued – on 17th May 2002.  This notice warned the Appellant in bold type as follows:
“You may be liable to a surcharge if you are in default in respect of a prescribed accounting period ending within the surcharge period which runs from the date of this notice until 31 March 2003 (please see note 2 overleaf).”
9.	Note 2, under the heading in bold type “What will happen if I default” explain that a Surcharge Liability Notice or Surcharge Liability Notice Extension would be sent.  These would extend the surcharge period and, where appropriate, notify a liability to surcharge.  The notes conclude with the following passage printed in capital letters, and introduced by the heading in bold type: “PLEASE REMEMBER:”
“–	YOUR VAT RETURNS AND ANY VAT DUE MUST REACH THE VAT CENTRAL UNIT BY THE DUE DATE.
– 	IF YOU EXPECT TO HAVE ANY DIFFFICULTIES CONTACT EITHER YOUR LOCAL CUSTOMS AND EXCISE DEBT MANAGEMENT UNIT OR ADVICE OFFICE FOR VAT AS SOON AS POSSIBLE.  AN AGREEMENT WITH YOUR LOCAL DEBT MANAGEMENT UNIT TO DEFER PAYMENT DOES NOT PREVENT YOU BEING SURCHARGED FOR DEFAULTING.”
10.	Mrs. Hoey (or the Appellant’s accountant Christian Spindelbock) thereafter contacted a local Customs and Excise Debt Management Unit in Croydon and spoke to an official there, a Miss Nicola Duffy.  Miss Duffy apparently agreed to accept the VAT for the period 03/02 in instalments, although the official letter incorporating this agreement (known as a “time to pay agreement”) is not on the Tribunal’s file.  The VAT for the period 03/02 of £7,262.95 was received by the Commissioners in two instalments, £3,500 on 7th June 2002, and £3,762.95 on 3rd July 2002.
11.	Mr. Spindelbock wrote to Miss Duffy on 20th July 2002 thanking for permission to pay the VAT for the period 03/02 by instalments and asking for permission to pay the VAT for the period 06/02 (due on 31st July 2002) in two instalments (£3,000 on 20th August 2002 and £3,925.80 on 20th September 2002).  The difficulties were explained as an unpaid invoice of £8,000, the VAT on which was being accounted for, and an application to the bank for a business loan being as yet not approved.
12.	Miss Duffy’s letter in reply, dated 30th July 2002, is in the Tribunal’s papers.  She approved the proposed payment by instalments of the VAT liability for the period 06/02, subject to various stated conditions, the last of which was printed in bold type as follows: “Acceptance of this arrangement does not prevent or cancel the recording of defaults, liability to surcharge, and interest where applicable”. 
13.	The VAT return for the period 06/02, was received on 23rd July 2002 (before the due date, 31st July 2002). The return showed VAT of £6,925.80 as payable (as indicated above), but it was not paid by the due date.  A Surcharge Liability Notice Extension was issued on 16th August 2002, showing an extension of the surcharge period to 30th June 2003.  This notice stated that “[t]he Commissioners do not propose to surcharge you on this occasion” but warned that “[I]f you default again in respect of a prescribed accounting period ending within this surcharge period it will be further extended and you may become liable to a surcharge assessment calculated at the rate of 5%”.  The notes overleaf concluded with the same advice following the heading “PLEASE REMEMBER:” as had appeared in the notice dated 17th May 2002.
14.	The agreed instalments of the VAT due for the period 06/02 were received by the Commissioners on 20th August 2002 (as to £3,000) and on 19th September 2002 (as to £3,925.80).  This was in accordance with what had been proposed and agreed.
15.	The VAT return for the period 09/02 was received on 29th October 2002 (before the due date, 31st October 2002). The return showed VAT of £6,876.91 as payable, but it was not paid by the due date.  A Surcharge Liability Notice Extension was issued on 15th November 2002, showing an extension of the surcharge period to 30th September 2003.  This notice (like the notice of 16th August 2002) stated that “[t]he Commissioners do not propose to surcharge you on this occasion” but warned that “[I]f you default again in respect of a prescribed accounting period ending within this surcharge period it will be further extended and you may become liable to a surcharge assessment calculated at the rate of 10%”.  The notes overleaf concluded with the same advice following the heading “PLEASE REMEMBER:” as had appeared in the notices dated 17th May 2002 and 16th August 2002.
16.	The Tribunal has no direct evidence of a time to pay agreement being reached in respect of this VAT liability, but we do know that it was paid in two instalments, £3,000 being received on 2nd December 2002, and £3,876.71 being received on 24th December 2002.
17.	As we have already said, the VAT return for the period 12/02, was received on 29th January 2003 (before the due date, 31st January 2003) and showed VAT of £5,675.36 as payable – but the VAT was not paid by the due date.  
18.	There is with the Tribunal’s papers a letter dated 6th February from Miss Duffy to the Appellants recording a further time to pay agreement in relation to this VAT.  It allows payments to be made as follows: £2,675.36 on 20th February 2003, and £3,000 on 20th March 2003. (The VAT was in fact received as to £2,675.36 on 20th February 2003, and as to £3,000 on 26th March 2003.)  
19.	Following the non-payment of the VAT due for the period 12/02 by the due date (31st January 2003), a Surcharge Liability Notice Extension was issued on 14th February 2003, showing an extension of the surcharge period to 31st December 2003.  This notice (unlike the notices of 16th August and 15th November 2002) communicated an assessment of a surcharge calculated at 10%, i.e. £567.53.  It is against this liability that the Appellant appeals.
20.	Mrs. Hoey spoke by telephone to Miss Duffy to complain that the late payment to which the surcharge related was one that was being negotiated with her.  Miss Duffy advised Mrs. Hoey to write to the Commissioners asking for a review of the surcharge.  Mrs. Hoey did so, by a letter dated 24th February 2003 addressed “F.A.O. The default surcharge appeal team”. In that letter she wrote: 
“I wrote a letter to Miss Nicky Duffy explaining that we would like to pay the VAT in two parts, to help with cash flow.  I obviously had to wait for Miss Duffy to reply to my letter, of [sic] which she did on the 6th February.  In her letter she had agreed to the two payments, the first payment to be received on the 20th February (letter attached).  So in the light of this could you review the penalty charge.”  
21.	On 17th March 2003, Mrs. Duggan of the Commissioners’ Poole Business Centre Reconsiderations Team wrote to Mrs. Hoey stating that the Commissioners did not accept that the Appellant had a reasonable excuse.  She reminded Mrs. Hoey that the acceptance of a time to pay agreement does not prevent or cancel the recording of a default and that this had been specified in the letter dated 6th February 2003, sent by the Debt Management Unit (i.e. by Miss Duffy).  She also stated that insufficiency of funds is explicitly excluded from being a reasonable excuse by virtue of section 71(1)(a) VATA.
The Appellant’s submission

22.	Mrs. Hoey stated (and the Tribunal accepted her evidence) that she was unaware that in paying VAT late in accordance with agreements reached with Miss Duffy, the Appellant was continuing to be in default for the purposes of section 59 VATA.  She did not understand that the Debt Management Unit was concerned with recovery of VAT, which is a distinct function from the assessment of default surcharges.  She complained that Miss Duffy had never made this clear and in particular that when she had spoken to Miss Duffy she (Miss Duffy) had never made it plain that payment in accordance with a time to pay agreement could directly lead to the incurring of default surcharges.  She said that she did not remember receiving the default notices which we have summarised above, and was unaware of the liability to which the Appellant was exposing itself by negotiating agreements with the Commissioners to pay VAT liabilities late.  She did not pay attention to the passages in the letters recording the time to pay agreements (if indeed she ever read them) which specifically warn that “[a]cceptance of this arrangement does not prevent or cancel the recording of defaults, liability to surcharge, and interest where applicable”.  She said that if she had realised the position she would have arranged for the VAT liability for period 12/02 to be paid on time because there was money in the bank available for this purpose.
The Commissioners’ submission

23.	Mr. Holl, for the Commissioners, responded that it was reasonable for the Commissioners to expect a business registered for VAT for over 6 years to be aware of the system of default surcharge which was explained in the surcharge liability notices and other literature (including the time to pay agreement letters).  He submitted that the Appellant had shown no reasonable excuse, both because at root this was a case where the default was due to an insufficiency of funds, which is expressly provided not to be a reasonable excuse (by section 71(1)(a) VATA) and also because the Appellant failed to satisfy the test of showing a reasonable excuse as laid down by the decision of the Court of Appeal in Customs and Excise Commissioners v Steptoe [1992] STC 757.
24.	In Steptoe the Court of Appeal unanimously decided that where in fact the default is caused by an insufficiency of funds, an appellant can argue that the reason for the insufficiency of funds affords a reasonable excuse within the statutory code (now section 59(7)(b) VATA) – see: per Scott LJ at ibid. p.765a, with whom Nolan LJ agreed at ibid. p.768b, and per Lord Donaldson of Lymington MR at ibid. p.770b.
25.	On the question of what could be regarded as a reasonable excuse, there was a disagreement in the Court, but the view of the majority (Nolan LJ and Lord Donaldson MR) was expressed as follows:
“if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, then the taxpayer may well have a reasonable excuse, but that excuse will be exhausted by the date on which such foresight, diligence and regard would have overcome the insufficiency of funds” – see per Lord Donaldson MR at ibid. p.770d/e.  
Decision
26.	There are four defaults in issue (in respect of each of periods 03/02, 06/02, 09/02 and 12/02), and we consider them in turn to see whether the Appellant has shown a reasonable excuse for any of them.
27.	No excuse is offered for the default in respect of period 03/02.  Mrs. Hoey first contacted Miss Duffy after the Appellant had received the relevant surcharge liability notice.
28.	With respect to period 06/02, the request for permission to pay late by instalments was made (on 20th July 2002) before the due date for payment (31st July 2002).  The explanation of the request was insufficiency of funds, but no underlying reason for the insufficiency was advanced, such as would show a reasonable excuse within the Steptoe test.  What is said, is that Miss Duffy had not explained over the telephone that late payment in accordance with a time to pay agreement would not prevent the recording of a default.  We note that we have had no evidence from Miss Duffy, but on the basis that we accept Mrs. Hoey’s evidence on this point, the Appellant still has to deal with the fact that the surcharge liability notice in respect of period 03/02 (which we assume Mrs. Hoey must have read, because it prompted her to contact Miss Duffy in the first place) had in terms put the Appellant on notice that “an agreement with your local debt management unit to defer payment does not prevent you being surcharged for defaulting”.  The Tribunal concludes from this that “the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date” (c.f. the judgment of Lord Donaldson MR in Steptoe) would have corrected any misapprehension arising from Miss Duffy’s not putting the Appellant on notice of the point in the telephone discussion(s).  We conclude that the Appellant was in default in respect of period 06/02.
29.	With respect to period 09/02, no evidence was advanced to show a reasonable excuse on the part of the Appellant.  By the relevant due date (31st October 2002), of course, the warning that a time to pay agreement does not prevent a default surcharge had been conveyed in writing in the surcharge liability notices for periods 03/02 and 06/02 as well as in Miss Duffy’s letter dated 31st July 2002.  We cannot assume (which was only faintly suggested by Mrs. Hoey) that the notices and the letter were not delivered.  We therefore conclude that the Appellant was in default in respect of period 09/02 also.
30.	We come now to period 12/02, the position being that Mrs. Hoey had (before the relevant due date – 31st January 2002) spoken on the telephone to Miss Duffy to obtain a further time to pay agreement.  We will approach the matter on the basis that Miss Duffy had not warned Mrs. Hoey about the Appellant’s exposure to a default surcharge.  We also accept that the Appellant had money in the bank to pay the VAT due on time, so that no question of insufficiency of funds arises.  The Appellant’s case rests on the assertion that it is not to be prejudiced for not having read the several written warnings contained in the texts of the surcharge liability notices and the time to pay agreement letters, but instead can rely on the fact that Miss Duffy had not, in verbally dealing with the request for time to pay, warned the Appellant of their exposure to liability for a default surcharge, even if payment of VAT is made in accordance with the terms of a time to pay agreement.
31.	The Tribunal must reject this submission.  A reasonable excuse requires that “the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date” would not have avoided the default.  We cannot accept that in ignoring the repeated written warnings in the surcharge liability notices for periods 03/02, 06/02 and 09/02 as well as in Miss Duffy’s letter dated 31st July 2002, the Appellant showed due diligence and a proper regard for the fact that the tax would become due on, in this case, 31st January 2003.  We therefore hold that the Appellant has not shown a reasonable excuse for the default in respect of period 12/02 and we dismiss the appeal.  
32.	We add the observation that it would be helpful if officials at the Debt Management Unit had standing instructions to advise persons in the position of Mrs. Hoey when time to pay agreements are negotiated by telephone, of the consequences of adherence to the agreements in terms of liability to default surcharge. Such instructions would in our view contribute to better administrative practice by assisting taxpayers, while not prejudicing the Commissioners’ discharge of their statutory functions.  It is likely that if Mrs. Hoey had received such advice in her telephone discussions with Miss Duffy the surcharge and this appeal would have been avoided. 

JOHN WALTERS QC
CHAIRMAN

RELEASED:

LON/03/353