DEFAULT SURCHARGE – Electronic payment – Effect of Notice 700 to allow 7 extra days – Telephone conversation with National Advice Centre – Misunderstanding – Not reasonable excuse – CHAPS transfer using cash – VAT Regs 1995 r.25, 40(3) – Appeals dismissed

LONDON TRIBUNAL CENTRE

	MICHAEL HOWARD RUSE	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE  (Chairman)
						CAROLINE de ALBUQUERQUE 

Sitting in public in London on 26 November 2003

The Appellant appeared in person

Jonathan Holl, senior officer advocate, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	These were two separate appeals against default surcharges arising out of payments by credit transfer for the periods ending November 2002 and February 2003. 

2.	The issues were not the same and we heard the appeals successively.  However because many of the facts are common we give a single decision.

3.	The Appellant is a valuation consultant with a turnover of around £100,000.  He had a small number of clients not all of whom paid their bills promptly.  His receipts fluctuated.

4.	From the early part of 2001 he paid his VAT by bank giro credit transfer.

5.	Returns and payment are normally due by the last day of the month following the end of the period to which it relates, see regulation 25 and 40(2) of the VAT Regulations 1995.  The requirements of regulation 40(2) do not apply where the Commissioners allow or direct otherwise, see regulation 40(3).

6.	Paragraph 21.3.1 of Notice 700 includes the following:

“If you choose to pay the VAT shown as due on your return by … BACS, Bank Giro Credit Transfer or … CHAPS, you may receive up to 7 extra calendar days for the return and payment to reach us …

-	The 7 day extension to the due date will be applied automatically every time you pay your VAT return using … Bank Giro Credit Transfer …
-	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.”

The effect of this is that the Commissioners have allowed otherwise within regulation 40(3) subject to the stated conditions.

7.	The Appellant was provided by Customs with bank giro credit payment books which include under “How to use Bank Giro”, 

“4.	Please ensure that:
The amount paid equals the tax due, as shown in Box 3/5 of your VAT return (form 100).
	Payment is effected at least 3 clear banking days before due date.”

8.	The payments for periods 05/01 and 08/01 were both late, payment for the latter period being despatched on the last day, 7 October 2001. A surcharge liability extension notice was sent stating that although he was in default no surcharge was being made but the surcharge period was extended.  On the reverse it was stated, 

“there is a minimum surcharge of £30.  However, we will not issue surcharge assessments for less than £200 except where the rate of surcharge is 10% or above.”.

9.	In a short letter dated 25 October 2001 the Appellant wrote that the extra time for payment using the paying-in book exists only in theory.  “I shall continue to use the paying-in book but on the assumption that it gives no extra time.”  The 11/01 return showing £2,354.94 VAT was also late and an extension notice was sent.  Again there was no surcharge, being under £200.  The extension notice contained a box offering to make the trader aware of the help and support available and giving the National Advice Service telephone number.

10.	On 4 April 2002 the Appellant paid £4,062.19 VAT for period 02/02 by credit transfer using a cheque.  It was not paid at his own branch.  The payment which was made on a Thursday was recorded by Customs as received on 8 April, the following Monday.  A 5 per cent surcharge of £406.21 was imposed.  The Appellant wrote that the VAT had been paid at the Moorgate branch of HSBC at 9.30am on 4 April, enclosed a copy of the payment counterfoil and asked for the surcharge to be cancelled.

11.	Customs withdrew the 02/02 surcharge in a letter dated 24 April 2002.  This contained the following paragraphs,

“When you pay by electronic transfer, you must ensure that the full payment is in our bank account on or before the seventh calendar day.  The date you made the payment to your bank is not the date of receipt.

However, as your business has a turnover of less than £100,000 and entered the Default system after 30 June 2001, the budget changes in respect of surcharge procedures for small businesses will apply.  Therefore, I am pleased to inform you that the above surcharge will be withdrawn.

In future, if you pay by electronic transfer, you must ensure that the VAT return and full payment is in our bank account on or before the seventh calendar date (sic).  If the seventh falls on a weekend, or bank holiday, you are advised to check with your bank how many days they will need to complete the transaction.  This will avoid the possibility of future defaults and possible surcharge assessments.”

The relevance of the budget changes in 2001 (see paragraphs 30 and 31 below) is not apparent.

12.	The Appellant paid the VAT due for 05/02 on 3 July, a Thursday, and was not in default.  He paid £6,072.20, which was £2 too much, by cheque. 

13.	At the end of June or early July 2002, the Appellant telephoned the National Advice Centre at the telephone number shown on the VAT return form.  We return to this.

14.	On 9 October 2002 the Appellant paid the £2,265.89 VAT for 08/02 by credit transfer using a cheque.  No surcharge was imposed and no surcharge liability extension notice was issued.  In a letter dated 12 February 2003 Customs said that this was due to an accounting adjustment.

15.	The Appellant paid the £2,889.68 VAT for 11/02 by credit transfer on 10 January 2003 using a cheque. This time a 10 per cent surcharge was imposed and against this the Appellant appeals.

16.	On 24 January 2003 the Appellant wrote, 

“In July 2002 I was advised by your National Advice Centre that for businesses with a turnover £100,000 pa payment of VAT received a period of grace beyond the 7 days allowed through using electronic payment means (my query arose naturally enough as a result of delays in debt collection).”

17.	On 18 February 2003 Customs wrote that there were no records of a telephone conversation in July 2002 although it was Customs’ practice “to record all conversations on our systems.”  The surcharge was confirmed.  The letter of 18 February repeated that payments by electronic transfer should arrive within 7 calendar days after the due date and advised him to check with his bank how many days were needed.

18.	The Appellant paid the VAT for the period to February 2003 at HSBC, Moorgate branch, at 9.30am on Friday 4 April. He paid £3,006.51 by cash. A surcharge of 15 per cent was issued on 11 April 2003. The schedule of defaults accompanying Customs’ bundle showed the payment as received on 8 April, which was the following Tuesday.  That surcharge is the subject of the second appeal.

19.	The Appellant gave evidence that he telephoned the National Advice Centre in late June or early July 2002 to ask what the current period of grace was for payment by credit transfer since he anticipated difficulty in getting in cash for the next quarter;  the July payment itself was not a problem.

20.	He told the Tribunal that having spoken to a lady he came away with the distinct impression that there was an extra 7 days and that it was relevant that his turnover was less than £100,000.  He said that he could not be more specific but that on the basis of what he was told he made the payment for period 08/02 on 9 October.  No surcharge was levied for the October payment; he thought that this was because more time had been given and on this basis he deliberately paid the next period’s VAT on 10 January.

21.	He insisted that he had rung the National Advice Centre in July.  He said that he had telephoned the Centre on the day before the present hearing and had not been asked for his name and VAT number.  He had recorded this to prove that details of messages are not in fact kept.

22.	He said that following the surcharge for 11/02 he paid the VAT for 02/03 by cash at Moorgate on 4 April 2003.  This was the only time he had paid in cash. He said that he was told by a female cashier that if he paid in cash it would clear in time.  He drew the necessary cash from the bank and saw the cashier key in the details of the transfer; this did not happen with cheque transfers when the cheque and the form were placed in a pile.  He drew the cash because he was under the impression that it would clear in time.  There was a short queue.  He had gone to the bank at about 9.30am; it was 10 minutes from his office in Old Street.  He said that he had gone back to the Moorgate branch after the surcharge had been imposed to ask about the advice but could not identify the cashier and could get no confirmation; he had no written evidence of his inquiry to HSBC.

23.	Stephen Barrett, manager of the Appeals and Reconsiderations Team at Poole, said that it was usual to keep a record of telephone messages and that his team had seen no record of a conversation with the National Advice Centre.

24.	Mr Holl, for Customs, stressed that the burden of proof in establishing a reasonable excuse was on the Appellant.  He said that since the Appellant had no difficulty in paying the VAT due in July 2002 there was no need for him to query an extension of time then.  The Appellant’s evidence about what was said to him was unclear.

25.	He said that although the Appellant’s evidence regarding the 02/03 surcharge seemed plausible there was no supporting evidence of what the Appellant said.  He would expect some correspondence.  Electronic payment was what it said and took up to three days.  4 April was a Friday so that the VAT was due by the next working day.  The Appellant had provided no evidence of when the cash drawn to pay the VAT had been debited to his bank account.

26.	The Appellant submitted that the only issue for period 11/02 was whether the late payment was conditioned by what he was told on the telephone coupled with the lack of a surcharge for 08/02.  He had intended to pay the VAT as late as he could without incurring a surcharge.

27.	As regards the surcharge for 02/03 the question was whether he had paid on 4 April 2003 expecting to be on time.  His relationship with his bank was good and it was not reasonable to claim against them.

28.	Because of the difficulty in understanding what extra-statutory concessions were in effect at the time of the telephone conversation with the National Advice Centre, the Tribunal requested Customs to clarify the position and what had been published and on 11 December 2003 released a direction requesting them to serve a document containing specific details of the budget changes to which the letter of 24 April 2002 (see paragraph 11) referred and a document containing details of the non-statutory policies in place in July 2002.

29.	Mr Holl responded with a letter dated 30 December 2003 and a copy of VAT Notes No.4 2001 dated December 2001.  These were served on the Appellant who was given an opportunity to make further observations.

30.	The letter included the following quotation from the Chancellor of the Exchequer in press notice 68/01 released on 18 June 2001,

“Fifth, for half a million businesses with turnovers of less than one hundred thousand pounds, we will remove the presumption that fines are levied automatically. In future, automatic VAT fines will be levied only after a written communication is first sent offering advice and help to sort out the problem.”

31.	In December 2001 VAT Notes No.4 2001 contained the following,

“3.	Default surcharge and small businesses.
Customs are in the process of changing their administrative procedures for applying default surcharges for small businesses. If your business has a total turnover of £100,000 or less, and you have entered the default surcharge system after 30 June 2001, our new procedures will apply to you. You are advised to contact our National Advice Service on 0845 010 9000 as soon as possible.  This will explain how to get your surcharge position reviewed.”

This presumably went out with the Appellant’s return form for 02/02.  These appear to be the changes to which the letter of 24 April 2002 referred.  It is to be noted that the extension notice for 11/01 did contain an offer of help and support, see paragraph 9 above.

32.	In fact it appears from Mr Holl’s letter that the £200 threshold for 2% and 5% surcharges had been increased to £400 for periods 05/01 to 10/01 being applied manually as cases were reviewed.  From then on the £400 figure appeared on the surcharge notices.

33.	A joint Press Release by the Inland Revenue and Customs on 17 April 2002 reproduced at De Voil V5.373 said,

“The package … will offer reductions in tax and compliance costs burdens for up to 900,000 businesses in the UK.  It includes … the removal of automatic penalties for all those firms with turnovers of up to £150,000, who will instead first be offered help and advice when they are late with their VAT payments ...”

34.	Mr Holl’s letter stated that the policy in place in July 2002 was as follows:

“• 	A business with a turnover of up to £100,000, not currently in the surcharge regime, should receive a letter offering help and support rather than a Surcharge Liability Notice for the first default.

•	If a further default occurs within twelve months, then a Surcharge Liability Notice should be issued.  If a further default occurs after 12 months then a further help letter will be issued rather than a Surcharge Liability Notice if the turnover criteria are met.

•	For all businesses, a surcharge will not be issued at the 2% and 5% rates if it would be less than £400.”

His letter states that the revised policy is not extra-statutory but reflects the administrative discretion to serve notices of default under sections 59(2)(b) and (3) and to assess under section 76(10).

35.	We observe that the £100,000 limit under the first point conflicts with the Press Statement at the Budget referring to £150,000.  Furthermore the policy is much more tightly drawn than was stated in the Budget Summary which read literally would cover the Appellant since on its plain wording it would cover all defaults by all businesses under the £150,000 limit.

Conclusions

36.	We are satisfied that, in spite of Customs’ letter of 18 February 2003 and Mr Barrett’s evidence, there was a telephone call in June or July 2002 which was not recorded. The issue for our decision is whether what the Appellant was told either allowed him an additional extension over and above the seven days referred to on the credit transfer payment book or so confused him as to give rise to a reasonable excuse.

37.	It is important that the Appellant did not assert that he was told that no surcharges would be imposed on a business of his size.  His case was that he was given to understand that he was allowed additional time because his turnover was under £100,000.

38.	Although the Press Release of 17 April 2002 was lacking in clarity, the advice which the Appellant claims to have been given bears no similarity to the actual concessions for small businesses at the time, none of which involve an addition to the seven days available for electronic payments.  The most probable explanation for the Appellant’s impression is that the person to whom he spoke mentioned the additional time for electronic payments not realising that the Appellant was paying by credit transfer already. While an oral statement by an officer clearly can have the effect of allowing more time for payments under regulation 40(3), advice such as this would not in our judgment have the effect of allowing the Appellant 14 days instead of seven.

39.	In view of the clear wording of the third paragraph of the letter of 24 April 2002 a prudent trader would require a clear and specific statement to rely on any additional extension.  We do not accept that the Appellant was given such a clear and specific statement on the telephone.

40.	The Appellant was fortunate not to receive a surcharge for period 8/02.  While this may have lulled the Appellant into a sense of false security, we do not accept that this gave a reasonable excuse for the late return for 11/02.

41.	Nor do we accept that there was a reasonable excuse for the following default.  The Appellant admitted that he was paying as late as possible.  He did not allow the three banking days advised in the payment book but made the transfer only one working day before the tax was due.  We do not find it credible that the cashier would not have informed him of the facility for accelerated transfer for a fee. If the Appellant wished to cut it fine it was for him to be sure of his ground.  To apply the statutory words in section 59(7)(a), we are not satisfied that the VAT “was dispatched 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”, which in that case was the next working day.

42.	Finally we observe that we can see no good reason why the concession for payment by electronic transfer is not statutory. As it is, paragraph 21.3.1 of Notice 700 is a form of tertiary legislation.

43.	Nor can we see any good reason why the administrative relaxations set out in Mr Holl’s letter should not be statutory. Administrative relaxations of this type are confusing to traders and to the Tribunal. This case suggests that there is also an element of confusion among Customs own officers; we instance the letter from which we quote at paragraph 11.

THEODORE WALLACE
CHAIRMAN

RELEASED:

LON/03/167