18809
DEFAULT SURCHARGE – two surcharges – Appellant received two assessments which should have been cancelled but were not –Appellant kept asking for them to be cancelled but received no substantive reply - one of the Appellant’s letters was lost for some months  – Appellant continued to receive  demands for the payment of the tax assessed and interest -Appellant knew that it would receive a visit if it did not render a return – it therefore  held back its returns so that it would receive a visit and could ensure that the assessments were cancelled - when the visit took place the returns were handed over  - whether a reasonable excuse –very  exceptionally yes – VATA 1994 S59 (7)(b)  

LONDON TRIBUNAL CENTRE

R O SOMERTON LIMITED
Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

			Tribunal:	DR NUALA BRICE (Chairman)
DR MICHAEL JAMES

Sitting in public in Bristol on 7 September 2004 

Andrew Merricks, a Manager of the Appellant, for the Appellant

Jonathan Holl, of the Office of the Solicitor for the Customs and Excise, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

The appeal

1.	R O Somerton Limited (the Appellant) appeals against two default surcharges. The first was for the accounting period ending on 31 August 2002 and amounted to £403.18. The second was for the accounting period ending on 30 November 2002 and amounted to £659.73.

The legislation

2.	Section 59 of the Value Added Tax Act 1994 provides that where a return, or the tax due, is received late the taxable person is in default. A surcharge is imposed for the second and subsequent defaults. However, section 59(7)(b) provides that if a person who would be liable for a surcharge satisfies the Tribunal that there was a reasonable excuse for the return or the tax not being sent in time then he is not liable to the surcharge.    

The issue

3.	Thus the issue in the appeal was whether the Appellant had a reasonable excuse for the delay in sending the returns and tax for the accounting periods ending on 31 August 2002 and 30 November 2002.

The evidence 

4.	A bundle of documents was produced by Customs and Excise. Oral evidence was given on behalf of the Appellant by Mr Merricks, the Manager of the Appellant. 

5.	Customs and Excise handed in two witness statements one signed by Mr Graham Hatten and one by Mr Haydn Wood, both Officers of HM Customs and Excise. These had not previously been served on the Appellant under the provisions of Rule 21 of the Value Added Tax Tribunals Rules 1986 SI 1986 No. 590. We decided to admit the statements but, in deciding what weight to give to the evidence in them, we bore in mind that the witnesses were not present at the hearing and so could not be questioned on behalf of the Appellant. Mr Merricks, for the Appellant, told us that he had asked Customs and Excise to arrange for Mr Hatten to attend the hearing but had been told that Mr Hatten would not attend.

The facts

6.	From the evidence before us we find the following facts.

The Appellant and its previous defaults

7.	The Appellant runs a public house called The Royal Oak in Somerton, Somerset. Mr Merricks is the manager. Value added tax is paid each quarter on the amount of takings for that quarter. Annual turnover is in the region of between  £120,000 and £200,000 per annum.

8.	Before the defaults the subject of this appeal the Appellant was in default four times. The first default occurred in the accounting period ending on 31 May 2001. Later this default was cancelled. We received very little evidence about this default.  The return and tax for the accounting period ending on 30 November 2001 should have been received on 31 December 2001. The return was received on 12 April 2002 and the tax was received partly on 22 February 2002 and partly on 12 April 2002. The return and tax for the accounting period ending on 28 February 2002 should have been received on 31 March 2002 but were received on 9 May 2002. The return and tax for the accounting period ending on 31 May 2002 should have been received on 30 June 2002 but were received on 15 July 2002.  

9.	The return for the accounting period ending on 30 November 2001 was three and a half months late because the Appellant had had difficulties with the competence of its book-keeper and problems with the accounts. When Mr Merricks appreciated what was happening he sent all the papers to the Appellant’s accountants for the calculations to be re-done and for the accountants to ensure that the figures up to 30 November 2001 were correct.  The default for the accounting period ending on 30 November 2001 is not in issue in the appeal but the facts relating to that default are relevant. 

January 2002 – Mr Hatten’s visit

10.	On 26 January 2002 Mr Hatten, who was a Customs Officer from the Taunton office, visited the Appellant and spoke to Mr Merricks. The visit was unexpected but was prompted by the fact that the return for the accounting period ending on 30 November 2001 had not by then been received by Customs and Excise. At the visit Mr Hatten raised a query about the amount of input tax claimed on the return for the accounting period ending on 31 August 2001. Mr Merricks could not answer the query there and then and so Mr Hatten asked him to find the answer and to get back to him with the explanation. During his visit Mr Hatten did not inspect the value added tax books and records of the Appellant. 

11	On 19 February 2002 the Appellant received a notice of assessment for the sum of £1,550. (We call this the late return assessment.) The assessment had been raised by Mr Hatton but there was no explanation as to why it had been raised. Mr Merricks was baffled but guessed that it might relate to the input tax for the accounting period ending on 31 August 2001. However, as Mr Hatten had not expressed any urgency in dealing with that matter he did not think much of it at the time. (In fact the 19 February 2002 assessment was made because of the late rendering of the return for the accounting period ending on 30 November 2001 and should have been cancelled when the return was rendered, and the tax paid, on 12 April 2002).  

12.	On 3 March 2002 Mr Hatten wrote to the Appellant and referred to his visit of 26 January and the fact that Mr Merricks had been unable to produce evidence of the input tax claimed in the return for the accounting period ending on 31 August 2001. He said that he had allowed two weeks for Mr Merricks to produce evidence. Mr Merricks disputed this and, in the absence of oral evidence from Mr Hatten, we prefer the oral evidence on oath given by Mr Merricks.. The letter concluded by saying that the amount of £1,259 would be assessed. Mr Merricks did not reply to this letter as on 8 March 2002 the Appellant received another notice of assessment for £1,259 with interest of £35.99 making a total amount assessed of £1,294.99 (we call this the input tax assessment). 

13.	In or about April 2002 the Appellant’s papers came back from the accountant and it became clear that the amount of tax declared for the year ending on 30 November 2001 was correct. On 12 April 2002 the Appellant rendered the return, and paid the rest of the tax, for the accounting period ending on 30 November 2001. At this stage the assessment of 19 February 2002 should have been cancelled.  

14.	Mr Merricks claimed that in April and May 2002 he sent to Mr Hatten information about the input tax claimed in the return for the accounting period ending on 31 August 2001. One of the letters had been sent with the return for the accounting period ending on 31 May 2002. Customs and Excise denied that any letters had been received and Mr Merricks produced no copies of them. However, we accept the oral evidence of Mr Merricks and conclude that the originals may have been lost as was Mr Merricks’s subsequent letter of 2 July 2002. 

15.	In any event on 2 July 2002 Mr Merricks wrote to Mr Hatten about Mr Hatten’s letter of 3 March and the input tax assessment of 8 March 2002. He confirmed that his accountants had completed the final accounts for the year ending on 30 November 2001 and had confirmed that the amount of value added tax paid for that period was correct. The reason for the high amount of input tax claimed in the return for the period ending on 31 August 2001 was that a large number of purchase invoices had not been entered on the system for the period ending on 31 May 2001 and so had been included instead in the return for the period ending on 31 August 2001.

16.	Mr Merricks then thought that, as he had supplied sufficient information about the input tax, he would hear no more about it and that the input tax assessment would be cancelled. Actually, his letter of 2 July 2002 was received by Customs and Excise but was lost for some months. The Customs Offices in South West England, including the office at Taunton, were being converted to a new electronic folder system and several problems were encountered with it. During this time all incoming correspondence was sent to Plymouth. Mr Merricks’s letter of 2 July 2002 only turned up some months later.

17.	However, Mr Merricks did not know that his letter had been lost and he continued to receive demands. On 30 July 2002 he received a red letter demand for £1,259 with no explanation. On 5 August 2002 he telephoned Customs and Excise at Southampton debt management unit (where the demand had come from) and said he had written on 2 July 2002. They said that someone would come back to him but nothing happened. 

18.	The Southampton records show that, after they received the call from Mr Merricks on 5 August 2002, they sent an email to Mr Hatten on the same day (5 August 2002) and he replied to them on 21 August 2002 to say that he had contacted the trader and asked them to “hold action”. However, Mr Hatten did not at that time get in touch with Mr Merricks or the Appellant. 

19.	There followed a period of inactivity caused by the fact that the files of the Taunton Office were being converted to the electronic medium. The Appellant’s letter of 2 July 2002 subsequently emerged but Mr Hatten again failed to progress the matter. 

20.	Mr Merricks had received no acknowledgement of his letter of 2 July 2002 and was continuing to receive demands for the payment of money he did not owe. The return and tax for the accounting period ending on 31 August 2002 should have been received by Customs and Excise on 30 September 2002. Mr Merricks knew from experience that if he did not send a return he would receive a visit and so he decided to withhold the return for the accounting period ending on 31 August 2002 so that he would be visited and the matter of the assessments could be cleared up. 

21.	However, on 21 October 2002 the Appellant received a demand for interest on the £1,259 and another demand in December 2002. As Mr Merricks thought that he did not owe the money he kept calling Southampton but got no useful response. He tried to get hold of Mr Hatten but could not do so. On 2 December 2002 an officer at the Southampton Office said that she would send an email to Mr Hatten and ask him to get in touch with Mr Merricks. She sent an email to Mr Hatten on 2 December 2002 and Mr Hatten replied to her on 3 December to say that he would action the matter as soon as possible. However, Mr Hatten did not get in touch with Mr Merricks or the Appellant. 

22.	Mr Merricks told the officer at Southampton that he did not owe the money and that someone had to stop sending him demands for tax and interest. He also said that if no-one would talk to him about the demands he would withhold his returns until they did. The return and tax for the accounting period ending on 30 November 2002 were due on 31 December 2002 but were withheld for the same reason that the previous return and tax had been withheld.

23.	On 12 February 2003 Southampton again sent an email to Mr Hatten asking for an update and on 14 February he replied to say that he was going to visit the Appellant on 18 February and hoped to get the returns then.

The second visit

24.	On 18 February 2003 the Appellant was visited by Mr Hatten and Mr Wood and discussions took place. The reason for the visit was to receive the returns for the accounting period ending on 31 August 2002 and 30 November 2002. By that time the late return assessment and the input tax assessment had not been cancelled even though Mr Hatten had agreed to cancel them. Mr Hatten said that the matter had been over looked. Mr Hatten agreed that if the Appellant handed over both returns he would remove both assessments. Mr Merricks said that he did not want to be surcharged. There was a conflict of evidence about what Mr Hatten then agreed. Mr Merricks said Mr Hatten agreed that the Appellant would not be surcharged whereas Mr Hatten denied that he made any such agreement. We do not have to resolve this conflict for the purposes of our decision but if we had to we would accept the oral evidence of Mr Merricks. Mr Merricks then went upstairs and picked up the already completed returns for the accounting periods ending on 31 August 2002 and 30 November 2002 and the cheques and handed them all to Mr Hatten. Mr Hatten asked however that they be posted and Mr Merricks crossed the road and posted them. Mr Hatten said that that was the end of the matter .

25.	The returns were received by Customs and Excise on 19 February 2003. On 20 February 2003 the input tax assessment was withdrawn but the Appellant was not informed. However, on the same date the Appellant received a mis declaration penalty (which has since been cancelled and is not the subject of this appeal.) Further demands were received on 26 February 2002, on 17 March 2003; and 26 March 2003.  Later Mr Merricks found that the two latest demands were for default surcharges for the accounting periods ending on 31 August 2002 and 30 November 2002 when he thought he had agreed with Mr Hatten that there should be no surcharges for those periods.  

26.	On 26 March 2003 Mr Merricks made more telephone calls. Again it was very difficult to get a response from Mr Hatten. Mr Hatten did telephone Mr Merricks on 20 August 2003 and said that the two defaults the subject of the appeal would not be removed as he had no power to remove them. However, the surcharge for the accounting period ending on 31 May 2001 would be removed. (We received no evidence at all about the surcharge for the accounting period ending on 31 May 2001 which was not in issue in the appeal.). On 26 August 2003 the surcharge for  the accounting period ending on 31 May 2001 was removed. 

The progress of the complaint

27.	On 25 September 2003 Mr Merricks wrote to Customs and Excise to complain about the treatment he had received. In reply he was asked for further information. A reminder was sent on 24 October and Mr Merricks replied on 6 November and sent a copy of his letter of 2 July 2002. His 6 November letter was referred to the Regional Complaints Unit in Southampton. He received a reply dated 20 January 2004 which agreed that there had been excessive delay in withdrawing the two assessments. The letter also agreed that the assessment in respect of the period ending on 30 November 2001 (the late return assessment) was still extant when it should have been withdrawn shortly after the receipt of the return and cheques for the period (which were received on 12 April 2002). The letter said that the assessment and any interest and further interest had been removed and credited to the Appellant’s account. 

The arguments for the Appellant 

28.	For the Appellant Mr Merricks argued that he had a reasonable excuse for the delay in rendering the returns because the with-holding of the returns was the only way to get the matter of the two assessments (the late return assessment and the input tax assessment)  “sorted”.  He was desperate to resolve the situation relating to the two assessments because he continued to receive demands which he did not understand for tax and interest which he did not owe. He kept getting demands from Bristol, Southampton and Southend and he did not know how the whole system worked. He did not know what was going on. He knew that he would get central assessments if he did not render returns but the amounts demanded did not relate to anything and he was totally confused. He knew that he would receive a visit if he did not make a return. He argued that Mr Hatten knew his reasons for withholding the returns which were ready at the visit of 18 February 2003. He accepted that he had to comply with the obligation to render returns but Customs and Excise had obligations too and had failed to respond to his enquiries from 5 August 2002 to 18 February 2003. The constant demands placed a burden on him and he had dealt with each through the debt management unit at Southampton.

29.	Mr Merick also argued that at his visit on 18 February 2003 Mr Hatten had agreed that there would be no default surcharges for the two periods in respect of which the returns had been withheld. 

The arguments for Customs and Excise

30.	For Customs and Excise  Mr Holl accepted that there had been “a catalogue of errors and incompetence” in the way in which Customs and Excise had handled the Appellant’s matters but there were obligations on both parties to keep up-to-date. A central assessment was usually issued if a return were rendered late and a surcharge was usually imposed. If the Appellant had always complied with the legal time limits for the rendering of its returns it would not have been issued with so many central assessments. There had been four earlier defaults and so the Appellant was aware of the working of the surcharge regime. There was no written communication from the Appellant that he was withholding his returns because he had a dispute with Mr Hatten. Indeed, there was very little correspondence from the Appellant apart from the letter of 2 July 2002 and, if the Appellant had wished to make a protest, he could have sent the return but withheld the tax.

31.	Mr Holl also argued that Mr Hatten denied that he had agreed at the visit on 18 February 2002 that there would be no surcharges for the late rendering of the returns for the accounting periods ending on 31 August 2002 and 30 November 2002 and that in any event visiting Officers did not have the power to withdraw surcharges. 

Reasons for decision

32.	What we have to decide is whether the Appellant had a reasonable excuse for the late rendering of the returns for the accounting periods ending on 31 August 2002 and 30 November 2002. These should have been rendered on 30 September 2002 and 31 December 2002 respectively. Accordingly, what we have to consider is whether, at both those dates (30 September 2002 and 31 December 2002) there was a reasonable excuse for not sending the returns. 

33.	For this reason we regard it as irrelevant whether Mr Hatten, on 18 February 2003, did or did not agree to the fact that no surcharges would be imposed. Either the Appellant had a reasonable excuse on 30 September 2002 and 31 December 2002 or it did not. If it did then the surcharges are not payable. If it did not, then they are. 

34.	We begin by stating that in our experience the facts of this appeal are wholly exceptional. We found Mr Merricks to be a credible witness and much of his evidence was substantiated by the written record of his dealings with the debt management unit in Southampton which record was produced by Customs and Excise. Mr Hatten did not attend the hearing and so could not be questioned. 

35.	We accept the evidence of Mr Merricks that he was baffled by the numerous demands for tax and interest made on the Appellant and desperate to have the late return assessment and the input tax assessment cancelled. He wrote on 2 July 2002 but his letter was lost for some months. He of course did not know that. He continued to receive demands for tax and interest and made numerous telephone calls to the debt management unit in Southampton. The debt management unit appear to have dealt speedily with each approach by Mr Merricks but it seems that all they could do was to ask Mr Hatten to contact the Appellant which he did not do. We received no explanation as to why Mr Hatten failed to respond to the Appellant’s requests between 5 August 2002 and 18 February 2003 apart from the reference to the fact that the files of the Taunton office were being converted to the electronic medium. However, that does not explain why no action was taken on the emails from the debt management unit.

36.	We do not condone the late rendering of returns but in our view there are obligations on both sides. Taxable persons are obliged to render their returns on time but we are also of the view that Customs and Excise have a duty of good administration. In this wholly exceptional appeal we do consider that there was a reasonable excuse. The Appellant wanted the late return assessment and the input tax assessment cancelled and was unable to receive any meaningful reply from Customs and Excise to his letter and telephone calls.  

37.	Mr Holl argued that there was no written communication from the Appellant that he was withholding his returns because he wanted a visit from Mr Hatten and that there was very little correspondence from the Appellant apart from the letter of 2 July 2002. We agree that there was very little written communication from the Appellant but that has to be considered within the context of the fact that the Appellant’s letter of 2 July 2002 was lost for some months and not replied to and also of the fact that Mr Merricks made numerous telephone calls to the debt management unit at Southampton which, as far as he was concerned, yielded no substantive response. Having heard the oral evidence of Mr Merricks we find that he did tell the debt management unit that he was with holding his returns until he received a visit. There was no written document recording how the arrangements for the second visit on 18 February 2003 were made but the debt management’s unit written notes indicate that on 14 February 2003 Mr Hatten told them that he hoped to get the returns at his visit. Thus it must have been made clear to him before that date that the returns were being withheld until the visit. Also, the unit’s own written record for 18 March 2003 records that Mr Merricks said that he did not submit his returns deliberately in order “to elicit human intervention”.  We accept that both these dates are after the dates of the defaults but they support the oral evidence of Mr Merricks that he made his reason for with holding the returns clear to Customs and Excise. .

Decision  

38.	Our decision on the issue for determination in the appeal is that the Appellant did have a reasonable excuse for the delay in sending the returns and tax for the accounting periods ending on 31 August 2002 and 20 November 2002. 

39.	The appeal is, therefore, allowed.

DR A N BRICE

CHAIRMAN

RELEASE DATE; 21 October 2004

LON/2003/1167
20.10.04