19430
	VAT Default surcharge - reasonable excuse - farmer’s milk statement for previous 	month  arriving late in following month - little time to prepare a return - not cash 	accounting - on the facts appeal dismissed.

	Harold Leslie Stott and Rita Marilyn Stott	Appellants

-	and –

	The Commissioners for Her Majesty’s Revenue and Customs	  Respondents

Tribunal: 	Charles Hellier (Chairman)
					    and	Chris Perry

Sitting in public in Bristol on 14 December 2005

Mr and Mrs Stott in person 

Mrs Crinion instructed by the Acting Solicitor for HMRC for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Mr and Mrs Stott appeal against a VAT default surcharge of £976.28 imposed by the Respondents in respect of the VAT quarter 12/04 being the quarter ending on 31 December 2004. The surcharge represented 15% of the net amount of VAT payable for that quarter.

2.	We found the following facts:

(i)	Mr and Mrs Stott run a farm and agricultural contract business from their home at Callow Hill Farm, Wookey near Wells in Somerset. The supplies they make include milk and agricultural contracting services. The supplies they make of agricultural contracting services are standard rated. The supplies they make of milk are zero rated.

(ii)	Their milk supplies are made to a milk wholesaler which accounts to them monthly for the milk supplied: generally they receive a cheque and a statement from the wholesaler between the 17th and 21st of each month for the supplies made in the preceding month. The statement shows the amount of the milk supplied and the price for it and contains deductions for supplies of haulage and other items made by the wholesaler to Mr and Mrs Stott. These supplies made to Mr and Mrs Stott are standard rated and the VAT on them forms part of Mr and Mrs Stott’s deductible input VAT.

(iii)	Mr and Mrs Stott invoice their agricultural contracting customers directly. 

(iv)	Mr and Mrs Stott retain a firm of accountants to prepare their accounts, their tax returns and their VAT returns. During the course of each VAT quarter they collect the copy invoices for the supplies they make, the invoices they receive for supplies made to them and correspondence from HMRC in a box. The accumulated paperwork is then sent to the accountants on about the 8th to the 10th of the month following the end of the quarter. Their bank statements generally arrive on the 18th - 20th of each month and, as we have mentioned the milk statement between 17th and 21st of the month. These are sent to the accountants shortly after they are received by Mr and Mrs Stott.

(v)	The bookkeeper at their accountants uses the bank statements to check the completeness and accuracy of the figures prepared for a quarter, and the milk statement to compile the figures for the input VAT and the total sales on the VAT return. Having completed the return the accountants send it back to Mr and Mrs Stott who sign it, and where VAT is shown due, complete a cheque and send it and the return to HMRC.

Because the bank statements and the milk statement do not reach the accountants until about the last week in the month following the end of the VAT quarter, the completed VAT return generally does not reach Mr and Mrs Stott until after the end of that month. As a result, the return and the payment (where relevant) do not reach HMRC within the time limit prescribed by the VAT Act 1994 and the Regulations made under it.

(vi)	The following VAT returns and payments were made late:

(a)	Returns for the quarters ending 31 March, 30 June, 30 September and 31 December 2003 and 2004.

(b)	VAT payments for the quarters ending:

	31 March,  30 September
	30 December 2003; and
	30 June and 31 December 2004.

(vii)	Mr and Mrs Stott have apparently not been advised by their accountants to operate the cash accounting system for VAT. If they were to operate that system then there would be no need to wait for the milk statement before their return was completed: it could instead be completed on the basis of cash payments and receipts made in the quarter. If they operated the system and arranged for their bank statements to be sent to them shortly after the end of each month, there would be about three weeks in which queries could be addressed and the return completed. It could then be sent with any cheque to HMRC, thus enabling the return and the cheque to be received by HMRC before the end of the month. Had this procedure been adopted it seems to us that the surcharges in this appeal would not have arisen.

4.	The Legislation

	Section 59 VAT Act 1994 sets out the VAT surcharge regime. It provides that if a person is in “default” in a “surcharge period” then that person is liable to a surcharge equal to the relevant percentage of the VAT outstanding for that period (i.e. the VAT which was not paid within one month after the end of the period). The relevant percentage is:

2% if it is the first time in the period that the person is in default;
5% if it is the second time in the period that the person is in default;
10% if it is the third time in the period that the person is in default; and
15% if it is the fourth time in the period that the person is in default.

As a result, if Mr and Mrs Stott were in default within a “surcharge period” four or more times then they would be liable to a penalty of 15% of the tax outstanding for the period for which they were in default. If there was no outstanding tax (because it had been paid, or because it was a reclaim period) the surcharge would be 15% x nil = nil, but the default would count towards the number of defaults in the period.

A surcharge liability period is a period beginning with the end of a period for which the taxpayer was in default and lasting initially for 12 months. The period can be extended, however, if the taxpayer is in default within it. If extended, it lasts for a further 12 months from the last default.

But a surcharge period cannot start and cannot be extended unless:

“..(b) the Commissioners serve notice on the taxable person (a “surcharge liability notice”)  specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning subject to subsection (3) below, on the date of the notice…”

(See VAT Act 1994 section 59(2)(b)). Thus before a surcharge period can commence the notice must be served. If it is not served no surcharge is due. A period may be extended only if a further default surcharge notice - or default surcharge notice extension - is served in respect of a default for a period in the surcharge period.

Section 59(1) defines “default” thus:

“If by the last day  [which in this case is the end of the month following the quarter end] on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period -

(a) the Commissioners have not received that return, or

(b) the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period,
	
Then that person shall be regarded for the purposes of this section as being in default in respect of that period…”

But section 59(7) says that something is not a default if:

“(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.”

We use the term “reasonable excuse” below for an excuse which by virtue of this provision prevent something being a default.	

5.	Accordingly, Mr and Mrs Stott are liable to the VAT default surcharge of £976.28 only if all of the following conditions are satisfied:

(i)	a surcharge liability notice was served on them in respect of a VAT period in which they were in default;

(ii)	the VAT surcharge default period was extended to encompass the period in which the default surcharge  under appeal was made by one or more surcharge liability extension notices;

(iii)	In the period 12/04 Mr and Mrs Stott’s VAT return and VAT payment were not received in time;

(iv)	the VAT due in respect of that period was £6,508.58; and

(v)	Mr and Mrs Stott had no reasonable excuse for their default.

6.	The First Condition: A surcharge liability notice served in respect of a period in which Mr and Mrs Stott were in default.

We were shown a copy of Mr and Mrs Stott’s VAT return for the period 03/03 ending March 2003. This was signed by Mr Stott on 29 August 2003. It was due to be received by HMRC on or before 30 April 2003. Mr and Mrs Stott were therefore in default in respect of that period unless they had a reasonable excuse for the delay in the submission of the return.

We deal in more detail below with the question of whether or not Mr and Mrs Stott had a reasonable excuse for their VAT return being late, but the reasons for that lateness were the same for each period, and we find below that there was no reasonable excuse in the terms of the statute. We therefore conclude that they were in default in relation to the period 03/03.

HMRC showed us a copy of a Value Added Tax Notice of Assessment of Tax Surcharge Liability Notice dated 16 May 2003, said to have been sent to Mr and Mrs Stott. Mr and Mrs Stott had no recollection of having received this notice. They accepted that the address on the copy notice was correct and that if it had gone to one of their neighbours by mistake it was likely that it would have been sent on to them. The copy notice was dated May 2003 which was a busy time of year for Mr and Mrs Stott. It seems that their accountants received the notice because in their letter of 13 June 2003 to HMRC they say “our client has passed to us your Notice of Assessment of Tax for each of the four quarters to 31 March 2003”. The Surcharge Notice dated 16 May 2003 was headed “Notice of Assessment of Tax” and below that “Surcharge Liability Notice”. It seems to us that it is more likely than not that this notice was received by Mr and Mrs Stott, but that when they received it, it was put fairly automatically into the box to go to the accountants and as a result its significance was not appreciated.

We therefore find that the first condition is satisfied.

7.	The Second condition: the extension of the VAT Surcharge Period.

HMRC’s bundle enclosed copies of three notices which extended the surcharge liability period:

Relevant
VAT period	Date of Notice	Date Surcharge Period Extended to	
			
06/03	15 August 2003	30 June 2004	
09/03	21 November 2003	30 September 2004	
12/03	13 February 2004	31 December 2004	

If each of these notices was properly served on Mr and Mrs Stott then surcharge liability period (the period within which any default would lead to a default surcharge) was extended to the period ending 31 December 2004 as a result of which any default in that period could lead to a default surcharge. The quarter ending 31 December 2004 was the period in respect of which the £976.28 surcharge under appeal was made.

It was not disputed that in each of these periods Mr and Mrs Stott’s VAT return was received by HMRC after the due date. Unless there was a reasonable excuse for that delayed receipt, it constitutes a default for these purposes. We deal below with the question of reasonable excuse and conclude that there was not such an excuse for these periods. Therefore if the notices were properly served upon Mr and Mrs Stott, they validly extended the surcharge period.

Mr and Mrs Stott could not recall receiving these notices. There was no evidence before us, as there was in the case of the initial notice that the notices had been received by the accountants. However, we note that the notices are headed:

“Notice of Assessment of Tax
                              Surcharge Liability Notice Extension”

and suspect that on a quick glance they might be taken as being a tax assessment rather than something else as well. Mr and Mrs Stott run a farming business and leave the VAT issues to their accountants. We think that, on balance, it is likely that these notices did arrive at Mr and Mrs Stott’s address, but that when they were opened the heading “Notice of Assessment of Tax” and the amount assessed (which was in a prominent box on the form) sprung to the attention of the reader, and the more detailed words about the extension of the surcharge period were overlooked and regarded as something which the accountants would deal with.

We therefore find that the surcharge liability period was properly extended to 31 December 2004.

8.	The Third Condition: Mr and Mrs Stott’s VAT return or VAT payment for the period was not received in time by HMRC.

There was no dispute about this issue. The return was signed on 1 February 2004 and would not have been received by HMRC until after that date. The return was due to be received on or before 31 January 2004.

9.	The Fourth Condition: The VAT payable for the period was £6,508.58.

Mr and Mrs Stott did not dispute the amount of VAT payable. It was the amount shown on their return.

10.	The Fifth Condition: Reasonable Excuse.

If Mr and Mrs Stott have a reasonable excuse for the delayed submission of any of their VAT returns or late payments of VAT then that delay does not constitute a default. If that is the case then no surcharge can be levied in respect of the delay and any Surcharge Liability Notice or Surcharge Liability Notice Extension is not valid in relation to that delay.

Mr and Mrs Stott relied upon their accountants to prepare their VAT returns and to deal with their VAT compliance. They carefully collected together the information needed and gave it to their accountants. They forwarded their bank statements to their accountants when they arrived. They did not receive their milk statement until the third week of the month so could not forward it until then. They had to deal with any questions from the accountants who were in  Wells - five miles away: some delay was inevitable.

It seems to us that, on the evidence of the Appellant, it would have been reasonable to expect Mr and Mrs Stott’s accountants to have taken steps to ensure the timely submission of the VAT returns. These steps could have included:

(i)	asking Mr and Mrs Stott to instruct their bank to provide statements shortly after the end of the month so that the reconciliation could have been dealt with sooner;

(ii)	getting everything ready apart from the milk statement figures before that statement arrived so that all that would be needed to be done was to add these figures in so that the return would be ready for Mr and Mrs Stott to submit a few days before the end of the month;

(iii)	discussing with HMRC whether the return could be submitted with estimated figures for the zero rated milk supplies and omitting the input tax on the supplies for the milk wholesaler - and adjusting for the estimate and those supplies in the next return;

(iv)	adopting the cash accounting basis which would mean that the milk statement figures would not have to be received before the return could be submitted; and

(v)	warning Mr and Mrs Stott that they were in a VAT surcharge period and that failure to pay VAT by the due date would attract a surcharge.

It appears that it was not the direct fault of Mr and Mrs Stott’s that these steps were not taken, but the VAT Act 1994 effectively treats the actions or omissions of an agent as the acts or omissions of a taxpayer. That is because section 71 provides that for the purposes of determining whether there is a reasonable excuse for any conduct:

“when reliance is placed on any other person to perform a task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.”

Therefore we cannot find that, because it was the accountants who may not have taken reasonable steps to ensure that the returns were submitted in time, Mr and Mrs Stott had a reasonable excuse for the delays.

In the circumstances, we therefore find that there was no reasonable excuse for any of the delays in question and accordingly that they constituted defaults. As a result, the appeal against the surcharge is dismissed.

11.	We feel some sympathy for Mr and Mrs Stott. It is we think easy on initial inspection not to focus on the surcharge element in the “Notices of Assessment of Tax” and understandable to pass this on to the accountants to deal with. It was a pity that, as the Tribunal understands the situation, the accountants did not advise them of the seriousness of their situation and of steps which could have been taken to avoid the surcharge.

12.	Our decision was unanimous.

Charles Hellier - CHAIRMAN

RELEASED: 19 January 2006

LON/2005/0473

££Harold Leslie Stott and Rita Marilyn Stott v Her Majesty's Revenue and Customs [2005] UKVAT V19430 (19 January 2006)