19796 

Default surcharge – reasonable excuse  - severe and continuing illness of of key employee – default occurring after his return to work – appeal dismissed 

MANCHESTER TRIBUNAL CENTRE 

	

  PROTEC FIRE DETECTION PLC			Appellant

              -  and – 

    THE COMMISSIONERS FOR 
             HER MAJESTY’S REVENUE AND CUSTOMS                    Respondents	                    

Tribunal Chairman:       Lady Mitting 

Sitting in Manchester on 22 September 2006

Mr Tom Fairnie, for the Appellant 

Mrs K Tilling, instructed by the Acting Solicitor for HMRC Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

DECISION

1.	The Appellant first defaulted in payment in the quarter ended 28 February 
2005.  A surcharge liability notice was issued on 22 April 2005.  A second default occurred in the period ended 28 February 2006 when a 2% surcharge assessment was issued in the sum of £3,354.  The company appealed against the assessment to the surcharge in 02/06 and this enabled us also to consider the earlier period when there was no surcharge but the Appellant company wished to argue that there was a reasonable excuse for that default as well. 

2.	We heard oral evidence from the Appellant’s Financial Controller, Mr 
Tom Fairnie who also presented the company’s case.  The Respondents called no oral evidence. 

3.	Legislation	

	The Appellant is a large payer and as such makes its payments under the payments on account system.  The relevant legislation for the purposes of this appeal is set out in Section  59A(1) and (8) Value Added Tax Act 1994.  

		“Paragraph 59A Default surcharge:  payments on account 

(1)  	 For the purposes of this section a taxable person shall be regarded as in default in respect of any prescribed accounting period if the period is one in respect of which he is required, by virtue of an order under section 28, to make any payment on account of VAT and either – 

(a)  a payment which he is so required to make in respect of that period has not been received in full by the Commissioners by the day on which it became due;   or 

(b)  he would, but for section 59(1A), be in default in respect of that period for the purposes of section 59. 

(8)	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 – 

(a)   in the case of a default that is material for the purposes of       the surcharge and falls within subsection (1)(a) above – 

(i)  	that the payment on account of VAT 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 by the day on which it became due, or 

(ii)	that there is a reasonable excuse for the payment 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).” 

4.	The Appellant’s grounds of appeal read as follows:

       “I was unaware that we had paid late in February 2005, the responsibility then was with the previous Financial Controller, Peter Livesey, who has now retired due to a stroke.  The stroke was in December 2003 but we worked with him to try and aid his rehabilitation and return to work.  His eyesight was impaired and he retired on medical grounds in July 2005.  The workload he left was onerous and VAT compliance was reassigned.  The second late payment was “flagged” by myself, Tom Fairnie, and actioned immediately the error was noted.  This will not happen again and, dependent on the outcome of this appeal, we may have to reassess our supervision of employees returning to work after serious illness.”

5.	I heard the following evidence from Mr Fairnie.  The Appellant is the largest independent manufacturer and installer of fire safety equipment and emergency lighting in the UK.  On 12 December 2003 the company’s then financial controller, Mr Peter Livesey, suffered a massive stroke.  Mr Livesey had been with the company for 15 years and he was managing an annual group turnover of in excess of £30M.  Mr Livesey was not immediately replaced because it was thought that he would eventually make a full recovery and return to work and, also, the company had been quoted rates of £100 per hour to employ temporary accounting cover for him.  His absence was managed by the existing employees taking on more themselves and sharing his work between them.   Over the next six months, Mr Livesey began to make a gradual recovery from his stroke although he was left with quite severe impairment.

6.	In June 2004, Mr Livesey had recovered sufficiently to want to return to work.  It was abundantly clear to the company that he was unable to carry out his original workload but given his seniority, his long-standing service and their liking for him, the company wished to accommodate him as much as they could in the hope and belief that some form of work could accelerate his recovery.  I note from the correspondence between the Appellant and their insurers, the Norwich Union, there is reference to Mr Livesey returning to work “on a therapeutic basis” for a couple of hours per week.  Over the following months, Mr Livesey began to build up his hours, gradually to one day and eventually to three days per week.  Mr Fairnie told us that it was clear that he was not coping.  He was left with tunnel vision;   an inability to concentrate on complex matters;   an inability to cope with anything which involved reading;   was very slow and became excessively tired.  In September 2004, a letter from the company to the Norwich Union describes Mr Livesey as “attending a few hours per week to help with menial clerical tasks in order to improve his dexterity and increase his strength.”   Throughout the months of his attempted rehabilitation, Mr Livesey delegated as much as he could. 

7.	It appears from Mr Fairnie’s evidence that the problem which the company had in dealing with Mr Livesey and his workload was twofold.  First, Mr Livesey was the most senior employee in what was a very large company.  He was described as “the boss” and as Mr Fairnie told me, as such he could only be over-ruled by the man who ran the business.  Therefore if Mr Livesey was maintaining he could cope and do things, Mr Fairnie felt it was not for the company to over-rule him or contradict him.  Secondly, Mr Fairnie said that although the company realised Mr Livesey could not cope, they did not realise the detailed aspects of his inability to cope.  Eventually the company had to take some form of definitive action and in July 2005 Mr Livesey was asked to leave on the grounds of ill-health.  It was quite clearly, and I totally accept this, a very difficult decision for the company to take and they dealt with the financial basis of his termination handsomely. 

	Dealing with the VAT had always been one of the roles which Mr Livesey had undertaken.  As large payers, the company paid its VAT under the payment on account system.  This, I was told, consisted of making three payments each quarter.  The first two payments were on pre-set dates in pre-set amounts as set down by the Respondents and the final payment would be a balancing payment at the end of each quarter.  The company paid by BACS and the procedure for payment would therefore be that on the pre-set date, a telegraphic transfer or BACS would be made to complete the payment.  Before his stroke, Mr Livesey would have kept rigidly to the timetable and have made the payment himself without reference to anybody else.  After his stroke, Mr Livesey retained control of the VAT but was helped, on request, by Mr Fairnie.  I understand that the procedure would then be that Mr Livesey kept an eye on the dates of the payment and when payment was due, as one of the aspects of his disability was that he was not himself able to complete the forms to trigger the actual payment, he would then ask Mr Fairnie to actually make the payment.  The two therefore worked in tandem, Mr Fairnie actually making the payment when requested to do so by Mr Livesey.  I was told and it is apparent from the fact that there were no previous defaults, that from Mr Livesey’s return to work in June until the first default, payments had been made on time. 

	Under the payment on account system, a default occurs when any of the pre-determined payments are not made.  In 02/05, the first instalment was due on 31 January 2005.  Mr Livesey missed the date and this was not spotted until 3 February 2005 when Mr Livesey alerted Mr Fairnie and the payment was immediately made but by then, the delay had triggered the default mechanism.  There was no problem with the remaining two payments in that period.  The second instalment was due and was paid on 28 February 2005 and the third balancing instalment, due on 31 March was received on 24 March. 

	The Respondents produced a record of a telephone call which Mr Livesey made to the Respondents on 14 February 2005.  The relevant part of the note reads:

“Trader ‘phoned knows payment was late but oversight as he has been ill and is currently working part-time in conjunction with an accountant.  Between them they forgot to pay.   Explained that he would have to wait any DS notice and then he could appeal against that if he wished…..”

8.	In relation to the second default in 02/06, Mr Fairnie said very little.  By this time, Mr Livesey had been left for some six months and Mr Fairnie was the new financial controller.  It was his responsibility and, probably due to pressure of work, he missed the date.  The instalment upon which he defaulted was due on 31 January 2006 and was paid on 9 February 2006.

	Mr Fairnie submitted that the Appellant had a reasonable excuse for the 
defaults in both quarters.	He made no specific submission in regard to 02/06 but in respect of 02/05, Mr Fairnie submitted that responsibility for the payment of VAT rested with Mr Livesey.  It was thought that he was coping as the system they had developed had worked for the previous six months.  Mr Fairnie was junior to Mr Livesey and he therefore acted under Mr Livesey’s instruction.  Mr Fairnie had no reason to doubt that the payment would be made on time. 

	In respect to the period 02/06, I cannot find any reasonable excuse.  Mr Fairnie, very fairly, did not try and excuse the omission.  It was his error and once he had spotted the oversight he remedied it immediately. 

	The matter is rather more complicated in respect of 02/05 but I cannot find that there was a reasonable excuse for the default.  I appreciate and respect the actions which the company took to assist Mr Livesey after his illness.  He was clearly a much valued employee for whom everyone wanted to do their best.  Unfortunately, this resulted in a failure to put into place an effective protective strategy that would ensure that payments were maintained regularly.  It is not known for certain that it was Mr Livesey’s illness that caused the oversight but given his previous reliability one assumes that it was.  I believe it was not a reasonable action by the company, albeit for the best of motives, to leave responsibility for payment of VAT to someone who was as sick as Mr Livesey.  Only three months before the missed payment, Mr Livesey was described in correspondence as “helping with menial clerical tasks in order to improve his dexterity and increase his strength.”  If that was the extent of Mr Livesey’s involvement in work affairs, he clearly should not have been expected to have assumed responsibility for payment of the VAT.  It was not reasonable for the company to have relied upon Mr Livesey to keep to accurate dates when, as Mr Fairnie told me, he had difficulty in anything that involved reading or was complicated.  I am unable to accept, for these reasons, that the company did have a reasonable excuse for default in this period.  It was in my view incumbent upon the company to put into place a sufficiently reliable system to ensure that dates could not be missed and payment would be made on time.  I am sorry to have to reach this decision but for the best of motives, the company failed to act to protect its position and left itself in a highly vulnerable position.   The system which was adopted of leaving it to Mr Livesey to spot the date and to ask somebody else to do the paperwork for him was not sufficiently sound or reliable. 

	I am therefore unable to find that the company had a reasonable excuse for the defaults in either 02/05 or 02/06 and the appeal is dismissed.   There was no application for costs and I make no order.  

.

LADY MITTING
CHAIRMAN
Release Date: 4 October 2006

MAN/06/384