20638

VAT – DEFAULT SURCHARGE – Appellant ceased trading – Managing director responsible for the VAT administration – unable to solicit help from former employees – a large surcharge in excess of £50,000 – a prudent business person would have anticipated and dealt with the problems experienced by the Appellant – the large surcharge arose from the Appellant’s persistent failure to comply with the deadlines – no reasonable excuse – Appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

	VALD BIRN (UK) Ltd  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ROLAND PRESHO FCMA (Member)	  

Sitting in public in North Shields on 30 January 2008

Anthony John Hewson, Managing Director, for the Appellant

Bernard Hayley of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against a default surcharge in the sum of £56,009.62 for the period ending 30 April 2007 issued on 6 July 2007.
The Facts
2.	The Appellant was established in 1976 as a subsidiary of a Danish family concern, Vald Birns Jemstoberi A/S, manufacturing components for the automotive engineering industry. In the 1990s the Appellant’s annual turnover was about £20 million with a workforce of 300 employees.
3.	In December 2005 the Appellant ceased trading following the loss of its principal customers to competitors from India and China. The Appellant’s Danish owners decided not to put the Appellant into receivership but instead funded the costs of closing the business, including honouring the commitments to its employees.
4.	From March 2006 the Appellant auctioned its plant and machinery which were sold to businesses operating in Sri Lanka. The sale realised £2,537,779.71 of which £377,967.19 was VAT. In March 2007 the Appellant received an invoice of the sale from its auctioneers.
5.	The Appellant’s managing director was left with one member of staff to deal with the administration associated with the closure of the business. The administrative burden on the managing director was considerable, particularly in the areas of employees and safe plant removal. The managing director was not trained in VAT administration, and unable to obtain help from former employees with respect to completing VAT returns.
6.	The Appellant’s compliance with its VAT obligations up to the closure of its business had been good.  The Appellant, however, was late with its VAT returns or payments since the quarter ending 31 October 2005 resulting in default surcharges  and surcharge liability notices for each quarter except quarter ending 31 October 2006 when it received a repayment and a surcharge liability notice extension.  The liability notices extended the surcharge liability period and advised the Appellant of the consequences of not making the VAT returns and payments on time. 
7.	Mr Hewson accepted that he received the surcharge liability notices and returns for all VAT quarters except quarters ending 30 January and 30 April 2007. He realised that he had not submitted the returns for the quarters ending 30 January and 30 April 2007 following a visit from a VAT officer, who found the Appellant’s VAT records complete except for the quarters ending 30 January and 30 April 2007.  Mr Hewson had always signed the Appellant’s VAT returns but from April 2006 he completed them as well. 
8.	The disputed default surcharge related to the period ending 30 April 2007 when the Appellant declared the sale of its plant and machinery. The Appellant’s return for quarter was received by the Respondents on 2 July 2007. The due date for the return was 30 May 2007. The surcharge was calculated at the rate of 15 per cent of the VAT due on the sale, £373,397.48, resulting in a surcharge of £56,009.62.
The Appellant’s Reasons
9.	Mr Hewson emphasised that the Appellant acted ethically in relation to the closure of its business. The Appellant chose to meet the full costs of the closure rather than going into liquidation which was the course advocated by its professional advisers. Following the closure the administrative burden upon Mr Hewson was excessive. He was unable to secure from former employees help with the VAT administration. Mr Hewson pointed out that the quarter ending 30 April 2007 contained a one-off receipt, the proceeds from the sale of plant and machinery, which gave rise to an exceptional VAT liability. The Appellant considered the quantum of the surcharge disproportionate to the degree of its culpability.
The Respondents’ submissions
10.	The Respondents acknowledged the operational difficulties facing the Appellant following the cessation of its business. The Respondents also accepted that the quantum of the surcharge appeared iniquitous. The Respondents, however, pointed out that the Appellant had defaulted with its returns on seven consecutive VAT quarters and that the percentage progression of the surcharge was fixed in law. The Respondents considered that the Appellant did not have a reasonable excuse for being in default for the quarter ending 30 April 2007. The Appellant was responsible for submitting the returns on time and fully aware of the consequences of failing to comply with the deadlines.
Reasons for Our Decision
11.	Section 59 of the VAT Act 1994 requires the Appellant to furnish VAT returns and pay the outstanding VAT within one month of the relevant accounting period.  The Appellant failed to pay the VAT owing by the due date for the accounting period ending 30 April 2007. As the Appellant was subject to a surcharge liability notice throughout the relevant accounting period it was liable to pay a surcharge at the rate of 15 per cent of the VAT due, namely £56,009.62. 
12.	 The Appellant can avoid the default surcharge if it can satisfy the Tribunal on the balance of probabilities that it had a reasonable excuse for not furnishing the VAT return and payment on time. 
13.	The defence of reasonable excuse is strictly construed. The legislation takes no account of the difference between a trader who has made a genuine effort to comply albeit without success and a trader who has made very little effort and it takes no account whatever of the extent of lateness. Either a trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability.
14.	We acknowledge that the Appellant’s owners acted ethically in meeting the full costs of the closure which they could have avoided by putting the Appellant into receivership. However, the fact that the Appellant’s owners acted ethically did not explain its failure to submit on time the 30 April 2007 VAT return.  The causes of the Appellant’s failure were the workload pressures upon its managing director in dealing with the consequences of the closure, and his lack of knowledge of VAT administration. We consider these causes to be foreseeable which a prudent business person would have anticipated and taken steps to avoid. A prudent business person would not have restricted his efforts to soliciting help from former employees. Further the Appellant was fully aware of the repercussions of its failure to comply with the requirements of submitting VAT returns. The disputed default surcharge represented the Appellant’s seventh consecutive default. A prudent business person would not have allowed this state of affairs to have persisted for so long. 
15.	The quantum of the surcharge is fixed by the legislation as a defined percentage of the VAT due with the percentage rising in set amounts in accordance with the number of defaults in a 12 month period. The Appellant’s neglect to deal with the problems with its VAT administration gave rise to the large surcharge imposed for its default for the 30 April 2007 quarter.
16.	We find that the reasons put forward by the Appellant for not submitting the 30 April 2007 VAT return on time did not amount to a reasonable excuse. As explained above a prudent business person would have anticipated and dealt with the problems experienced by the Appellant. We, therefore, dismiss the Appeal and make no order for costs.  

                                

                             MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 1 April 2008

MAN/