Martin Yaffe International Ltd v Revenue & Customs [2005] UKVAT(Customs) C00197 (14 July 2005)

C00197

VALUE ADDED TAX — import VAT — Simplified Import VAT Accounting (“SIVA”) — trader authorised to defer payment with nil security — default in accounting for domestic VAT — whether sufficient without more to justify revocation of nil security requirement — criteria to be considered — whether trader representing risk to the revenue — appeal allowed and further review directed — Community Customs Code, arts 224 to 227 — VAT Act 1994 s 16 — CEMA 1979 s 45 — Customs Duties (Deferred Payment) Regs 1976, reg 4 as adapted by VAT Regs 1995, reg 121A — Finance Act 1994, s 16

MANCHESTER TRIBUNAL CENTRE

MARTIN YAFFE INTERNATIONAL LIMITED	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Colin Bishopp (Chairman)
Alban Holden

Sitting in public in Manchester on 21 June 2005

Leslie Whitworth, director, for the Appellant

Andrew O’Connor, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	In this appeal we are required to consider, apparently for the first time in this tribunal, the revocation by the Respondents of a trader’s Simplified Import VAT Accounting (“SIVA”) authorisation. The Appellant’s authorisation was granted on 20 October 2003 and withdrawn on 5 July 2004, with immediate effect. The Appellant asked that a statutory review be undertaken and a review was duly undertaken by Shelley Chamberlain. Her conclusion was that the withdrawal of the authorisation should be upheld. The Appellant now appeals against her decision, contained in a letter of 19 August 2004.
2.	Articles 224 to 227 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (the Community Customs Code) provide a framework by which the payment of import duties and input VAT may be deferred for up to a month. So far as relevant, those articles are as follows:
“Article 224
Provided the amount of duty payable by the person concerned relates to goods declared for a customs procedure which entails the obligation to pay such duty, the customs authorities shall, at that person’s request, grant deferment of payment of that amount under the conditions laid down in Articles 225, 226 and 227.
Article 225
The granting of deferment of payment shall be conditional on the provision of security by the applicant …
Article 227
1.	The period for which payment is deferred shall be 30 days …”
3.	These provisions are implemented in domestic law by section 45 of the Customs and Excise Management Act 1979 and the Customs Duties (Deferred Payment) Regulations 1976 (SI 1976/1223). In accordance with those provisions, the Appellant, which is an importer of household goods, has been permitted to defer the payment of import duties and input VAT since 1998, subject to its providing security, as article 225 requires. Its domestic VAT account is treated rather differently: it is required to make payments on account, with the balance to be paid one month after the end of each prescribed accounting period. That requirement arises from the Value Added Tax Act 1994, section 28 and the VAT Regulations 1995 (SI 1995/2518), regulations 40A, 44 to 48, and the Value Added Tax (Payments on Account) Order 1993 (SI 1993/2001).
4.	Section 16(1) of the VAT Act provides that:
“(1) Subject to such exceptions and adaptations as the Commissioners may by regulations prescribe and except where the contrary intention appears—
(a)	the provision made by or under the Customs and Excise Acts 1979 and the other enactments and subordinate legislation for the time being having effect generally in relation to duties of customs and excise charged on the importation of goods into the United Kingdom; and 
(b)	the Community legislation for the time being having effect in relation to the Community customs duties charged on goods entering the territory of the Community,
shall apply (so far as relevant) in relation to any VAT chargeable on the importation of goods from places outside the member States as they apply in relation to any such duty or customs or excise or, as the case may be, Community customs duties.”
5.	The SIVA system was introduced in the United Kingdom on 1 October 2003, by the insertion (by the VAT (Amendment) No 5) Regulations 2003 (SI 2003/2318)) of a new regulation 121A into the 1995 Regulations. The statutory provisions pursuant to which authorisations for the deferred payment of customs duties are granted, and may be withdrawn, are to be found in regulation 4 of the 1976 Regulations. Regulation 121A provides that, in relation to import VAT, regulation 4 is to be read subject to “prescribed adaptations”.  As so adapted, and so far as material, regulation 4 reads as follows, the adaptations being identified by italic type:
“(1)	A person who wishes to be approved for the purposes of these Regulations shall apply to the Commissioners in such form and manner as they shall determine, furnish security for payment on payment day of the amount of customs duty in respect of which he seeks deferment, and make arrangements with the Commissioners for the payment of that duty on payment day.
In regulation 4(1) (application for approval), regard ‘security’ as being ‘appropriate security (which may be nil if there is no risk to the payment)’.
(2)	If satisfied with the security and arrangements as aforesaid, the Commissioners shall in writing approve the applicant with respect to an amount of customs duty not exceeding that for which he has furnished security;
Provided that such approval may be limited to the deferment of customs duty payable, apart from these Regulations, on the making of entry within any named Collection.
In regulation 4(2) (security and payment arrangements), regard there being a second sub-paragraph as follows —
‘Provided that the amount in question may exceed that of the security in the case of nil security’.
(3)	The Commissioners may, for reasonable cause, at any time vary or revoke any approval granted under this Regulation.”
6.	Thus the Respondents have the power to allow a trader to defer payment of his import VAT without security (or, more accurately, with nil security), if there is no risk to the payment and may, for reasonable cause, vary or revoke the authorisation. In this case, the authorisation has been varied by amending the value of the security requested from nil to 100 per cent, but not by revoking the Appellant’s authorisation to defer payment altogether. The cost to the Appellant of providing security is substantial, hence its appeal. 
7.	The issues we must address relate to the circumstances in which the Respondents can properly exercise the power to revoke or vary such authorisations. Save for the indication that, if there is no risk to the revenue the security may be nil (with the obvious implication that if there is such a risk, it may not be set at nil) and for the indication that revocation or variation of an existing authorisation may be only for good cause, the statutory provisions offer no guidance. It follows, therefore, that the grant, variation and revocation of permission are matters within the Respondents’ discretion.
8.	It is too well-established a proposition to require authority that any body which exercises a discretion is entitled to follow a policy when doing so, the more so when, as here, several officers will exercise the discretion on its behalf and there is a public interest in consistency of application. The policy must respect the purpose of the statutory provision granting the discretion, and cannot be so strict that, in practice, no real discretion can be exercised. The Respondents have published their policy in Public Notice 101, which deals with several different (though similarly applied) deferment schemes. We were also shown an unnamed publication answering a number of “frequently asked questions” about the SIVA scheme. Of the many conditions, described in those publications, only one is of relevance here, the trader’s VAT compliance and payment history. In the latter document, the criteria are put in this way:
“2.	VAT Compliance History
Applicants must have a good VAT compliance history. Eligibility will be assessed against a number of compliance criteria, outlined below:
•	the number of errors made on VAT returns;
•	the timeliness of rendering VAT returns;
•	the number of assessments raised on VAT returns;
•	the number and value of VAT underdeclarations;
•	the number and reasons for any default surcharges …
6.	Payment History
(a)	The business’s departmental payment record in connection with Duty Deferment will be reviewed. Traders who have defaulted on deferment payments more than once in the 12 month period prior to application will be refused approval.
(b)	VAT payment history (VAT returns, surcharges and underdeclarations, debts) will also be assessed to ensure timely payment is rendered.”
9.	These requirements, and the possibility that the approval might be withdrawn, were also spelt out in the letter granting the approval:
“I am pleased to inform you that your Application for SIVA has been approved. This will allow you to operate with 0% Security for Import VAT through your Duty Deferment Account.
This Approval is granted subject to your compliance with the following criteria …
•	You must remain compliant in your dealings with HM Customs and Excise and continue to meet the approval criteria …
•	HM Customs and Excise reserve the right to withdraw or suspend approval for SIVA, without prior notice, if you fail to comply with any of the approval criteria that are required. Withdrawal of the SIVA concession will result in you having to provide full security immediately for VAT imports, if payment is to be deferred.”
10.	We were told that the Respondents considered that a trader was not “compliant” if (among other things) he had failed to send in its VAT returns, or pay the tax due, on time within the preceding two years. In fact, the Appellant had failed to make its payments on account by the due date twice in the three years before its approval was given—in September and December 2002—and default surcharges had been imposed on it in accordance with section 59A of the VAT Act. It necessarily follows that there must have been another default not more than a year earlier, but that would have resulted only in the warning of a surcharge liability notice. Andrew O’Connor of counsel, representing the Respondents, told us (although the published policy does not so indicate) that they disregard a surcharge liability notice for these purposes; thus one isolated default is excused. But it is evident that, despite the published criteria, no (or at least no accurate) check on the Appellant’s payment history had been undertaken before the authorisation was granted. As the review letter indicates, had the Respondents applied their own policy correctly, the approval would not have been granted at all. Mr O’Connor, correctly in our view, did not rely on the antecedent defaults as a reason for revocation—he accepted that if the Respondents made a mistake of that kind, they must live with it—but he said, they could properly take the earlier defaults into account when considering whether to revoke or vary an authorisation if, as here, the trader defaulted again after its approval had been granted.
11.	In fact the Appellant defaulted twice—its payment on account due on Friday 28 November 2003 was received on Monday 1 December 2003, and its balancing payment, due on Friday 30 January 2004, was received on Friday 6 February 2004 while the return did not arrive until the following Monday, 9 February 2004. The Respondents have accepted that the first of those defaults was caused by staff illness, and that there was correspondingly a reasonable excuse for it; thus it is to be left out of account. They do not accept that there is a reasonable excuse for the second default, and have refused to waive the surcharge imposed in consequence of it. The Appellant did not appeal against that refusal but paid the penalty. It was, however, aggrieved when, some five months later, it learnt that in addition its SIVA approval had been withdrawn because of the default.
12.	The reasoning behind that decision, as the review letter makes clear, is that a defaulting trader, for that reason alone, presents a risk to the revenue. Thus, without more, the Respondents have reasonable cause to revoke or vary the approval. Mr O’Connor argued that even if (contrary to his contention) the Respondents could not properly take account of the earlier defaults, overlooked when the approval was given, this one, later, default, was enough on its own: the delay, though only a week, was not insignificant, and the amount (the penalty, at 10 per cent, stood at £54,470) was substantial.
13.	The Respondents’ decision is an “ancillary matter” falling within paragraph 1(m) of Schedule 5 to the Finance Act 1994. This tribunal’s jurisdiction is conferred on it by section 16 of that Act. Subsection (4) severely limits our powers: we may allow an appeal against a decision as to an ancillary matter only if we are satisfied that the officer making the decision “could not reasonably have arrived at it” and, if we do allow the appeal, we can (in practical terms) do no more than direct a further review.
14.	It is, perhaps, unfortunate that the Appellant did not challenge the Respondents’ refusal to accept that it had a reasonable excuse for the last default by an appeal to this tribunal. As it is, neither party had prepared itself to argue the point before us. Leslie Whitworth, the Appellant’s finance director who represented it at the hearing, told us that in the latter part of 2003, the Appellant had begun to make payments to its creditors by the BACS system (having previously used cheques) and this was the first occasion on which a payment by that means had been made to the Respondents. The member of his staff who brought the return to him did so on, it appears, 5 February 2004 (that is the date Mr Whitworth has written on it) and he immediately authorised the payment, by keying the appropriate instructions himself into a computer terminal. The employee who prepared the return (who had joined the Appellant only in October 2003) and Mr Whitworth had both relied on the statement on the reverse of the return that if a payment was made by direct transfer to the Respondents’ bank account, seven calendar days of grace were allowed—thus if the payment was received by 6 February 2004 (as this payment was) it would have been treated as having been made on time. He was aware now, as a result of subsequent events, that the seven days of grace were not available to traders making payments on account, and he accepted that the Appellant had received a direction to that effect in January 2003; but since, at that time, it did not pay by that means, it was not immediately affected and Mr Whitworth forgot, or overlooked, that instruction, relying instead on the unqualified statement on the reverse of the VAT return, which (as Mr O’Connor accepted) made no mention of the exceptional treatment of traders required to make payments on account.
15.	Mr O’Connor’s argument was that the SIVA scheme represented a concession to the trader and that it was appropriate that strict compliance with the conditions on which approval was granted be demanded. The Respondents had the duty to protect the revenue and it was necessary that they should be cautious. It could not be said, in these circumstances, that no reviewing officer could reasonably have concluded that the Appellant’s approval should be withdrawn.
16.	We agree with much of that argument. Certainly, we accept that strict compliance is to be expected, and that the Respondents are right to be cautious. Where we differ from them is in our view that a default is not necessarily indicative of a risk to the revenue, even if there is no reasonable excuse for it. We have come to the conclusion that, as the test laid down in the statutory provision is “risk to the revenue”, that must be the focus of officers making decisions of this kind. We do not doubt that a default is serious, and without more is sufficient to put the Respondents on enquiry; but we do not think the mere fact of a default is enough to warrant the withdrawal of approval. Of course, if a return and payment are very late, without compelling explanation, or there are repeated defaults, the Respondents would be failing in their duty if they did not withdraw the approval. 
17.	The circumstances of this case, however are a little different.. We have already commented that the parties were unprepared for an argument about whether or not there was a reasonable excuse for the last default, and we do not propose to decide that issue; but it is plain that the Appellant has rather more than merely fanciful arguments to advance in favour of the conclusion that there was a reasonable excuse. Even if there was not a reasonable excuse, as that term is interpreted in the context of the default surcharge, there is a cogent explanation. Lateness of payment may be symptomatic of financial difficulty, or it may, as we are satisfied is the case here, be nothing more than the consequence of an innocent mistake. We have looked too at the earlier defaults. That of November 2003, for which it has been accepted there was a reasonable excuse, was one working day late. The earlier defaults, in the latter part of 2002, occurred when payments were late by a matter of two or three days. However, the other payments in the same period were early.
18.	We do not underestimate the seriousness of defaults, nor of course do we condone them, but it does not appear to us that the mere fact of the defaults indicates that this trader presents a risk to the revenue. There is good reason for the default surcharge regime and for the automatic imposition of penalties since timely compliance with a trader’s VAT accounting obligations is necessary if the system is to function properly, and we can see the administrative attraction to the Respondents of a SIVA system which employs the same mechanical approach. We are satisfied, however, that it is the wrong approach, and that officers making decisions of this kind must look beyond the mere fact of a default, and decide whether that default, with any other material information, can properly lead to the conclusion that the trader’s continuing use of a SIVA approval represents a risk to the revenue. That was not done here, and since the reviewing officer did not take all the material factors into account, and asked herself the wrong question, it necessarily follows that her decision was not one at which she could reasonably arrive.
19.	We therefore allow the appeal and direct that a further review be carried out, taking into account the points made in this decision. The review is to be concluded within six weeks of the release of this decision, by an officer not previously involved in the case, and copies of the letter setting out the decision are to be sent to the Appellant and to the tribunal. We add, in conclusion, that we are sure there is no substance to Mr Whitworth’s suspicion that the January 2004 default has been used as an excuse, enabling the Respondents to correct their mistake of granting the approval in the first place.

COLIN BISHOPP
CHAIRMAN
Release Date: 14 July 2005
MAN/04/7035