19236
DEFAULT SURCHARGES – three reasonable excuses for separate periods involving illness of accountant, insufficient funds and sudden absence of chief executive overseas – appeal dismissed – VATA 1994 s59(7)(b) and s71(1)(a) & (b)

LONDON TRIBUNAL CENTRE

	SILVER SOFTWARE CONSULTANTS LIMITED
	Appellant	
	and		
			
	HER MAJESTY’S REVENUE AND CUSTOMS	    Respondents	

Tribunal : Rodney P Huggins  (Chairman)
                                                     Caroline S de Albuquerque

Sitting in public in London on 3 August 2005

Mr B A Singh Accountant for the Appellant.

Mr Rowell of the Office of the Solicitor for Revenue and Customs for the Respondents.

©  CROWN COPYRIGHT 2005

DECISION

The appeal

1.  Silver Software Consultants Limited (the Appellant) appeals against three default surcharges the latter two totalling £10,947.09 for consecutive periods ending 31 August 2003, 30November 2003 and 29 February 2004.  The surcharges were imposed because the VAT returns and/or the amounts of the tax due were not received timeously.

The legislation

2.    Section 59 of the Value Added Tax Act 1994 (the 1994 Act) provides that where a value added tax return, or the tax due, is not received in time, the taxable person is in default.  A surcharge is imposed for the second and subsequent defaults within a period of twelve months.  This was the second default in the series.  Section 59(7)(b) provides that, if a taxable person satisfies the tribunal that there was a reasonable excuse for the return of tax not being sent in time, then he is not liable to surcharge.

3.   However, Section 71(1) provides two instances where exceptions apply.  They are :

“(a)     an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b)     where reliance is placed on any another person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.

The issue

3.   The issue for determination in the appeal was whether there were reasonable excuses for the three defaults which were admitted by the Appellant for three reasons.  These were, in chronological order, illness of an outside accountant who assisted the Appellant in its VAT affairs, temporary insufficiency of funds and sudden absence of the Appellant’s managing director in India

The evidence

4.    Oral evidence was given on behalf of the Appellant by its managing director and chief executive Mr Parminder Singh (P Singh) and Mr Bhupinder Singh (B Singh) partner in the firm of JSP accountants who also represented the Appellant at the hearing.  He produced several documents.

For Revenue and Customs, Mr Rowell produced a bundle of documents but did not call any witnesses.

The facts

5.   From the evidence before us, we find the following facts.

6.    The Appellant is a relatively new company having started its software business in 1998.  There are only two shareholders having one share each. P Singh is the managing director since the outset and has the day to day control of the business.  The company started with one or two global clients and expanded to Bangalore in India a few years ago.

7.   By 2003, the Appellant had some 15 employees which has increased to about 40 in the United Kingdom by 2005.  Mr P Singh signs cheques but his wife is nominated also to sign but rarely does so.

8.   The turnover in the Appellant’s trading year to 31 March 2005 was over five million pounds sterling and for the year to 31 March 2004 was at least three million pounds.

9.      All the financial book-keeping including the preparation of VAT returns has, until very recently, been in the hands of the Appellant’s accountants the Jolly Singh Partnership (JSP) of 2 Watling Gate, 297/303 Edgware Road, London NW9.  Mr B Singh is one of two partners in the practice and he is responsible for looking after the Appellant’s accounting affairs and in 2003/4 he had two audit assistants in his practice who helped him with the Appellant’s work as it was a perpetual audit. This entailed Mr P Singh delivering to JSP all relevant paperwork approximately at three monthly intervals usually a few weeks before the Vat returns were due.  Mr B Singh’s assistants would prepare the figurework for the VAT returns which Mr B Singh reviewed for errors about one week before the returns had to be submitted.  Mr B Singh would then send the return to Mr P Singh for signing and submission with a cheque for the tax due.

The period to 31 August 2003

10.  Mr B Singh had colitis for many years which necessitated a proctocolectomy and ileonal pouch formed in May 2003.  He had a reversal of ileostomy operation in the first half of September 2003 which resulted in a sudden relapse on 16 September but fortunately he was able to recover eventually returning to work at the beginning of October 2003.

11.   Due to his absence from the office, Mr B Singh was unable to check the VAT return which had to be submitted by 30 September 2003 at the latest. As there had not been any defaults by the Appellant over the past 12 months, only a SLN was issued and no surcharge was payable.  The return was sent to the Defendants probably  in the first week in October 2003 and received at the VAT Central Unit at Southend-on-Sea on 7 October.  The cheque sent with the return was returned by the Appellant’s bankers unpaid and the amount outstanding was paid on by two instalments on 27 October 2003 and 15 December 2003. The total amount of tax due was £175,736.67.

12.   Mr P Singh was unaware of the illness of Mr B Singh in September 2003.

13.   As there had not been any defaults by the Appellant over the previous twelve months, only a surcharge liability notice (SLN) was issued by the Respondents and no surcharge was payable.

The period to 30 November 2003

14.  The VAT return was prepared by JSP in time and submitted to Mr P Singh who signed the return on 30 December 2003. It was received at the VAT Central Unit at Southend on 5 January 2004.  The net amount was £150,412.88.

15.   However, as the Appellant was relying upon an assurance by one of their global clients Westinghouse Rail System that a payment for outstanding invoices for a sum of £566,700.58 would be made on             16 December 2003.  This did not occur until much later.

16.   Mr P Singh gave the following further information in his letter to the Poole Business Centre of the Respondents of 29 July 2005.

“ … The client has in the past reliably assured us of payment dates and credited our account on the date specified. In addition, the date our client specified was in line with the pattern of previous payment dates.  This is supported by the payments received from the client as per the attached bank statements.  Hence we planned our cash flow on that basis and had no reason to doubt our client.  Unfortunately, on this one occasion our client made the payment on 2nd February 2004.  We only became aware our client was going to be late when the payment was not credited to our account as promised.  Thus we did not have sufficient time to make alternative arrangements to ensure our payment to Customs and Excise was not delayed. You will note that our VAT return was filed on time.”

17.   At the time, the Appellant did not have any bank overdraft or other loan facility already in place.  No contact was made with the VAT office to explain what had happened.

The period to 29 February 2004

18.   Again, the accountants JSP prepared the VAT return on or about 21 March 2004 and sent it to Mr P Singh to sign and submit it with a cheque for the tax due before 31 March 2004.  However, he was suddenly called to Bangladesh, India because his company was being assessed by the aeroplane manufacturer Boeing as to whether the Appellant could be given a substantial contract.  The Appellant was in competition with several other companies.  Mr P Singh flew to India on 24 March 2004 and Mr B Singh was informed about the position.  He therefore wrote to the Uxbridge VAT office on 24 March 2004 as follows :

“We have recently prepared our above named client’s tax return for the quarter ended 5 April 2004.

The return has been sent to him for his approval and signature but unfortunately, we understand that he has had to rush off to India and as such will not be in a position to sign and send the return to you with the cheque.

We understand that he will be returning to the country on 13th April and will arrange to forward the return and the cheque duly signed as soon as possible after that date.”

A copy of the unsigned VAT return was sent to the respondents by JSP on 30 March 2004.

19.   Mr P Singh returned home on or about 12 April 2004.  However, the return with the outstanding VAT payment were not received at the VAT Central Unit at Southend until 14 May 2004.

20.   At the end of March 2004 the Appellant had sufficient funds in its bank account to settle the outstanding VAT of £158,776.91.

Correspondence with the Respondents

21.   Initially, the Appellant only appealed against the surcharge for the period ending February 2004 but then realized that there were a further two defaults outstanding.  Mrs C Maxted of the VAT Poole Business Centre’s Reconsiderations Team wrote to JSP on 9 July 2004 setting out details of the three current default surcharges mentioning there had been a surcharge percentage of 2% for the period ending 11/03 in the sum of £3,008.25 and another of 5% for the period ending 02/04 in the sum of £7,938.84.

22.   She asked JSP to offer explanations as to the late returns and payments for the periods 08/03 and 11/03. She supplied notice 700/50 on Default Surcharges for their information.  She also asked for further details about the delay for the period 02/04.

23.   Certain information was subsequently supplied by Mr P Singh later in 2004.

24.   On 2 November 2004 Mrs Maxted informed the Appellant in a letter dated 2 November 2004 that the Respondents could not accept that the Appellant had a reasonable excuse for the default for the period 02/04.  The Appellant then appealed that decision.

25.   On 27 April 2005 there was a preliminary hearing when the Appellant was permitted to extend the appeal to include the further periods of 08/03 and 11/03. Mr P Singh wrote to the officer Mrs L Woon at the Poole VAT Business Centre on 29 July 2005 with reasons for the appeal for the two further periods.  She responded on 1 August 2005 stating that she had  reviewed the imposition of the two Surcharge Assessments and on the information available did not consider the Appellant had reasonable excuses for failing to submit VAT on time.

The arguments for the Appellant

26.  For the Appellant, Mr B Singh argued that there were exceptional circumstances affecting the three periods in the appeal and he relied specifically on what was stated in Customs Notice 700/50/04 at paragraphs 4.2 and 4.3.

27.   Paragraph 4.2 sets out the circumstances which may constitute a reasonable excuse and he quoted two of the examples which were as follows :

- Illness : where the person normally responsible for completing the VAT return is unable to do so because of illness.

- Unexpected cash crisis : where funds are unavailable to pay your tax due following the … sudden non-payment by a normally reliable customer.

These examples applied to periods 8/03 and 11/03.

28.   Paragraph 4.3 referred to the factors which Customs will take into account when considering reasonable excuse.  It stated that Customs “will take into account whether you could have foreseen the circumstances that led to the delay in submitting your return and/or payment, and if so what steps you took to make alternative arrangements.”  He argued that this applied to the situation in March 2004 when Mr P Singh had to go to India suddenly just when the VAT return had to be signed and a cheque provided.

The arguments of the Respondents

29.   Mr Rowell submitted on behalf of the Respondents that with reference to the 08/03 period the Appellant’s excuse that Mr B Singh’s sudden illness caused the delay should not be accepted as it fell to be disregarded under section 71 (1)(b) of the 1994 Act.  He was not an employee of the Appellant.

30.   As for the 11/03 period return excuse. He argued this was excluded under section 71(1)(a) of the 1994 Act since insufficiency of funds was the reason for the delay.

31.  Finally, the excuse for the lateness of submitting the 02/04 return and payment of tax should not be accepted because although Mr P Singh relied upon his last minute trip to India he should have put in place a system to deal with regular VAT returns beforehand in such a situation.  He had to go abroad to visit his company’s Bangalore place of business frequently and for other reasons.

32.   In this connection he brought to the attention of the tribunal two other tribunal decisions namely Ultracolour Limited v Customs and Excise Commissioners (1989) VAT Decision 3278 and Tradeplan Limited v Customs and Excise Commissioners (1989) VAT Decision 4033. Both decisions related to Directors who were responsible for signing VAT returns and cheques being out of the country at the relevant time.  In both cases, it was found that the Appellants did not have reasonable excuses.

33.  As for the extracts from Notice 700/50/04 quoted by Mr B Singh in his submission, he pointed out they were for guidance only and were not legislation.  He relied upon section 71 of the 1994 Act.

Reasons for decision

34.   We consider separately the arguments put forward by the Appellant in respect of the three defaults.

08/03 period

35.  Mr B Singh is a partner in JSP and therefore is not an employee of the Appellant  Therefore he is within the description of “other person” to bring him under the exception set out in section 71(1)(b) of the 1994 Act.  In any event, although he gave evidence that he considered it was essential that he checked the VAT return before it was sent to Mr P Singh, we cannot believe that it was not possible for his partner or another member of his staff to carry out this function.  Furthermore, Mr P Singh was not aware at the time about his absence from work because of his illness.  Mr P Singh should have checked why the return was not sent to him at the normal time (if that be the case) and made alternative arrangements.  Also, we are not satisfied the Appellant was able to  meet the considerable amount of VAT due of £175,736.67.  The reason for this is that document 62 in the bundle is information from log entries from Customs.  These were not challenged during the hearing by the Appellant’s representative and we accept their veracity.

36.   The entry for 3 October 2003 reveals that there was a telephone call from an employee of the Appellant to the VAT office stating that a cheque had been sent on 30 September 2003 and a request was made to hold it for one week as no funds would be in the Appellant’s bank account until 13 October 2003.  The VAT for the quarter was subsequently paid by two instalments on 27 October 2003 and 15 December 2003.  We accepted this entry as being a fact and therefore a cheque was sent by the Appellant on 30 September 2003 which does not accord with Mr B Singh’s version.  Also it is quite apparent the Appellant had insufficient funds to pay the VAT due at that time.

11/03 period

37.   The Appellant admitted that it was unable to meet the VAT due at 31 December 2003 because it was waiting for an overdue remittance from one of its major customers. That falls squarely within section 71(1)(a).  But it has been established in the Court of Appeal decision in Customs and Excise Commissioners v J B Steptoe [1992] STC 757 that notwithstanding the provision in section 71(1)(a) an insufficiency of funds could constitute a reasonable excuse ‘if the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency’.

38.   The Appellant had difficulty in meeting the tax due for the previous period 08/03 and indeed only paid the balance due on 15 December 2003.  In our view, the Appellant should have taken steps to put controls in place to ensure that payment of outstanding invoices would be chased up.  The Appellant’s directors did not notify the department before 31 December 2003 that there were possible problems in settling the VAT due.  Mr P Singh told us when giving evidence that the Appellant has now arranged a loan facility with its bank for future similar contingencies.   This could have been instigated towards the end of 2003. As the Appellant knew it had cash flow problems in meeting the 08/03 VAT it should have foreseen the consequences on non-payment for this period as well and it has not therefore provided  a reasonable excuse.

02/04 period

39.   We accept that Mr P Singh had to go to India on business suddenly on 24 March 2004. He must have been aware at that time the VAT return had to be submitted before 31 March and the tax paid.  We learnt during his evidence that his wife was another signatory for company cheques and she did not accompany him on his trip.  It was mentioned that she may not have been available to sign cheques at the time but this has not been substantiated.  Also there were three other directors and one of them could have been deputed to sign the VAT return in his place.  After all. the figures had been prepared and checked in Mr B Singh’s office so the signing of the form and the preparation of the cheque were formalities only.  We were informed that there were sufficient funds in the Appellant’s bank account to meet the VAT due at that time.  We cannot believe that all financial transactions in Mr P Singh’s office came to a  standstill when he went to India.  With an annual turnover of at least £3 million and a staff in excess of 15, alternative arrangements must have been made as Mr P Singh was abroad until 12 April 2004, a total of 19 days.

40.   Another factor which was not explained to us was why the VAT was not paid until 14 May 2004, a month after Mr P Singh had returned from India.

Decision

41.  Our decision on the issues for determination in the appeal is that there were no reasonable excuses for the late receipt of the returns and tax due for the periods ending 31 August 2003, 30 December 2003 and 29 February 2004.

42.   The appeals are therefore dismissed.

43.   There will be no order as to costs.

Rodney P Huggins
Chairman

Release date: 23 August 2005

LON/04/2322