Total Technology (Engineering) Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 July 2011 |
| Neutral Citation | [2011] UKFTT 473 (TC) |
| Date | 15 July 2011 |
| Court | First-tier Tribunal (Tax Chamber) |
[2011] TC 01323
[2011] UKFTT 473 (TC)
Anne Redston (Presiding Member) (Chairman); Ian Perry (Tribunal Member)
Dean Coughlan, director of Total Technology (Engineering) Limited and Michael Matthews of Mathews Pulman, Accountants, for the Appellant
Jack Lloyd, Higher Officer of HM Revenue and Customs, for the Respondents
Default surcharge - Whether appellant had a reasonable excuse - Whether penalty proportionate - The appeal was against a default surcharge of £4,260 imposed for the late payment of VAT due in period 06/09 - The payment was received by the commissioners one day after the due date - The appellant contended that it had a reasonable excuse for the default for two reasons: firstly, its accounting system was unreliable and had subsequently been replaced; and secondly, a single person within the company carried the burden of accounting, including the VAT filing, and it had not been possible to increase staff numbers - The appellant further contended that the amount of the surcharge was disproportionate to the offence committed - The commissioners argued that the appellant did not have a reasonable excuse - In relation to the accounting system, there had been longstanding problems which should have been resolved by the appellant - Reliance on an individual was precluded from being a reasonable excuse by the Value Added Tax Act 1994, Value Added Tax Act 1994 section 71 subsec-or-para 1s. 71(1)(b) - With regard to the claim of disproportionality, the commissioners submitted that the whole structure of the surcharge legislation was designed to be proportionate to the VAT unpaid - Furthermore, its purpose was to encourage compliance - Up to 20% of traders were within the default surcharge regime at any one time, and an effective remedy was very necessary - Held, that neither the defects in the accounting system nor the appellant's reliance on a single accountant constituted a reasonable excuse for the default in question - Turning to the matter of proportionality, the tribunal considered that the penalty of over £4,000 was extremely high for a small company with annual profits of around £50,000 - It was acknowledged that the purpose of the default surcharge was to deter non-compliance and, although mindful of the high degree of deference which courts and tribunals must properly give to statutory regimes put in place by Parliament, the tribunal considered that, on the particular facts of this case, the penalty was not only harsh but plainly unfair - In reaching its decision, the tribunal noted in particular the lack of correlation between the single day of delay and the quantum of the penalty; the relationship between that quantum and the company's relatively small profits; the sudden jump in surcharge from zero in respect of the previous default to over £4,000; and the appellant's generally good compliance record both before and after the default - The surcharge was disproportionate - Since the tribunal had no power to reduce the penalty it was discharged - Appeal allowed.
1.This is the appeal of Total Technology (Engineering) Limited ("the Company) against a VAT default surcharge of £4,260.26 for the quarter ended 30 June 2009. The Company's VAT payment was received one day late, on 8 July 2009 instead of 7 July 2009.
2.The issues in the case were whether the Company had a reasonable excuse for the late payment and whether the surcharge was disproportionate.
3.The surcharge was levied under Value Added Tax Act 1994 section 59s 59 Value Added Tax Act 1994 ("VATA"). The legislation is set out in the Appendix to this Decision.
4.The Company was on a quarterly basis for VAT, so its VAT return and the related payment were due on or before the end of the month following each calendar quarter1.
5.HMRC have discretion to allow extra time for both filing and payment when these are carried out by electronic means2. Under that discretion, HMRC allow a further seven days for such electronic filing and payment.
6.We were provided with a bundle of documents including the correspondence between the parties and a "Schedule of Defaults" provided by HMRC. Mr Coughlan also gave oral evidence on the Company's behalf. From the evidence before us we find the following facts.
7.The Company runs an employment agency. It has been trading since 1973. Mr Matthews submitted that the Company had an excellent compliance record, not only in relation to VAT but also for other taxes, and this was not disputed.
8.In 2001 Mr Coughlan joined the Company. He purchased a new accounting system. Between 2001 and 2008 the Company's turnover grew by around 25% a year. In the spring of 2009 the company began working on a new contract with the Department of Work & Pensions, which involved significant extra work. One individual was responsible for the book-keeping and accountancy.
9.Although no accounts were provided, we were told that the Company made profits of around £50,000 a year, a profit margin of approximately 12%.
10.The Company's VAT payment history, so far as relevant to this Appeal, is as follows:
Period to |
VAT due |
Due date |
Paid by due date |
Paid after due date |
Rate of sur-charge |
Amount |
No. of default |
£ |
£ |
£ |
£ |
||||
31/5/08 |
126,246 |
31/7/08 |
125,769 |
476 |
0% |
0 |
1 |
30/11/08 |
108,957 |
7/1/09 |
108,626 |
331 |
2% |
0 |
2 |
31/5/09 |
85,205 |
7/7/09 |
nil |
all |
5% |
4260.26 |
3 |
11.As can be seen from the table, small adjustments to the total VAT due were paid after the due dates in respect of the returns ending May and November 2008. Mr Coughlan said that these arose because of problems with his accounting system. During this two periods, the system produced first the original figure, which was filed with HMRC, and subsequently a slightly increased figure for the same period.
12.The Company informed HMRC of these amendments; because they were after the due date, they were recorded as a late payment.. Despite extensive negotiations with the Company's software supplier, it had been impossible to establish the cause of the problem and the system has now been replaced.
13.The Tribunal asked Mr Lloyd about the zero surcharge for the quarter ending in November 2008, and he said that the surcharge was levied but not collected. In particular, he confirmed that the surcharge had not been withdrawn under VATA 1994, Value Added Tax Act 1994 section 59 subsec-or-para 7s 59(7).
14.The "Schedule of Defaults" produced by HMRC also included figures for three earlier quarters, but it was confirmed by Mr Lloyd that none of these gave rise to a surcharge.
15.There had been one further default during the two year period between the quarter ended May 2009 (the subject of this Appeal) and the date of this Tribunal hearing.
16.This further default relates to the quarter ending February 2010. Mr Coughlan informed this Tribunal that, during that period, the accountant's sister was diagnosed with a serious and life-threatening illness, of which she subsequently died, and Mr Coughlan's daughter was in hospital with a serious kidney infection.
17.The Company has appealed the surcharge. The appeal was stayed pending this Appeal, so no decision has yet been made by HMRC. Mr Matthews said that a letter setting out the grounds for a reasonable excuse defence will be sent to HMRC following this hearing.
18.Mr Matthews, on behalf of the Company, put forward two grounds of reasonable excuse:
(2) The accounting system was unreliable (in written submissions, the word used was "unwieldy"). It has now been replaced. Although this should have been dealt with more quickly, the Company had been hit by the recession in 2008 and the staff were overstretched - particularly in early 2009 when they won the DWP contract, and it would have been difficult also to implement a major systems change.
(3) The Company had only a single individual who carried the burden of the accounting, including the VAT filing, and it had not been possible to increase staff numbers.
19.Mr Matthews also argued the surcharge was disproportionate. He relied on the First-tier Tribunal decision of Enersys Holdings UK LtdTAX[2010] TC 00335 ("Enersys"), and drew attention to the similarities between that case and the Company's position. He said that the Company's payment had been only one day late, as in Enersys and that the sum was excessive both in relation to the company's profitability and as an absolute amount.
20.He pointed out that the earlier two defaults had been very small because they were charged on the balancing amounts caused by the systems errors. Over 99.5% of the sums due had been paid on time. The 2% surcharge for the second default was so low as to be not worth collecting.
21.It was disproportionate for a penalty to rise from zero to £4,206. Furthermore, the company had an excellent compliance record and the late payment was not deliberate.
22.Mr Lloyd made very clear and well-argued submissions to the Tribunal on behalf of HMRC. He said, firstly, that the Company did not have a reasonable excuse. In relation to the accounting system, it was clear that there had been longstanding problems which should have been addressed by the Company. Reliance on an individual was precluded from being a reasonable excuse by VATA s 71(1)(b).
23.On proportionality, he drew the Tribunal's attention to the recent First-tier Tribunal decisions of Scotpackaging Ltd v R & C Commrs [2010] UKFTT 504(TC) ("Scotpackaging"), Crane Limited v R & C Commrs [2010] UKFTT 378 (TC) ("Crane") and 1st Glass and Mirror Company Ltd v R & C Commrs [2011] UKFTT 30 (TC) ("1st Glass"). In all these cases, the facts were distinguished from Enersys, and the surcharges levied were not found to be disproportionate.
24.In Scotpackaging a small company paid its VAT late on several occasions, with those relevant to the surcharge being 36...
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