18687

DEFAULT SURCHAGE – Reasonable excuse – VAT payment not received on time – Appeal dismissed

LONDON TRIBUNAL CENTRE

	K E DAVIS & SONS	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC   (Chairman)
						ROBERTA JOHNSON

Sitting in public in London on 7 April 2004

Victor Kish, cashier, for the Appellant 

Mrs P Crinnion for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	 K E Davis & Sons appeal against a default surcharge of £5,705.65 imposed at the 15% rate for the 7/03 period.  K E Davis & Sons are a firm of solicitors with two partners.  We refer to them as “the firm”.

2.	The return for the 7/03 period was sent on 29 August 2003.  No cheque was sent with the return. A cheque for the tax of £38,037 was received by the Commissioners on 8 September. A payment of £176,367.90 is recorded as having been paid by “the trader” (whom we take to be the firm) on 29 August 2003.  We will deal with that feature later.

3.	The firm was represented by its cashier, Mr Victor Kish.  He told us that the firm had been in the surcharge regime since the end of 1999 and had, since then, only twice paid tax on time.  Over the years the nature of the firm’s practice had changed and “downsized”.  The principle partner was Mr Robin Davis.  

4.	Mr Kish sought to introduce a disciplined regime into the firm’s VAT and PAYE compliance.  He held a discussion with Mr Davis in July 2003.  Mr Kish’s suggestion was that the firm should open a savings account to hold amounts equal to its monthly VAT liabilities.  Mr Davis approved the suggestion and on 10 July 2003 Mr Kish wrote to the firm’s bank asking for new office accounts to be opened, one as an Office VAT Reserve Account and the other as an Office PAYE Reserve Account.  The accounts were duly opened.  The firm was advised by the bank of the opening of the accounts on 26 August.

5.	On 27 August the firm paid in £8,000 to the Office VAT Reserve Account on which they intended to use to meet the VAT liability for the 7/03 period.  The amount of VAT for that period was £38,037: this is shown in the firm’s return signed by Mr Davis on 19 August.

6.	The firm received no cheque book for the Office VAT Reserve Account until 5 September 2003.

7.	There being no cheque book for the Office VAT Reserve Account, Mr Kish decided to draw a cheque on the firm’s General Office Account.  He gave instructions to his assistant.  His assistant misunderstood the instructions.  Instead of drawing a cheque in favour of the Commissioners on the General Office Account, she transferred the amount needed to cover the VAT (over and above the £8,000 already in the VAT Reserve Account) from the General Office Account to the VAT Reserve Account.  Then on Friday 5 September, after the VAT Reserve Account cheque book had arrived, the assistant drew a cheque on that account in favour of the Commissioners.  This was received by the Commissioners on 8 September.

8.	Mr Kish conceded that things had not been managed as well as they should have.  He accepted that it had been his responsibility to pay the VAT; but the bank had, he said, handled things badly by not opening the Office VAT Reserve Account earlier and sending a cheque book to the firm.  The firm was, he said, now paying VAT on time.  A just solution would have been to suspend the default surcharge for a year.

9.	On the evidence of what happened in the office, there was a muddle and not, as we see it, a reasonable excuse.  The firm should have seen to it that the VAT was paid on time.  There appeared to have been funds in the Office General Account.  The muddle arose because of the attempt to keep a separate account to hold the VAT due to the Commissioners.  Something should have been done to ensure that payment of the VAT due was made when the return was submitted.  If the funds were in the Office General Account, those funds should have been used.  What is more, the firm has had an almost unbroken record for non-compliance and it should have taken much firmer control over its procedures for paying VAT.

10.	On those grounds we do not think the firm has established a reasonable excuse.  Moreover, we have no power to suspend the default surcharge for a year, as suggested by Mr Kish.

11.	Our attention was caught by a “Log Entry” included in the file prepared by the Commissioners.  This contains the following entry, dated 1 September 2003, by someone in the LRU – Civil Recovery Team:

	“Trader has paid £176,367.90 on Friday 29 August 2003 and is supposed to 	pay remaining debt today”. 

It appeared from the Log Entries that “the trader” (whom we take to be the firm) had owed the Commissioners large amounts and had been the subject of debt recovery proceedings.  We were interested to know why part of that £176,367 payment had not been attributed to the firm’s liability for payment of the £38,037 of VAT shown as due the return received by the Commissioners on the same day.  We were told by Mr Kish that Mr Davis had remortgaged his house.  We felt that there might have been much more to the case than Mr Kish was able to tell us.  Was there some other cause for the history of defaults?  Why had Mr Davis not been advised by the Civil Recovery Team that he should, come what may, have elected to attribute £36,037 of the £176,367 payment to the firm’s current liability to pay VAT for the 7/03 period?  Perhaps it had still been open to him to elect to that effect and so eliminate the default?  We had not been fully put in the picture.

12.	We therefore directed that the hearing be stood over for further evidence as to the debt management arrangements taking effect in September 2003.  We fixed a resumed hearing date for 9 June 2004 and further directed that as the evidence of Mr Robin Davis was essential if the case were to proceed, the firm should notify the Tribunal by 18 May 2004 that he intended to be present at the hearing on 9 June.  Our reason for requiring Mr Robin Davis’s presence was that Mr Kish disclaimed any knowledge about the payment of £176,367 that reached the Commissioners on the same day as the return for the 7/03 period.  By 26 May 2004 we had heard nothing from the firm.  In particular we had not been notified that Mr Robin Davis would attend and give evidence.  We therefore directed that the hearing, listed for 9 June was not to take place and that the Tribunal would decide the appeal on the evidence received at the hearing on 7 April.  We gave the parties a further 14 days in which to apply for further directions and stated that in the absence of any such application the Tribunal would produce a written decision and determine the matter.  No application has been made.  This then is the written decision.

13.	In the absence of any help from Mr Davis, we are bound to conclude that there was no reasonable excuse for the firm’s failure to pay the VAT by the end of August 2003.  We therefore dismiss the appeal. 

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:09/07/2004

LON/2003/1068