20042

DEFAULT SURCHARGE – reasonable excuse – insufficiency of funds – underlying reasons giving rise to insufficiency – did the Appellant satisfy burden of proof – no – section 59(7) Value Added Tax Act 1994, section 71(1) Value Added Tax Act 1994

LONDON TRIBUNAL CENTRE

	THANKI NOVY TAUBE PARTNERSHIP	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	Nicholas Aleksander (Chairman)
					Ranbir S. Suri

Sitting in public in London on 28th February 2007

Girish Thanki, solicitor and one of the partners of the Appellant, for the Appellant

John Holl, advocate of HM Revenue and Customs Solicitor’s Office, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This appeal relates to a default surcharge levied on the Appellant for the period 1 November 2005 to 31 January 2006.  The VAT and the relevant return were due on 28 February 2006.  The return was received by Customs on 13 March 2006, and the VAT was paid on 22 March 2006.  
2.	Mr Thanki, a partner in the Appellant firm, represented the Appellant.  Mr Holl of the Solicitor’s Office of HM Revenue and Customs, represented the Respondents.  A bundle of documents was produced to the Tribunal.  The background facts were not in dispute.
3.	The Appellant is a firm of solicitors founded in 1992, specialising in criminal defence and human rights law.  Almost all of its work is publicly funded.
4.	The default surcharge which is the subject of this appeal was issued on 17 March 2006.  It relates to the period 1 November 2005 to 31 January 2006.  The due date for payment of the VAT and filing of the return was 28 February 2006.  The VAT return  for the period was not filed until 13 March 2006, and the VAT (being £68,510.24) was not paid until 22 March 2006.
5.	The Appellant had been issued with a default surcharge liability notice on 11 June 2004 relating to the period 04/04.  Defaults subsequently arose in respect of the periods 07/04, 04/05 and 10/05, and surcharges were assessed in respect of each of those periods.  Accordingly, the default surcharge for the period 01/06, which is the subject of this appeal. was levied at the rate of 15%, namely £7276.53.
6.	This appeal is made under section 59(7) Value Added Tax Act 1994.  This provides that if the Appellant had a “reasonable excuse” for late filing of the return or the late payment of the VAT, then it shall not be liable to the surcharge, and shall not be regarded as having been in default in respect of the relevant period.  Pursuant to section 71, insufficiency of funds to pay any VAT due is not a reasonable excuse (although the underlying cause giving rise to the lack of funds may provide a reasonable excuse).  The onus of proof is on the Appellant to show that it had a reasonable excuse.
7.	Mr Thanki submits that the Appellant has a reasonable excuse for the delays for three reasons.  The first reason is the payment practices of the Legal Services Commission, the second is because of serious disputes that arose between the partners of the Appellant, and the third reason is the impact of an unexpectedly high service charge levied on the Appellant by its landlords.  Mr Thanki also submitted that the surcharge was too severe in the light of the payment and compliance record of the Appellant over the years.
8.	Mr Thanki concedes that insufficiency of funds cannot, of itself, be a reasonable excuse.  However he argues that because the Appellant practices almost exclusively in the fields of criminal and human rights law, it is dependent on public funding.  Most of its income is only paid following the conclusion of a trial when its bill is assessed by the National Taxing Team.  Bills typically take three to four months to be assessed and paid.  Because of Crown privilege, the Appellant cannot sue to enforce payment, and because the amounts are subject to adjustment on review by the National Taxing Team, it is not possible for the Appellant to factor its invoices.  Mr Holl told us that the Appellant accounts for VAT on a cash basis, and therefore only has to account for VAT when it receives payment – not when it renders its bill.  The Appellant produced no evidence that there were unusual delays in receiving payment in the period in question.  We consider that the time taken for the assessment of the Appellant’s bills by the National Taxing Team (which is required before the bills are paid) is a normal hazard of its chosen business, and is not a reasonable excuse for the late payment of VAT.  In any event, any cash flow problems would not have affected the ability of the Appellant to file its VAT return on time, and we do not consider that its dependency on public funding would be a reasonable excuse for the late filing of its VAT return.
9.	As regards the dispute between the partners of the Appellant, this was settled in December 2004, and a payment was made to a retiring partner by the continuing partners (and not the Appellant) in January 2005. The Appellant incurred legal costs of approximately £80,000 in relation to the dispute. Given the length of time between the settlement of this dispute and the period under appeal, we do not consider that the dispute gives rise to a reasonable excuse either for the late payment of the VAT or for the late filing of the return.
10.	In 2004, the Appellant’s landlord undertook substantial repairs to the building in which the Appellants rents offices.  The landlord asserted that the Appellant’s share of the repair costs was approximately £50,000.  This was disputed by the Appellant, and it was ultimately agreed that only £37,881.45 was due and that this would be paid in three instalments in 2006.  Only the first instalment could be relevant to the period under appeal, which Mr Holl submitted would be £12,627 (assuming equal payments – which was not disputed by Mr Thanki).  He considered that this amount was within the financing capabilities of the Appellant, and was not therefore a reasonable excuse justifying late payment.  The burden of proof is on the Appellant to demonstrate that the facts and circumstances amount to a reasonable excuse, and having reviewed the bundle of documents and considered Mr Thanki’s submissions, we do not consider that the Appellant has done so.  In any event, any cash flow problems associated with the cost of the repair works would not have affected the ability of the Appellant to file its VAT return on time, and we do not consider that these factors represented a reasonable excuse for the late filing of its VAT return.
11.	Finally, the Appellant submitted that the amount of the penalty was too severe in the light of the overall record of the Appellant in meeting its VAT obligations – including filing its returns and paying the VAT due.  However absent a reasonable excuse there is no discretion under the VAT legislation for either the Respondents or this Tribunal to mitigate default surcharge penalties for any reason.
12.	Our decision on the issue for determination in the appeal is that the Appellant did not have a reasonable excuse either for the late submission of the VAT return or for the late payment of the VAT for the period 01/06.  That means that the appeal is dismissed.
13.	Mr Holl made no application for costs and we make no order.

		

Nicholas Aleksander

CHAIRMAN
RELEASE DATE: 14  March  2007

LON/2006/0952