DECISION

1. This is an appeal against a default surcharge issued by the Respondents ("HMRC") pursuant to section 59 Value Added Tax Act 1994 ("VATA") in respect of the late submission of the Appellant's VAT return and payment of the period 04/10. The main issue in the appeal is whether the Appellant had a reasonable excuse within the meaning of section 59 (7) VATA.

2. The amount of the surcharge (computed at the 5% rate in respect of the second default -- the first default usually being ignored) was £21,636.89. Documentary evidence was provided in a bundle prepared by HMRC and in a couple of manuscript pages prepared by the Appellant showing sales and turnover from 01/09 to 07/10. Mr Matt Gilmore, the Appellant's financial director, gave oral evidence.

The legislation

3. Section 59 (7) VATA provides:

" If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge—

(a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or

(b) there is a reasonable excuse for the return or VAT not having been so despatched,

he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served)."

4. Section 71 VATA provides:

"(1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct—

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

(b) where reliance is placed on any other 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.

(2) In relation to a prescribed accounting period, any reference in sections 59 to 69 to credit for input tax includes a reference to any sum which, in a return for that period, is claimed as a deduction from VAT due."

The facts

5. We find the following facts.

6. The Appellant is a communications agency, providing advice on refreshing brands and the development of websites. Many of its clients (approximately 50% at the relevant time) were in the public or "not for profit" sectors.

7. The period from February to April each year is a particularly busy time for the Appellant. Many of its public sector clients have a financial year end at 31 March and seek to spend the balance of their budgets by the end of the financial year on a "use it or lose it" basis. The VAT period 04/10 was particularly active for the Appellant with slightly over £4 million in sales.

8. The VAT return and payment were both received two days late on 9 June 2010. The due date, in respect of both the return and the payment, was 31 March 2010. However, because the Appellant paid electronically it was allowed an extra seven calendar days in which to submit its return and payment so that the due date was extended to 7 June 2010. The surcharge notice was issued because the return and payment were two days late.

9. There is no dispute, subject to the question of reasonable excuse and of proportionality, that the surcharge notice was correctly issued in the appropriate amount.

10. Although the Appellant's business had been very busy in February and March of 2010 work began to fall off in the run-up to the General Election in May 2010 and even more significantly after the General Election. Mr Gilmore estimated that the Appellant's revenues dropped by 50% in this period. It was clear that many of the Appellant's clients in the public sector were going to be affected by public expenditure cuts and in some cases the bodies themselves would be disbanded. Mr Gilmore stated that it was apparent towards the end of May 2010 that the fall-off in work was not a short term "blip". In the last week of May the Appellant's management started to discuss redundancies and it was apparent that between 20% and 30% of the Appellant's workforce of approximately 105 would need to be made redundant.

11. Mr Gilmore is the financial director of the Appellant and held that post at all times material to this appeal. Although described as a "director" he is not in fact a member of the board of directors of the Appellant but holds a senior management position as an employee.

12. Mr Gilmore said that in the first week of June all members of staff, except directors and (all but one) senior managers were made part of one of the eight different redundancy pools. Mr Gilmore was the only senior manager to be placed in a redundancy pool. Out of a total of 105 members of staff, 92 employees were placed in redundancy pools.

13. At this time the staff were very aware that their jobs were at risk by reason of redundancy. It was clear that the cuts in public expenditure were, in Mr Gilmore's words, having a massive adverse impact on the Appellant's business.

14. In the event, 24 employees were made redundant and a further seven were transferred to other companies and businesses in the Appellant's parent company group.

15. Mr Gilmore had started working for the Appellant in 2009 having spent the previous two years working for another company in the group, which then merged into the Appellant. His responsibilities included VAT. He reported directly to the commercial director who was a member of the board of directors. The commercial director had previously been responsible for the finance section of the company but had stepped away from direct involvement in the finance section after Mr Gilmore's appointment.

16. Mr Gilmore had entered in his diary the due dates for VAT returns and payments. However, he was preoccupied by the threat of redundancy. He believed that his job was at risk. He had seen the redundancy pools and knew that he was the only senior manager in any of the pools and, consequently, believed that there was a real risk he might be made redundant. This took precedence in his mind over everything else. Apart from his own position, his time was taken up running through the financial implications of various redundancy scenarios for the Appellant. The commercial director was also preoccupied by the redundancy process and therefore gave little or no input into the work necessary to collate information necessary to prepare the VAT return.

17. He recalled seeing the prompt in his diary concerning the due date for the VAT return and payment for the period 04/10 but wrongly thought he had a further seven working days in which to submit the return and make the payment. In fact, as Mr Gilmore acknowledged the extension afforded to businesses which filed electronically was, in fact, seven calendar days. He attributed the mistake that the fact that he was preoccupied by the redundancy situation.

18. In cross-examination Mr Hall suggested to Mr Gilmore that he should have been aware of the consequences of making a return and payment after the due date because of previous defaults by the Appellant. As regards the period 01/09, where payment was made approximately two days late, Mr Gilmore said that at that time the Appellant employed a financial controller and it was her responsibility to prepare the return. His role was to check the return and to sign it off. Since that was a first default no surcharge notice was issued. Mr Gilmore recalled the surcharge notice and thought that a payment had been made after a weekend rather than before the weekend.

19. Mr Hall also referred to two other "defaults" viz a default surcharge for 07/08 (which was before Mr Gilmore took up his role as financial director) and another default surcharge in respect of the period 04/09. Mr Hall suggested, particularly as regards the second default surcharge, that this must have drawn Mr Gilmore's attention to the need to make returns and payments on the due dates and to the penalty surcharge consequences of failing to do so. As regards the latter "default", Mr Gilmore explained that the return and payment had been sent on time but had been accompanied by the wrong reference number with the result that the payment had been misallocated. As Mr Singh pointed out in reply, HMRC withdrew both of these surcharges and confirmed that the Appellant was not in default.

20. Finally, Mr Hall referred to the surcharge notice issued to the Appellant in respect of the period 10/09. The surcharge notice was in the amount of £5, 944.62. Mr Gilmore explained that the corporate group of which the Appellant was a member was undergoing a financial restructuring at the time. On directions from the Appellant's parent company all payments to third parties were suspended for a couple of weeks pending an injection of funds from the parent’s shareholders. Mr Gilmore said that the Appellant did not appeal that surcharge and had made the parent company aware that a surcharge had been incurred.

Appellant's submissions

21. Mr Singh submitted that the Appellant had a reasonable excuse for the purposes of this section 59 (7) VATA. He noted that section 71 (1) provided that insufficiency of funds and reliance on third party who proves to be dilatory or inaccurate could not be a reasonable excuse.

22. Mr Singh referred to Rowland v The Commissioners for her Majesty's Revenue and Customs [2006] STC (SCD) 536 at [19] where the Special Commissioner indicated that the question of reasonable excuse had to be considered in the light of all the circumstances of the particular case.

23. Mr Singh argued that Mr Gilmore made the mistake of submitting the VAT return and payment for the period 04/10 two days late because he was suffering from stress and anxiety in respect of the redundancy situation in the Appellant's business. Mr Gilmore was particularly concerned about his own position since he was the only senior manager included in the redundancy pools. Mr Gilmore's preoccupation with the redundancy issue occurred at exactly the same time that the VAT return and payment for the relevant quarter needed to be submitted. This was the explanation for the two day delay and in Mr Singh's submission this constituted a reasonable excuse.

24. Mr Singh noted the guidelines published by HMRC on their interpretation of "reasonable excuse" (Notice 700/50). Mr Singh recognised that HMRC did not specifically state that what he described as "compassionate circumstances" were capable of constituting a reasonable excuse. However, he referred to Notice 700/41 in the context of late registration the VAT where HMRC recognised that compassionate circumstances could amount to a reasonable excuse.

25. Mr Singh submitted that it was necessary to look at the underlying circumstances which caused or contributed to the late return payment in determining whether there was a reasonable excuse. He referred to Customs & Excise Commissioners v Steptoe [1992] STC 757 where the Court of Appeal, in the context of insufficiency of funds, held that the underlying cause of the insufficiency of funds (in that case, late payment by a major customer) could constitute a reasonable excuse.

26. The mistake in submitting the return and payment two days late was caused by Mr Gilmore's anxiety and preoccupation in respect of the redundancy position, particularly his own position. In Mr Singh's submission, this constituted a reasonable excuse.

HMRC's submissions

27. Mr Hall submitted that there was no reasonable excuse. The surcharge was levied at 5% since it was the third default. He accepted that two other surcharge notices in respect of 07/08 and 04/09 had been withdrawn by HMRC. However, the earlier defaults meant that the Appellant was fully aware of the need to file returns to make payments on the due dates and the consequences of failing to do so.

28. In Mr Hall's submission, after the first two defaults, a reasonable taxpayer would have put measures in place to prevent a repetition. It was the Appellant's responsibility to ensure that it met its obligations.

29. As regards the loss of revenue suffered by the Appellant in May 2010 Mr Hall submitted that this was not apparent from the figures put forward by the Appellant. There was a wide variation in sales and there was no direct pattern.

30. In addition, Mr Hall submitted that the impact of redundancies and of the general financial situation of the country was common to businesses across all sectors and even to the public sector. There was nothing unique about the Appellant's or Mr Gilmore's situation.

31. On 7 June 2010 Mr Gilmore was faced with a choice, according to Mr Hall. Mr Gilmore could have spent time ensuring that the VAT return and payment were submitted or he could have spent time dealing with redundancy issues. Alternatively, he could have dealt with both by working longer hours.

32. Mr Hall submitted that it was the Appellant's responsibility to meet its legal obligations. The commercial director (Mr Gilmore's superior) had a dual responsibility with Mr Gilmore to ensure that the Appellant's tax obligations were discharged.

33. In Mr Hall's submission Mr Gilmore's failure to submit the VAT return and payment by 7 June 2010 was covered by section 71 (1) (b) VATA which provided dilatoriness was not a reasonable excuse.

Appellant's reply

34. Mr Singh addressed Mr Hall's comments as regards previous defaults. Although this was the third default this is not relevant to the question whether there was a reasonable excuse for this default.

35. As regards the two previous defaults (01/09 and 10/09) they had no bearing on the surcharge notice currently under appeal. The first default related to a payment that went through on Monday rather than Friday and the second default occurred because of a general instruction from the Appellant's parent company that payments to third parties should not be made. These circumstances were irrelevant to the question of whether there was a reasonable excuse for the failure to pay and submit a return on the due date in respect of the period 04/10.

36. As regards Mr Hall's submission that redundancies and public expenditure cuts affected many other businesses, Mr Singh observed that this appeal was not considering whether other parties might have a reasonable excuse but whether the Appellant did so. In this case, the worries about redundancy experienced by the Appellant's staff occurred at the very time that the return and payment had to be submitted. This was therefore an unusual set of circumstances and unlikely to be repeated.

37. Mr Singh said that Mr Hall's suggestion that Mr Gilmore could have put in more hours at work in order to ensure that the tax return and tax payments were made on time missed the point. Working longer hours would not have made Mr Gilmore any less worried about the risk of losing his job.

38. In respect of Mr Hall's submission that under section 71 (1)(b) it was not permissible to blame the dilatoriness of an internal accountant, Mr Singh submitted that the Appellant was not relying on failure of any other person to perform their duties but rather relying on a fear of redundancy.

Our decision

39. We concluded that the Appellant had established a reasonable excuse within section 59 (7) VATA. Mr Gilmore seemed to us to be a credible witness. He had clearly been anxious about the threat to his job caused by the Appellant's redundancy programme. We accept his explanation that in his anxiety caused by circumstances beyond his control he made a mistake about the date on which the VAT return and payment needed to be made. The timing of the redundancy discussions coincided exactly with the time when the return needed to be prepared and payment made. This unusual combination of circumstances resulted in the payment and return being made two days late.

40. We do not consider that the facts of this case fall within section 71(1). The Appellant's case is not based on reliance on another person or dilatoriness of that person but rather on the underlying reason for Mr Gilmore's failure. We accept Mr Singh's submission that Steptoe allows the Tribunal to look at the underlying cause for the failure concerned. In this case, as we have said, we consider that that underlying cause, viz the anxiety suffered by Mr Gilmore caused by worry about his redundancy position, constitutes a reasonable excuse.

41. For these reasons we allow the appeal.

Proportionality

42. In addition to reasonable excuse, Mr Singh argued that the surcharge of £21,636.89 for a two-day delay was disproportionate. Mr Hall objected that this point had not been raised in the Appellant's notice of appeal. Mr Singh pointed out that in the correspondence in which the Appellant appealed to the Tribunal (before Mr Singh had been instructed) the disproportionate amount of the penalty had clearly been raised as an issue.

43. Our decision on reasonable excuse means that we do not have to decide the proportionality issue. However, we indicated that, in any event, we were prepared to agree to Mr Hall's request for the hearing to be adjourned on this point. Proportionality is a very difficult issue and we considered that the Tribunal required fully prepared argument on this point. In addition, the issue is currently under appeal to the Upper Tribunal in Enersys Holdings Ltd v HMRC 2010] UKFTT 20 (TC) and, on reflection, we consider that had it been necessary to decide the proportionality point we would have stayed the adjourned hearing until after the decision of the Upper Tribunal in that case.

44. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents