[2011] UKFTT 338 (TC)

TC01198

Appeal number: TC/2011/01642

VAT – default surcharge – whether reasonable excuse – no – proportionality considered

FIRST-TIER TRIBUNAL

TAX

LUXOTTICA (UK) LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JUDGE NICHOLAS ALEKSANDER

GARETH JONES MBE JP

Sitting in public at 45 Bedford Square, London WC1 on 4 May 2011

Alan Craddock, of Kingston Smith LLP, Accountants, for the Appellant

Philip Rowe, an officer of HM Revenue and Customs, for the Respondents

DECISION

1. Luxottica (UK) Limited, appeals against a default surcharge of £22,700 for the late payment of VAT for the period 09/10 pursuant to section 59 Value Added Tax Act 1994 ("VAT Act").

2. Mr Craddock represented the Appellant, and Mr Rowe represented HMRC. Documentary evidence was provided in a bundle prepared by HMRC.

3. Mr Craddock submits that the Appellant had a reasonable excuse for its late payment of VAT, and that in any event, the surcharge was disproportionate.

The legislation

4. Section 59 (7) VAT Act provides:

"(7) 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)."

5. 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

6. The background facts are not in dispute and we find them to be as follows.

7. The Appellant trades in sunglasses. It is the UK subsidiary of an Italian listed parent. Because of the Appellant's level of turnover, it is within the "payments on account" regime, and does not benefit from the seven day extension for electronic payments. For each quarter, it makes three payments. The first two are payments on account, and the last payment is a final balancing payment.

8. During the course of 2009, the group changed its accounting system to one based on the well know SAP software. The Appellant was one of the first companies in the group to move to the new accounting system. The return for the period 12/09 fell due whilst the Appellant was in the process of migrating to SAP, and as a result it was not able to complete its VAT return and pay the VAT due by the due date. HMRC issued a surcharge liability notice on 22 February 2010. Although no default surcharge was payable, the Appellant was warned that a surcharge period would now run until 31 December 2010, and any default arising in this period would give rise to a default surcharge. The Appellant does not submit that it had a reasonable excuse for its failure to submit its VAT return and pay the VAT shown by the due date for the period 12/09.

9. For the period 09/10, the Appellant submitted its VAT return on time. The VAT balancing amount shown as payable was £1,135,006 and was due on or before 31 October 2010.

10. On Friday 29 October 2010, someone at the Appellant's accounts department in the UK keyed into its electronic payments system a VAT payment of £11,135,006 (namely £10 million greater than the VAT actually payable). In accordance with the Appellant's internal procedures and bank mandate, the payment was reviewed and approved by a second person, before the payment instruction was released electronically to Citibank, the bankers to the Appellant's group.

11. At some point during the course of 29 October, Citibank notified the Appellant's group treasury team in Ireland that the payment instruction appeared excessive. The treasury team notified this to the Appellant later that same day – but after 5pm. In consequence it was too late to give fresh instructions to Citibank to allow for the correct payment to be remitted to HMRC for value that day. As 29 October was a Friday, fresh instructions for the correct payment could only be given the following Monday (1 November 2010), and payment therefore only reached HMRC on 1 November 2010.

12. As the VAT payment reached HMRC's account after the due date, a default surcharge at 2% of £22,700 was levied.

Reasonable excuse

13. The Appellant submits that it has a reasonable excuse for its failure to pay the VAT by the due date. This is because Citibank failed to notify it of the error in the payment instruction in sufficient time for the Appellant to issue a corrected instruction to allow for payment on the same day.

14. The Appellant told us that HMRC had agreed in correspondence that it would cancel the surcharge if Citibank confirmed in writing that it had erroneously delayed notifying the Appellant that the payment instruction was excessive. Although the Appellant have asked Citibank to provide such confirmation, they have not done so.

15. Citibank's refusal to admit to an "error" does not appear at all surprising to us. Any error in this case was the Appellant's, first in miskeying the VAT due into its electronic payment system in the first place, and secondly in not spotting the error when the electronic payment was reviewed and released by the second person. There is no evidence before us which suggests that Citibank made any mistake at all. Even if Citibank had been dilatory in notifying the Appellant of the excessive payment, section 71(1)(b) provides that where reliance is placed on any other person to perform any task (and this would include Citibank), any dilatoriness or inaccuracy on the part of the person relied upon cannot be a reasonable excuse.

16. We find that the Appellant did not have a reasonable excuse for its late payment for the 09/10 period.

Proportionality

17. Proportionality in relation to the default surcharge regime was considered in detail in the First-tier Tribunal decision of Enersys Holdings UK Ltd [2010] UKFTT 20 (TC) following full argument on both sides, the benefit of which we have not had in this case.

18. We agree with the Tribunal’s conclusion in Enersys that, as a matter of European law, national measures implementing the VAT regime, such as the default surcharge penalty regime for late payments of VAT, are required to be proportionate (Garage Molenheide BVBA and others v Belgium C-286/94 [1998] STC 126). Further, the UK’s default surcharge regime is not by itself disproportionate but may, in exceptional cases, lead to the imposition of a penalty which is disproportionate. Where an individual penalty is disproportionate, the Tribunal must discharge it, having no power to mitigate it.

19. Is the penalty in this case disproportionate? The first point to make is that whether a penalty is disproportionate cannot be judged by solely comparing it to the time-cost use of money: the penalty is not intended to compensate the Government for being kept out of its money. It is not a substitute for an interest charge. It is intended to deter non-compliance with the obligation to pay on the due date. It is intended to be penal.

20. Nevertheless, it can be disproportionate where (as per Simon Brown LJ in the case of International Transport Roth GmbH v Home Secretary [2003] QB 728) it is “not merely harsh but plainly unfair”.

21. The default surcharge is a charged as a percentage of the tax unpaid on the due date. It is ratcheted so that there is no surcharge for a first offence, a second offence is surcharged at 2%, a third offence 5% and a fourth offence 10%. The late payment in this case was the Appellant's second. We do not find it plainly unfair that the rate for the penalty under appeal was 2% when seen in the light that the Appellant had had due warning with its earlier default, and been warned (as we find it was) what the percentage penalty would be on the next default.

22. We note that in Enersys the conclusion that the default surcharge in that case was “wholly disproportionate to the gravity of the offence” (paragraph 69) shows that the Tribunal considered, as we do, that in deciding whether a penalty is disproportionate it is necessary to do what the default surcharge regime does not, which is consider:

(1) The “gravity” of the default: in particular to what extent the taxpayer was at fault;

(2) How long the VAT was outstanding;

(3) The amount of surcharge relative to the size of the defaulter.

23. With regards the last point, we note in the Enersys case that one of the reasons why the Tribunal found the surcharge to be disproportionate was because its turnover (and therefore VAT due) for the particular quarter was higher than usual. In Enersys it was, in one way of looking, a matter of chance that the late payment arose in a quarter with a very high VAT liability. This is not the case here. Although the Appellant's business is seasonal, the period to which the default related was a quiet period. It busiest periods, with the highest turnover and VAT liabilities, are those before the summer in each calendar year. Schedules in HMRC's bundle shows the VAT payable and turnover of the Appellant for all of the VAT periods from 09/08 to 03/11, and it is apparent that the Appellant's VAT liability is consistently greater in the first two quarters in each calendar year (03/ and 06/ periods) than in the last two (09/ and 12/ periods). We therefore find that the surcharge for 09/10 was not disproportionate because of substantial fluctuations in the Appellant's turnover.

24. Mr Craddock also submitted that the surcharge was disproportionate when compared with the profits of the Appellant, representing 1% of its profits for the year. However, although a surcharge of £22,700 may viewed as substantial when considered in isolation, given the size of the Appellant and the scale of its profits and turnover, we do not consider the surcharge to be disproportionate in the circumstances of this case.

25. On the second point, Mr Craddock also made the case that he considered the penalty was high for a payment that was made only 1 working day late. We agree with the conclusion in Enersys that the fact that the default surcharge regime makes no allowance for how late a payment was made could lead to a disproportionate penalty. We note that on the particular facts of that case – as in this - a payment made only one day late was found to be disproportionate.

26. On the first point, the “gravity” of the default, we note that the default did not arise because of a simple mistake over the due date as in Enersys. As already mentioned, the Appellant knew the due date but miskeyed the VAT due into its payment system. It chose to only release the payment on the last working day possible, so that there was no time left to correct any errors that might arise. Although the Appellant had systems in place to review payments before they were released, the second person who reviewed the payment did not make adequate checks on the payment before releasing it to Citibank. We consider the “gravity” of the offence to be more serious than in Enersys although clearly far from the highest gravity. But for this reason too, we are not persuaded that the penalty is plainly out of proportion to the gravity of the offence when it is also borne in mind that the penalty is levied at the lowest rate of 2% of the tax paid late.

27. In conclusion, although we note that the payment was made only one working day late, and that the amount of the penalty in this case might be regarded as harsh, nevertheless we find that the Appellant has not made out its case that it is in that category of exceptional penalties that are plainly unfair. We do not find it disproportionate in the sense meant by the European Court of Justice in Garage Molenheide and we do not discharge it.

Conclusion

28. The appeal is dismissed.

29. 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)