C00264
VALUE ADDED TAX- import VAT – Simplified Import VAT Accounting ("SIVA")- trader authorised to defer payment within certain limits - limits exceed 6 times in 12 months – whether failure represented risk to Revenue – yes - appeal dismissed.
MANCHESTER TRIBUNAL CENTRE
NEWSTAR JEANS COMPANY LTD Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: David Porter (Chairman)
J P M Denny (Member)
Sitting in public in Manchester on 4 September 2008
No one appeared for the Appellant
Richard Chapman, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2008
DECISION
- Newstar Jeans Company Ltd ("the Appellant") appeals against the Respondents' decision to withdraw the Appellant's right to operate the Simplified Import Vat Accounting (SIVA) contained in a review letter dated 27 July 2007.The Respondents say that the Appellant has exceeded the agreed limits for the scheme 6 times in the last twelve months and as a result put the Revenue at risk because the level of VAT due from the Appellant is not adequately covered by the security.
- Richard Chapman appeared for the Respondents accompanied by Steven Payne the reviewing officer. He also provided a bundle for the tribunal. As no one appeared for the Appellant this tribunal determined to proceed under rule 26(2) of the Value Added Tax Tribunal Rules 1986 (as amended)
- We were referred to the following cases:
Martin Yaffe International Limited-v- Her majesty's Revenue and Customs
C00197 and
J B I Limited-v- The Commissioners of her Majesties Revenue and Customs C00254
The Facts
- In the absence of the Appellant Mr Chapman took us through the facts as contained in the statement of case and the correspondence. The Appellant was approved by the Respondents to use the SIVA on 1 October 2003. We understand from Martin Yaffe International Limited-v- Her majesty's Revenue and Customs C00197 to obtain that approval the Appellant needed to pass the VAT compliance test. The criteria are:
" VAT compliance History
Applicants must have a good VAT compliance history. Eligibility will be assessed against a number of compliance criteria, outlined below.
- The number of errors made on VAT returns
- The timeliness of rendering VAT returns
- The number of assessments raised on VAT returns
- The number and value of VAT under declarations
- The number and reasons for any default surcharges…
Payment history
(a) the business's departmental payment record in connection with Duty Deferment will be reviewed. Traders who have defaulted on deferment payments more than once in the 12 month period prior to application will be refused approval
(b) VAT payment history (VAT returns, surcharges and under declarations, debts) will also be assessed to ensure timely payment is rendered".
- On 11 May 2007 the Respondents wrote to the Appellant advising that they had failed to comply with the following criteria:
"Poor Deferment Account Compliance. Your company has exceeded the agreed Deferment Account Limit and/or Deferment Guarantee Limit more than once in the past 12 months. (August.September,October,November,2006 and March and April 2007)
Therefore we will not allow you to continue to be approved for this facility and the approval to operate SIVA is withdrawn with immediate effect"…
- On the 14 May 2007 the Appellant wrote to the Respondents indicating that they wished to appeal against the decision. It stated that in November 2006, when it was brought to its attention that the limits in October had been exceeded, immediate provisions to increase the DAL and DGL levels were made. Subsequently, the company's growth had exceeded expectations and in March 2007 its bank had been instructed to increase the guarantee levels to £50,000. The Respondents must be aware that this process took some length of time, yet before it could be completed the withdrawal notice had been received. The Appellant stressed that they had never defaulted in any payments to the Respondents on their deferred account.
- The bundle contains correspondence that has passed between the Respondents and the Appellants in relation to the levels for the security and payment. As a result of the default in January the Appellant had increased the DGL to £15,000 and the DAL to £45,000 on 16 February. The latter being increased to £50,000 by 27 February. There were no further defaults until August. The Appellant must have been aware of the levels of default at that time because duty deferment statements are sent out. The Respondents sent a letter on 4 October 2007 advising that the Appellant had exceeded the DGL by £12,667.60 in August and by £6,685.62 in September. They confirmed, however, that they understood that the Appellant was negotiating with the bank to increase the limits and they enclosed the appropriate forms. The letter also warned the Appellant that SIVA would be inhibited if there was further failure to comply. There is a note on the 9 November supplementary periodic deferment statement advising that Mr Patel (one of the Directors of the Appellant) should be telephoned to advise that the levels were being exceeded. On 1 December the National Westminster Bank supplied the Respondents with a Duty Deferment guarantee amendment form C1201A increasing the guarantee level to £30,000. On 19 December the Respondents wrote again to the Appellants advising that the increase made was insufficient to cover the increase needed for November and asked for the level to be increased again. Nothing appears to have been done and the Appellant must have been within the limits as the next time the levels were exceeded was in March 2007 when the DAL provision was too low. In April 2007 the DGL level was exceeded again and the Appellant immediately instructed the bank to increase the DGL to £50,000. On 11 May the Respondents advised that an inhibit had been placed on the Duty Deferment facility The Respondents replied on 27 July 2007 having treated the Appellant's letter as a request for a review. (We set out those parts of the letter which are relevant to this appeal in some detail as the Appellant is not present and it will help to identify the issues). In that letter they stated:
" Your deferment record from January 2006 to April 2007 shows the following:
January 2006 DGL DAL
Permitted levels £5,000 £18,000
Actual levels £16,132.27 £44,330.40
Levels Exceeded by £11,137.27 £26,330.40
HMRC Finance Accounting wrote to you, on 3 February 2006, to advise you of the above discrepancies….. HMRC advised you to provide replacement or supplementary guarantee and to apply to increase your SIVA deferment schedule…You subsequently applied to increase the DGL to £15,000 and the DAL to £100,000
August 2006 DGL DAL
Permitted levels £15,000 £100,000
Actual liabilities £27,667.60 £83,721.021
Levels exceeded by £12,667.60 £N/A
September 2006 DGL DAL
Permitted levels £15,000 £100,000
Actual liabilities £21,685.62 £65,818.52
Levels exceeded by £6,685.62 N/A
HMRC Finance Accounting wrote to you, on 4 November 2006 to advise of the discrepancies as before and provided the appropriate forms
October 2006 DGL DAL
Permitted levels £15,000 £100,000
Actual liabilities £37,805.80 £114,496.99
Levels exceeded by £22,805.80 £14,496.99
You contacted HMRC Finance Accounting Service on 3 November 2006 to advise that you were already in the process of negotiating with the bank to increase the guarantee to £50,000 and advised them that the new contracts were coming in.
November 2006 DGL DAL
Permitted levels £15,000 £100,000
Actual liabilities £34,253.33 £103,483.16
Levels exceeded by £19,253.33 £3483.16
You applied to increase your DGL and DAL in December 2006.The DGL was increased to £30,000 and the DAL to £130,000…..
March 2007 DGL DAL
Permitted levels £30,000 £130,000
Actual liabilities £45,141.29 £137,138.34
Levels exceeded by £15,141.29 £7,138.34
April 2007 DGL DAL
Permitted levels £30,000 £130,000
Actual liabilities £34,759.49 £105,701.18
Levels exceeded by £4,759.49 N/A
HMRC Finance Accounting Services wrote to you on 11 May 2007 to advise that an inhibit had been placed on your Duty Deferment facility. You were advised that the first reason for this was due to exceeding the DGL for August, September, October and November 2006 and subsequently in March and April 2007. The second reason for this was the fact that you exceeded the DAL for October and November 2006 and March 2007……..
My Decision
Your business' approval for SIVA was withdrawn as Newstar exceeded its DAL and DGL limits, indicating that the business represents a risk to the Revenue, and therefore should not be approved for the scheme at this time.
In accordance with the legislation, SIVA can only be approved for those traders that are able to satisfy HMRC that they present no risk with regard to the payment of the deferred VAT. Certain criteria in the form of "Business Rules" have been drawn up by Custom's policy team to provide guidance to authorising officers in deciding whether a trader presents a risk or not. Those rules are based on a wide experience of various risk factors and are used as an indication of a trader's relationship with HMRC. ………………
The SIVA Business rules under deferment account history give specific guidance to traders that it is the responsibility of the trader themselves to monitor their DAL and DGL levels. They must ensure that they operate within their approval limits:
Once authorised, traders must maintain an adequate guarantee and ensure the DAL (Deferment Accounting Limit) is operational within their approval limits .They must also ensure that new schedules are submitted to raise levels if necessary. Failure to do so may result in the withdrawal of SIVA approval and a request to provide 100 per cent guarantees to cover both duty and VAT"
As you can see from the background above. Your business exceeded the DAL or DGL levels on 6 of the 12 months between April 2006 and April 2007, meaning one or more of the guarantees were exceeded for 50% of the time. Therefore, from the evidence, your business has not operated within the approval limits and thus is considered a risk to the Revenue.
In response to your claim at point 3 of your letter dated 14 May 2007 – you stated that you had never exceeded the combined DAL levels or the non-secured import VAT levels. In fact, the DGL & DAL history shown above indicates that in October & November 2006 and in March 2007, Newstar exceeded both the DGL and DAL levels. However, the fact that your company has exceeded them at all is the point for this review. The SIVA criteria and agreement your company signed up to makes it clear that your company should not have breached any of the limits at all."
As a result Mr Payne concluded that he must uphold the decision to withdraw SIVA approval.
The Law
- Articles 224 to 227 of Council Regulation (EEC) No 2913/92 of 12 December 1992 and Commission Regulation No 2454/93 (laying down provisions for the implementation of Council Regulation 2913/92) (the Community Customs Code) provide a framework by which the payment of import duties and input VAT may be deferred for up to a month
The domestic law is contained in section 45 of the Customs and Excise Management Act 1979 and the Customs Duties (Deferred Payment) Regulations 1976 (SI 1976/1233) and 1978 Amendment (SI1978/1725). As a result of those provisions an importer is permitted to defer payment of import duties and input VAT subject to providing security. That requirement arises by virtue of section 28 of the Value Added Tax Act 1994 and the VAT Regulations 1995 (SI1995/2158), regulations 40A, 44 to 48, and the Value Added Tax (Payments on Account) Order 1993 (SI 1993/2001)
Section 16(1) of the VAT Act provides that:
"(1) Subject to such exceptions and adaptations as the Commissioners may by regulation prescribe and except where contrary intention appears-
(a) the provisions made by or under the Customs and Excise Acts 1979 and the other enactments and subordinate legislation for the time being having effect generally in relation to duties of customs and excise charged on the importation of goods into the United Kingdom; and
(b) the Community legislation for the time being having effect in relation to the Community customs duties charged on goods entering the territory of the community shall apply (so far as relevant) in relation to any VAT chargeable on the importation of goods from places outside the member States as they apply in relation to any such duty or excise or, as the case may be, Community customs duty"
- The Value Added Tax (Amendment) (No 5) Regulations 2003 (SI 2003 No 2318) provided that where there is no risk of payment of deferred import VAT, the customs authorities may, at their discretion, waive the need for security for the full payment of import VAT
- Both the Customs Duties (Deferred Payment) Regulations 1976 (SI 1976/1233) and Excise Duties (Deferred payment) Regulations 1992 (S1 1992/3152) anticipate that adjustments may need to be made to the payments. (See regulations 7 in both cases). Under SIVA the trader agrees a security limit and payment limit with the Commissioners. The security level covers the excise duty but is not needed for the VAT liability. A direct debit arrangement is set up and on the due date (15 days after the month end) the direct debit is taken. If the Commisioners are aware, before the date for payment, that the payment limits have been exceeded, they can increase the amount to be paid under the direct debit. Similarly they can reduce the amount. If they do not know the amount, or do not increase or decrease the direct debit, then the trader will be debited the amount of the payment limit. If that results in an underpayment then the trader must immediately pay an additional amount and is not allowed any deferment. If the trader pays too much he can set off the over payment against his next return.(see paragraph 7 Notice 101 Deferring Duty, VAT and other charges May 2004). The Deferred Account Limit must cover the VAT and Duty liability.
- Notice 101 also states at;
"5.8 paragraph 3 SIVA aims to provide compliance costs savings for legitimate businesses and should contribute to UK importers, whatever their size, improving their competitiveness".
Summing up
- Mr Chapman submitted that SIVA required the Appellant to keep within the agreed limits. The Appellant would know what the likely amounts for payment would be as a result of its own records. In any event electronic information was passed to the Appellant and the Respondents so that they would be aware of the amount due on the due date. The Appellant had exceeded its approved DGL and/or DAL 6 times in a twelve month period. This indicated that the Appellant had insufficient information to be able to increase the requirements and as a result the Appellant's bookkeeping arrangements represented a risk to the Revenue in that if the payments were not met there would be insufficient security to cover any shortfall. He accepted that the Appellant had always paid the amounts due. It was unclear how quickly the underpayments had been resolved, but he accepted that he had no evidence of any failure to make those payments either during SIVA or up to the present time. He submitted, however, the Respondents decision to remove the Appellant's approval to use SIVA was a determination that a reasonable body of Commissioners could arrive at. Further in view of the fact that the Appellant had not attended he would be asking for costs if the Respondents were successful.
The Decision
- The Respondents' decision is an "ancillary matter" falling within paragraph 1(m) of Schedule 5 to the Finance Act 1994. The tribunal's jurisdiction is conferred on it by section 16 of that Act. Subsection (4) limits our powers: we may allow an appeal against a decision as to an ancillary matter only if we are satisfied that the reviewing officer "could not reasonably have arrived at it" and, if we do allow the appeal , we can do no more than direct a further review. We agree with the observations of Mr Bishopp in Martin Yaffe International Limited-v- Her majesty's Revenue and Customs C00197who stated at paragraphs 7 and 8:
"7. The issues we must address relate to the circumstances in which the Respondents can properly exercise the power to revoke or vary such authorisation. Save for the indication that, if there is no risk to the Revenue the security may be nil (with the obvious implication that if there is such a risk, it may not be set at nil) and for the indication that revocation or variation of an existing authorization may be only for good cause, the statutory provisions offer no guidance. It follows, therefore, that the grant variation and revocation of permission are matters within the Respondents' discretion.
- It is too well-established a proposition to require authority that any body which exercises a discretion is entitled to follow a policy when doing so, the more so when, as here, several officers will exercise the discretion on its behalf and there is a public interest in consistency of application. The policy must respect the purpose of the statutory provisions granting the discretion, and cannot be so strict that, in practice, no real discretion can be exercised."
- In view of the above it seems to us that the compliance requirements for DGL and DAL must be different although both requirements are linked. Dealing with the alleged non-compliance in relation to the DAL we note that the Appellant exceeded the permitted level in January 2006 by a substantial amount. Under the provisions the direct debit would have been amended or the Appellant would have to have paid the excess immediately. We were told that the Appellant had done so and that it had not been, nor currently was, in arrears. The Appellant took immediate action in February to correct the position. In our view the Appellant acted reasonably and was still compliant in relation to the DAL limits by February. In fact there were no further defaults until October 2006. In October 2006 the Appellant exceeded the DAL by £14,496.99, in November 2006 by £3,483.16,and in March 2007 by £7,138.34. The Appellant had arranged to increase the levels in November but they had not been increased sufficiently. It is accepted that the Appellant had paid the amounts on time, but Mr Payne was unable to say whether that was through the direct debit method or by a cheque subsequently. Either way the scheme allows for adjustments up or down. It is inevitable that a trader may not always be precise. The scheme allows for a balancing payment to be made immediately and we are told that that was done. In fact if there is an underpayment the trader does not get an immediate refund but has to make the appropriate allowance in his next VAT return. The scheme favours the Respondents in those circumstances. We note that the Appellant exceeded the levels by £51,448.89 during the entire period but was under the levels by £74,759. We cannot therefore agree that Mr Payne acted reasonably in terminating the SIVA provisions on the basis of the payment record. The scheme allows for adjustments and no evidence has been led to show that the Appellant was ever in arrears.
- The compliance with regard to the DGL (which is linked to the DAL) is less satisfactory. The level started at £5000 and was increased to £15000 in February and £30,000 in April 2007. As we understand it the level is fixed for the customs duties as no security is required for VAT purposes under the SIVA scheme. Notice 101 states at:
"5.8 paragraph 3 SIVA aims to provide compliance costs savings for legitimate businesses and should contribute to UK importers, whatever their size, improving their competitiveness".
Presumably SIVA is designed to make matters easier for a trader. The Appellant has grown substantially over the 12 month period and has expressed some surprise at the extent of its growth. As pointed out by Mr Bishopp in Martin Yaffe International Limited-v- Her majesty's Revenue and Customs C00197 the trader must present a risk to the Revenue. The question for us is whether the Revenue were ever at risk because of the Appellant's failure to keep the DGL up to date? The Appellant has a responsibility to keep up with the paper work. A Duty Deferment Statement is sent each month and the Appellant is therefore aware of the required level for the DGL. The Appellant increased the level in February within 3 weeks of the end of January. The Appellant did not act as expeditiously in September October and November. Even when the bank amended the guarantee it was too little. The Appellants managed to update the requirement in February within 3 weeks but took 3 months from September. The levels appear to have been maintained after November, at the level fixed with the bank, until March 2007. They were not corrected again until May 2007 some two months later.
- In all the circumstances we must find that there was a risk to the Revenue if there was an insufficient guarantee to cover the liability. We accept that it must be open to a trader to be given a reasonable time to increase the limits. After all a trader would not want to increase the limits to an unreasonable level if there was a likelihood of his level of business reducing. Unfortunately we have been given no evidence as to the reasons why it took so long for the Appellant to agree the new levels of the guarantees. It may be that, as the level increased, the bank needed more time to consider the matter. The Appellant was able to arrange for an increase in February within 3 weeks. We are satisfied that if the Appellant had increased the DGL within the same time scale, then there could have been no reason to withdraw SIVA. Even though the Respondents were paid properly within the DAL requirements it is not possible to say that the Revenue would not have been at risk on any of the occasions when the security was insufficient. If the Appellant had not made the appropriate payments on time, then there would have been a loss to the Revenue. The evidence shows that the Appellants had adequate information and time to amend the level of DGL but that it failed to do so in a reasonable time, even though the Appellant was aware that SIVA would be removed for non-compliance. We therefore dismiss the appeal and find that Mr Payne acted reasonably in terminating SIVA. As the Appellant did not attend we award costs of £500 to the Respondents.
DAVID S PORTER
CHAIRMAN
Release Date: 21 October 2008
MAN/07/7042
