19794

Value Added Tax – Default surcharge – Largest customer late in providing sales figures – Whether reasonable excuse – No – S.71 ~VATA 1994

LONDON TRIBUNAL CENTRE

	MOORIM UK LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR K KHAN  (Chairman)
						MR TONY RING FTII

Sitting in public in London on 30 August 2006

Mr R A Mitchell, FCCA, Chartered Accountant, for the Appellant 

Mr Simon Chambers, Advocate, in the office of the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

	Moorim UK Limited (the Appellant) appeals against a default surcharge.  The default occurred in the accounting period ending 31 December 2005.  A payment was due on 31 January 2006 but was made on 14 February 2006.  The surcharge rate was 2% and amounted to £2,474.41.

The legislation

	S.59 Value Added Tax Act (VATA) 1994 provides that where a payment has not been received on the due date the taxable person is in default.  A surcharge is payable in respect of each default.  The amount of surcharge is calculated by reference to a specified percentage of the aggregate value of defaults for each accounting period.  The percentage is 2% for the first accounting period of default.  A person is not liable for a surcharge if he satisfies the Tribunal that he has a reasonable excuse for the payments of tax not being sent in time.  S.71(1) VATA 1994 provides:

“71(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 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.”

The Issue

	The main issue for determination in the appeal is whether the Appellant had a reasonable excuse for the VAT returns not being received on time.

The Evidence

	A small bundle of documents was produced for the Tribunal which contained correspondences between the Appellant and HMRC, telephone log of calls to the VAT Enquiry Centre, contract between the Appellant and its main customer, James McNaughton Paper Group Limited (“JMG”) dated  26 August 2005 (“Consignment Sale Contract”), sales invoices of the Appellant and their Report and Financial Statements for the year end 31 December 2005.

The Facts

	From the evidence before us we find the following facts.  The Appellant principal activity is the sale of specialist paper.  They are incorporated in the UK as a     wholly owned subsidiary of Shinmoorin Paper Mfg Limited, a company incorporated in Korea.  In the year to 31 December 2005 the turnover was £11,208,616 with profits before tax of £5,509.

	The Appellant introduced consignment sales in September 2005 based on the Consignment Sales Contract.  Under the terms of that contract, goods were classed as sales after 90 days in stock, if unused by the customer.  Clause 3.2 of the sale contract provided:

“As some of our goods may have a limited shelf life, you must ensure that you withdraw stock of a particular product on a first-in, first-out basis.  Any goods supplied under this Agreement which have not been withdrawn within 90 days will nevertheless be invoiced in accordance with Clause 5.”

During the 90 days period, the customer could withdraw stock as and when required.  The stock delivered by the Appellant was kept in the customer’s warehouse and the customer would withdraw stock when required. The Consignment Sale Contract provided in Clause 4.1:

“You must keep a complete and accurate record of all goods which you receive from us and which you withdraw from the stock.  Each withdrawal you make will be treated as a separate contract to which this Agreement and the general terms of trading apply.”

Clause 4.3 provides:

“On the last working day of each calendar month you must provide us with provisional figures by way of a written statement in a form acceptable to us detailing the withdrawals of each separate product from the stock, opening stocks, receipts and closing stocks (given in both number of sheets and kilos) during the period since your last due statement.  The final figures should be confirmed to us in writing in a form acceptable to us by the second working day of the following calendar month.”

Clause 5.1 provides:

“Upon receipt of your monthly statement, we will invoice you at the contract price for the goods you have withdrawn from the stock.”

The Appellant would therefore deliver stock which, if not returned by the customer would become a sale at the end of the 90 day period.  During the 90 day period, the customer would provide a monthly statement of stock used or withdrawn from the delivered stock.  This would form the basis for invoicing.  There were large quantities of paper which required two warehouses for storage and in the month of December 2005 amounted to 1,159,249 kgs of paper with an invoiced value close to £2m.

	On 31 December 2005, the Appellants’ accounts department could not agree on the stock used and to be invoiced to the JMG.

	On 13 January 2006, the Appellant knew the amount of stock which had been sold to JMG but required confirmation from the customer that the figures were correct.  This was not done by JMG in a timely manner.  This delayed the completion of the VAT returns and resulted in penalties on the Appellant. The Appellant was at the same time completing their financial accounts for the year end 2005. This placed an enormous pressure on the Appellant’s accounting staff and may have been a factor contributing to the late VAT returns.  The Appellant was of the view that they had to obtain accurate sales figures before submitting the VAT returns and therefore waited until all figures and adjustments to sales were obtained from JMG before submitting the VAT returns.  The Appellant claimed to have contacted the local VAT office in early January 2006 to explain their position.  However, there is no record of such contact being made on the telephone log provided to the Tribunal. 

	The Appellant explained that if the consignment stock sales were left out of the VAT return, the VAT payment due on the return would have been £16,299.84.  In sending the returns late (13 days) and having spent the extra time to verify the figures, the accurate payment of VAT of £123,720.88 was made, which was to the benefit of HMRC.  The final sales figures with JMG were only agreed in mid February 2006.  The records at the VAT National Advice Service indicate that the Appellant contacted them on 7 February 2006, which was after the due date.

The Arguments

	The Appellant’s argument is that their main customer, JMG, did not provide the requisite information on purchases and withdrawn stock as required under their consignment sale contract and this delayed the completion of accurate VAT returns.  The VAT return required accurate figures and the adjustments to sales after the year ended 31 December 2005 were not agreed until 10 February 2006, at which time the VAT returns were already late.

	In support of their argument the Appellant cited cases where VAT returns were delayed until records were verified or errors corrected.  (Cases cited include Dust Extraction (International) Ltd (VTD 3175); Capricorn Business Services Ltd, LON/89/1815 x (VTD 4802); Belgian Trading Co, LON/94/817P (VTD 12644)).

	The Respondents say there was no reasonable excuse where a person relies upon the customer to provide information for completion of the VAT return.  Further, this situation was foreseeable and should have been properly addressed by the Appellant, who up to two weeks before the date for the return knew there were figures which had not been reconciled with the customer.  Further, the cases cited are not relevant since they did not relate to a third party customer providing information for the completion of the VAT returns.

	Our decision is outlined below.

	It is our finding that there was no reasonable excuse for the late submission of the return and the payment of VAT.

	The Appellant should have made contact with HMRC through the National Advice Service or the Debt Management Unit at any earlier date with a view to providing estimated return until the sales figures were verified and accurate figures had been provided to HMRC.  There is a procedure for seeking guidance in such cases.  There is no record of such contact or request being made by the Appellant before the due date of the return.  It is the responsibility of the taxable person to ensure compliance with the value added tax regulations and to ensure that the returns and payment is made by the due date.

	It is clear that the Appellant knew their returns would be late and did make some effort to obtain the requisite information from the customer for completion of the returns.  The Consignment Sale Contract, though new to the Appellant, required the customer to provide sales information in a timely manner.  It is no good saying that the customer breached the contract in not providing the information.  It is up to the Appellant to ensure that the information is provided and the contractual provisions are observed.  The quantity of stock involved, and the mechanics of the sales contract required that proper checks and monthly sales figures be provided in order to make the relationship between the parties work in a commercial and efficient manner where neither party would incur penalties for lateness.  We do have sympathy for the Appellants having to deal with year end returns and the implementation of the Consignment Sales Contract at the same time, but this is not unique to the Appellant.  Indeed all businesses have busy year ends and deadlines to met in these matters.

	Certain cases have been cited to the Tribunal. These cases can be distinguished.  In those cases, the Appellants had made some contact to discuss their problems or had arranged a meeting with HMRC to present realistic terms for payment.  In our case, there is no evidence that such contact or meeting was made before the due date.  Further, in some of the cases cited there were errors discovered in the returns or records.  In our case, information had not been provided by a third party for the completion of the returns.  Whilst there is a similarity in that there is a lack of reliable records in all cases, our case can be distinguished for it involves a third party not providing information as opposed to errors discovered by the company’s accountant or a loss of data due to a computer malfunction.

	In the circumstances, the appeal should be dismissed and there is no direction as to costs.

DR K KHAN
CHAIRMAN

RELEASED: 27 September 2006

LON/06/558