20548

DEFAULT SURCHARGE – computer breakdown – whether reasonable excuse – yes – appeal allowed – VATA 1994 Ss59(7)(b) 

LONDON TRIBUNAL CENTRE

SWANSTAFF RECRUITMENT LIMITED 
Appellant

 - and -   	

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS 
Respondents

Tribunal: DR A N BRICE
 MRS C E FARQUHARSON 

Sitting in London on 21 November 2007

Mr Stephen Rogers, the Managing Director of the Appellant, for the Appellant 

Ms G Orimoloye, Advocate in the Office of the Solicitor of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The appeal
1.	Swanstaff Recruitment Limited (the Appellant) appeals against a default surcharge penalty of  £10,650.19. The penalty was imposed by the Commissioners for Her Majesty’s Revenue and Customs (Customs) because the value added tax return and the tax due for the accounting period ending on 30 March 2007 were not received in time 

The legislation
2.	Section 59 of the Value Added Tax Act 1994 provides that where a value added tax return, or the tax due, is not received by Customs in time the taxable person is in default. A surcharge is imposed for the second and subsequent defaults. However, section 59(7)(b) provides that a taxable person is not liable to a surcharge if he satisfies the Tribunal that there was a reasonable excuse for the delay. Section 71(1)(b) provides that, 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.

The evidence
3.	A bundle of documents was produced by Customs. We heard oral evidence from Mr Stephen Rogers, the Managing Director of the Appellant, who also represented the Appellant at the hearing. We found Mr Rogers to be a reliable witness and we accept his evidence. 

The facts
4.	From the evidence before us we find the following facts. 

5.	The Appellant has been in the surcharge regime since December 2001 and there were eight defaults between the accounting period ending on 31 December 2001 and the accounting period ending on 30 June 2006. At that time it was customary for the Appellant to contact Customs if there was to be any delay in sending the return or the tax. The returns for the accounting periods ending on 30 September 2006 and 31 December 2006 were received in time.

6.	In the accounting period ending on 30 March 2007 the Appellant’s value added tax return and the tax due should have been received by Customs on 30 April 2007 (which was a Monday) and were received on Tuesday 8 May 2007. A surcharge was imposed and Mr Rogers asked his accountant to prepare a letter to Customs. On 9 July 2007 Mr Rogers wrote to Customs to say that the return had been completed in time but had not been actioned by the book-keeper in error. The letter asked Customs to exercise their discretion not to impose the surcharge. Customs replied on 26 July 2007 to say that, where reliance was placed upon another person to perform a task, and there was delay or inaccuracy on the part of that other person, that was not a reasonable excuse. 

7.	Upon receipt of Customs’ letter of 26 July 2007 Mr Rogers investigated further the reason for the delay in sending the return and tax. The Notice of Appeal was lodged on 23 August 2007 and the grounds of appeal were set out in a covering letter. This stated that the return and the tax were due to be sent on 26 April 2007 (which was a Thursday) but had not been sent because the book-keeper was unable to send them because of a computer break down. The return and tax were in fact sent on 3 May 2007 which was a Thursday and Monday 7 May was a bank holiday. That explained why the return and tax had not been received until 8 May.

9.	The covering letter went on to say that on 26 April 2007 there had been a complete breakdown of the Appellant’s computer server; the engineers had been called immediately and found that a part was required which was placed on order. The part arrived by 3 May when the computer was repaired. At that point the server information was restored from the back up tape enabling the Appellant to audit the return, finalise the figures, and send the payment for the tax to Customs. Until the server was working the Appellant had no other way of retrieving the information in the return. Had the server been working the payment would not have been sent late. The covering letter stated that the computer consultants who carried out the repair could substantiate what was said.     

10.	At the hearing Mr Rogers produced copies of two Job Sheets completed by the firm of computer consultants who had dealt with the computer breakdown. The first Job Sheet showed that a visit had been made to the Appellant on 26 April 2007 and that the engineer had attended at 13.00 hours and departed at 17.30 hours. It was recorded that there had been “problems with data server hard disk error causing corrupt data - Replacement hard drive required.”  The second Job Sheet showed that a further visit had been made on 3 May 2007 and the engineer had attended from 08.00 hours and departed at 14.00 hours. It recorded that the engineer had “installed replacement hard disk in data server – tested OK – restored customer data from backup tape dated 24/4/07”. 

11.	We accept the oral evidence of Mr Rogers that, because of the breakdown of the computer on 26 April 2007, the Appellant did not know how much tax was owed and that the breakdown of the computer also caused other problems for the Appellant because it also affected all the payroll calculations. At the hearing Mr Rogers also produced evidence that the Appellant had the funds to pay the tax by the due date. Mr Rogers told us that the returns and tax for the accounting periods ending on 30 June 2007 and 30 September 2007 had been sent in time. 

The arguments
12.	For the Appellant Mr Rogers argued that the computer breakdown was a reasonable excuse for the delay. He was not relying on a third party. For Customs Mrs Orimoloye argued that the Appellant had previously contacted Customs if there was to be a delay and it was not understood why he had not contacted Customs this time. If the Appellant had contacted Customs on 26 April 2007, he could have been advised to pay the tax by electronic transfer the same day in which case the payment would have arrived on time. Alternatively, even if the actual figures for the return had not been available, the Appellant could have sent a return with estimated figures. In reply Mr Rogers argued that he had not contacted Customs at the end of April 2007 because he had contacted Customs on previous occasions of delay but the only advice they had given him was to pay the tax on time. As the Appellant had always paid its tax by cheque he was not then aware of the possibility of payment by BACS or CHAPS although he was aware of that now. Also, he had not then been aware that he could have sent an estimated amount of tax but, in any event, it would not have been possible to make an estimate. He had since taken action to ensure that the same situation did not happen again.

Reasons for decision
13.	On balance we are satisfied that the Appellant did have a reasonable excuse for the late rendering of the return and the tax which was due on 30 April 2007.The breakdown of the computer was an unforeseeable and inescapable misfortune which deprived the Appellant of the information to complete the return. Even the exercise of reasonable foresight and due diligence and a proper regard for the fact that the tax was due on 30 April 2007 would not have avoided the problem which led to the default. The Appellant did all it could to overcome the problem and sent the return and tax as soon as it was possible to do so. 

14.	Initially we were puzzled why the Appellant had not explained the position fully to Customs when writing on 9 July 2007 but accept the oral evidence of Mr Rogers that he did not know the full facts at that time. We also accept that at the end of April 2007 Mr Rogers was not aware of the advantages of electronic payments. We also accept that it was not feasible to estimate the amount of tax due even if Mr Rogers had known about the possibility of an estimated return.    	
   
Decision     
15.	Our decision is that the Appellant did have a reasonable excuse for the delay in sending the return and paying the tax for the accounting period ending on 30 March  2007. 

16.	That means that the appeal is allowed. 

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 25 January 2008

LON/2007/1480
24.01.08