20006

DEFAULT SURCHARGE – Electronic payment – Instruction to bank by home computer on Friday evening – Transfer by BACS started Monday – Customs credited at Bank of England Wednesday – Due date under extension Tuesday – VAT Regs 1995 reg 40(3) – Notice 700 para 21.3.1 – Payment late – On facts no reasonable excuse – Appeal dismissed

LONDON TRIBUNAL CENTRE

	NICHOLAS ANTHONY NEWMAN and	           Appellants
FIONA ANNE FARNWORTH NEWMAN

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	THEODORE WALLACE (Chairman)
						MRS R S JOHNSON

Sitting in public in London on 8 November 2006

Mrs Newman appeared in person for the Appellant partners

Jonathan Holl, senior officer, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This was an appeal against a default surcharge of £489.92 for the period ending 31 January 2006.  

2.	Customs recorded the payment of the VAT as received by bank giro on 8 March 2006 which is the day after the seven day extension allowed for electronic payments under paragraph 21.3.1 of Notice 700.  The seven day extension in Notice 700 took effect under regulation 40(3) of the VAT Regulations 1995, under which the requirement to make a return and pay the tax by the last day on which the return is due “shall not apply where the Commissioners allow or direct otherwise.”.

3.	Paragraph 21.3.1 provides (so far as relevant) as follows,

“If you choose to pay the VAT shown as due on your return by Bankers Automated Clearing System (BACS), Bank Giro Credit Transfer or Clearing House Automated Payment System (CHAPS), you may receive up to 7 extra calendar days for the return and payment to reach us.  Here are some important facts you need to know if you want to benefit from this concession – 

–	The day extension to the due date will applied automatically every time you pay your Vat return using BACS Direct Credit or Bank Giro Credit Transfer …
–	Payment must be in our bank account on or before the 7th calendar day.  If the 7th day falls on a weekend, we must receive payment by the Friday …
…

If you want to pay by Bank Giro you will need a book of paying-in slips and counterfoils.

If you pay by BACS … your bank will need to quote your VAT registration number as your reference number and make payments to – Bank of England …”

4.	Mrs Newman gave evidence and was cross-examined. Customs produced a bundle of documents.  We find the following facts.

5.	The Appellants trade in partnership.  Mr Newman is a cartoonist and comedy writer doing work for a number of clients including a national newspaper.  Mrs Newman carries out the administration.  This includes the collection of material for VAT returns.  She sends the material to their bookkeeper who is an accountant.  The bookkeeper collects the information and faxes the figures to be entered on the return to Mrs Newman.  She pays the tax and renders the return.

6.	The Appellants have three children of school age, the oldest being 18.  One of their children was ill for most of January with a high temperature and a stomach infection. At one time in January the entire family was ill in bed with the illness which the doctor said was a virus. Various members of the family were ill until well into February. By late February when the health problems had cleared up, Mrs Newman was very behind with everything including her university studies for an MSc.

7.	Earlier in the week ending 4 March she sent the material for the return to the bookkeeper.  Most of the paperwork related to outputs on which the VAT was £9,995.80.  It appears that the Appellants used Cash Accounting although this is not entirely clear.  She listed the outputs on a page and a half.  Inputs were comparatively small, the input VAT being £197.22 although Mrs Newman had not totalled inputs up.

8.	The Appellants had received a surcharge liability extension notice dated 17 June 2005 warning of a 5 per cent surcharge in the event of a default for any period up to 04/06. The two earlier defaults were for 04/04 when payment was recorded as received on 9 June 2004 and 04/05 when the payment was recorded as received on 10 June 2005. The payments for 07/05 and 10/05 were by electronic transfer and were on time..

9.	Around 2.00pm on the afternoon of Friday, 3 March 2006, Mrs Newman, who had not received the figures for the return from her accountant, telephoned the National Advice Centre. She was transferred to different officers including one at Newcastle.  One of the officers told her that it was necessary to ask in advance for permission to make an estimated return. She was then transferred to Mrs Shanahan, at Cardiff, who made notes of the enquiry on her computer. In a witness statement, which Mrs Newman agreed should be read, Mrs Shanahan stated that she told Mrs Newman that an estimated return would be accepted. The computer notes said, 

“This must be as accurate as possible.  Advised caller that she will need then to work out the correct figures a.s.a.p, and if the amount of the difference is under 2000, this can be adjusted on the return form and detailed records kept.”  

She recorded Mrs Newman as saying that she would do this and make an electronic payment.  She advised Mrs Newman that she may need to allow 3-4 working days for the transfer, that she may need to check with her bank and that the electronic payment must be received by Tuesday 7 March.

10.	Mrs Newman told us that the officer told her that she could make a same day transfer.

11.	Mrs Newman told us at first that she was told that the estimate must be accurate and that the payment must be accompanied by the return form.  She said that because of this she did not make an immediate payment that afternoon because she was not able to make an estimate to put on the form.  We are satisfied that she must have misunderstood what she was told since an electronic payment cannot be accompanied by the return form.  It is unfortunate that the officer did not make it clear that a surcharge would only be levied on the VAT not paid by the due date so that if she made a payment of £8,000 or £9,000 any penalty would be small.

12.	Following the conversations with Customs, Mrs Newman did not make a payment that afternoon.  However later that evening she received the figures from the accountant, entered them on the return and immediately went onto her computer and instructed her bank, Abbey, to make a payment to the account of Customs at the Bank of England.  This was about 8 or 9.00pm.  A summary statement from the bank showed  “04 Mar 066 Payment no. 06 to HM CUSTOMS EXCISE 9,798.58” leaving a credit balance of £3,490.98.  The balance at the bank was thus more than adequate to cover the payment.  4 March was a Saturday.  Retail branches of Abbey are open on Saturdays.

13.	An interrogation report produced by Mr Holl showed the return form as received by Customs on 6 March, the Monday, but recorded a credit of £9,798.58 with the description “BANK GIRO” and the date of receipt as 8 March, the Wednesday. This information had been keyed in to Customs’ computer on 9 and 10 March and is not primary evidence.  The VAT return was stamped as received on 6 March which was the Monday.

14.	Mrs Newman told us that she did not make a same day transfer because on a previous occasion she had been assured by her bank that payment would be immediate whereas it had not been immediate in fact; she gave the computer instruction on Friday evening because she did not want the money to be sitting in her account all the weekend.  She agreed with Mr Holl that she would expect the transfer to take some time to reach Customs, perhaps three days.

15,	Since there was no direct evidence as to the date when the payment was received by Customs, whose bank is the Bank of England, and the mechanics of transfer by the Appellant were unclear having been activated by home computer, we directed that both parties were at liberty to serve further evidence (a) as to the method and time the payment was transmitted or the funds were transferred by Abbey on behalf of the Appellant including whether settlement was multilateral or bilateral and (b) the time and method by which the payment was received by the Bank of England on behalf of Customs, which evidence could take the form of letters or witness statements from the respective banks.

16.	The Appellant sent an e-mail on 4 January 2007, which was outside the time limit, however we decided to admit it.  Customs submitted no further evidence.

17.	The Appellant’s e-mail was not a letter from the bank but rather her account of conversations with her bank.  It does however clarify matters.

18.	The e-mail stated that the banking information on her electronic account says that four working days should be allowed for payments to be received.  It stated this,

“However, the E-banking department at the Abbey told me that if an electronic payment was made late in the evening on Friday 3rd March and shows up on my statement as having left my account on Saturday 4th March, this means that the money did leave my account on that day, and not on the Monday,.  They also told me that when the money leaves an account in this way on one day, it then goes into the BACs system the next day – in this case on Monday 6th, the next working day.  The money would then have gone into the nominated account on Tuesday 7th and would have been available on Wednesday 8th March.”

19.	It is apparent from this that the payment was transmitted by BACS which involves multi-lateral settlement.  We do not understand why the receipt was recorded by Customs as “Bank Giro” when it was a multi-lateral BACS settlement.  Paragraph 21.3.1 points to the need for a book of paying-in slips for a Bank Giro payment.  The use of a paying-in slip is not consistent with the transfer being initiated by the Appellant’s computer.  The paper-based credit transfer system used for bank giro credits involves a wholly different credit clearing system from the electronic  clearing system operated by BACS, see Chitty on Contracts 29th edition (2004) at paragraph 34-380.  If the payment had been by Bank Giro then the three day BACS cycle which we describe below would not have been relevant.

20.	The Tribunal decision in Whitport Plc c Customs and Excise Commissioners (1996) Decision No.14337 on which Mr Holl relied is of no assistance in the present case since it concerned a payment by credit transfer rather than by BACS.  We also note that it concerned the clearing procedure over 10 years ago.  In an era of rapid technological change it is not clear that the procedure is the same.

21.	The BACS payment cycle is described at paragraphs 17.74-80 of Paget’s Law of Banking, 12th edition (2002).  The cycle takes three working days.  Input data must be received by BACS by 9.00pm on day one in respect of payments due on day three.  The data is processed overnight and credit and debit instructions are produced for each member bank; those include Abbey National plc and Bank of England.  On day two the member banks process the data received from BACS and ensure that credit and debits are made to customers’ accounts by the opening of business at 9.30am on day three.  Payment by the customer is complete at this time.  Once the inter-bank clearing is complete, settlement of the overall credit and debit positions of BACS members is carried out across the accounts of the banks at the Bank of England.

22.	The payment cycle is complicated in a case such as this because the recipient, Customs, uses the Bank of England as its banker. Bank of England therefore has two distinct functions : first it is the Central Bank and is in effect the banker for Abbey National; secondly, it is the bank for Customs just as Abbey National is for the Appellant.

23.	On the basis of the Appellant’s E-mail of 4 January, it appears clear that in this case day one of the BACS cycle was on Monday 6th March, day two was the Tuesday and day three was the Wednesday.  This is consistent with the interrogation report (see paragraph 13 above).  It follows that on the balance of probabilities the payment was not received by the Tuesday.

24.	The next question is whether, notwithstanding that the payment was received late, it was despatched at such a time and in such a manner that it was reasonable to expect that it would be received within the appropriate time, see section 59(7)(a) of the VAT Act 1994.

25.	Using electronic payment as opposed to cheque, the actual despatch of the payment was by the bank.  The Appellant gave instructions to Abbey National by computer, which Abbey National implemented.  Implementation on behalf of the Appellant was on the Monday using BACS.  Given the BACS cycle, it was not reasonable to expect the payment to be received on the Tuesday.  The Appellant did not suggest that it was.

26.	Mrs Newman submitted that she was being penalised because she was given misleading advice on the telephone as to the need to send the return form containing an accurate estimate and because of that she did not make an estimated payment on the Friday afternoon. We have already concluded that she must have misunderstood what she was told. She has however not satisfied us that she was misled by Mrs Shanahan. Having accepted the witness statement of Mrs Shanahan, we do not consider that it is legitimate to suggest in Mrs Shanahan’s absence that she was misled by her. The most that she could have expected was that Mrs Shanahan might have told her that any payment by BACS must be made that afternoon, however it appears from Mrs Shanahan’s note that she did say that she may need to allow 3 to 4 days.  We do not accept that the Appellant was misled so as to give rise to a reasonable excuse.

27.	Although Mrs Newman clearly had a very difficult time in January and February due to family illness she did not rely on this as giving a reasonable excuse.  The return was relatively simple and the bookkeeper had the figures some days earlier. Unknown to Mrs Newman the bookkeeper was away in the Lake District on work. Mrs Newman wrote to the appeals team on 28 April 2006 that she was told that he would be back within 24 hours but that having sent her paperwork she found that he had been detained away from home.  She did not enlarge on this in evidence and Mrs Shanahan’s note makes no mention of being told that the bookkeeper was away having been detained.

28.	The fact that she relied on the bookkeeper to produce the figures is not a reasonable excuse nor is a delay by him because of section 71(1)(b).  If he was unavoidably detained through no fault of his own that might constitute a reasonable excuse.  However there was no evidence as to this.  We assume that all that happened was that the other work took longer than expected.

29.	The question arises whether the combination of family illness in January and February, the fact that the bookkeeper was away for longer than expected and Mrs Newman’s misunderstanding of the requirements for an estimated return gave rise to a reasonable excuse. The fact of her telephone call to Customs on 4 March and the computer instruction that evening show that she was alive to her responsibilities.  However the return was relatively simple and she could either have paid a sum on the Friday afternoon or paid by CHAPS on the Monday.  While we have some sympathy with Mrs Newman’s problems at the relevant time, we are not satisfied that there was a reasonable excuse.  The appeal is dismissed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 7 February 2007

LON/06/840