Case: VAT surcharge failed
 UKFTT 0287
Judge Greg Sinfield, Mrs Janet Wilkins.
Decision released on 1 May 2019.
Value added tax – Default surcharge – Late payment of VAT due to HMRC – Whether genuine, but mistaken, belief that direct debit in place was a reasonable excuse – Yes – Value Added Tax Act 1994 (VATA 1994), s. 59(7) – Company’s appeal allowed.
Norfolk Premier Coachworks Ltd  TC 07126
Norfolk Premier Coachworks Ltd (NPCL) appealed against a default surcharge under VATA 1994, s. 59 for accounting period 12/17 at 15%.There was:
(1)a seven-day extension for persons paying the VAT declared on a return by Direct Debit, unless that day was a bank holiday or weekend when the payment must be made by the previous working day; and
(2)a ten-day extension for persons submitting the return online and using the Online VAT Direct Debit.
Generally, NPCL paid VAT electronically to HMRC. Some amounts were paid weekly by the National Direct Debit Service/System (NDDS), which is a direct debit system used for specified agreed amounts and dates.
In October 2016, a customer of NPCL became insolvent leaving the company with a bad debt that of £160,000. That caused significant cash-flow problems. There had been various time-to-pay arrangements with HMRC and other creditors. Mr Steward, a director of NPCL, had believed that the payment for period 12/17 would be made on time by Direct Debit. When he discovered that it had not been, he took steps to pay the VAT due as soon as possible.
NPCL accepted that it had failed to pay VAT by the due date. The only issue was whether NPCL had a reasonable excuse for paying the VAT due for period 12/17 two days late.
NPCL appeal stated:
“We had a dreadful 12 months trading during 2017 due to a very large debt. As a consequence, we have had to enter into arrangements with HMRC and other creditors to survive. We have not missed one payment on any of these.
When it came to the return in question, we contacted HMRC to see whether we could make 2 payments instead of one as we did not have sufficient funds to meet the whole liability. We were told ‘no’, so we moved heaven and earth to get funds together to meet payment. I even borrowed personally £8000, as evidenced by our bank statements to ensure funds were there on the 7th February 2018. When the monies were not collected, I telephoned HMRC on the 9th Feb and made a VISA payment for the full amount. The only thing we got wrong was that we were unaware that an effective [Direct Debit Mandate] was not in force.
To be charged 15% of the liability as a fine seem so incredibly harsh when we had made attempts to keep everyone informed and remained proactive after the due date. We do take our HMRC liabilities seriously.”
HMRC argued that the NDDS is materially different to the Direct Debit. The NDDS is a different form of direct debit, which is initiated by the taxpayer to pay a specified amount on a given date following a time-to-pay agreement with HMRC. However, the Direct Debit specifies neither the amount payable nor the date for payment, but it enables HMRC to collect VAT due. HMRC’s statement of case said:
“This could potentially [be] where confusion has arisen on the part of the Appellant where they believed that a [Direct Debit Mandate] was still in place. However genuine mistakes, honesty and acting in good faith are not usually considered reasonable excuses for surcharge purposes, unless it can be shown that in the particular circumstances concerned, the actions of the trader were reasonable.”
HMRC argued that the actions of the taxpayer should be considered from the perspective of a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the law. Whether there is a reasonable excuse depends on the particular circumstances in which the failure occurred and the particular circumstances and abilities of the person who failed to file the return on time. The test is to determine what a reasonable taxpayer, in the position of the actual taxpayer, would have done in those circumstances and, by reference to that test, to determine whether the conduct of the taxpayer can be regarded as conforming to that standard.
The FTT accepted that the director genuinely believed that the VAT due for period 12/17 would be taken from NPCL’s bank account by Direct Debit on 7 February 2018. The FTT accepted the evidence that the directors of NPCL borrowed money personally to ensure that there were funds to pay HMRC. The directors would not then deliberately leave that money sitting in the account. Indeed, the FTT did not think that HMRC had suggested that the director did not genuinely believe that NPCL had a Direct Debit in place.
It was understandable that the director failed to appreciate the distinction between a Direct Debit and the NDDS. Indeed, the author of HMRC’s statement of case recognised that as a potential source of confusion. The FTT was not referred to any published guidance that stated that the NDDS was used only to make payments of specified amounts on specified dates. Indeed, the distinction is blurred in HMRC’s own guidance. In the Direct Debits FAQs section on HMRC’s website, it states:
“Is Direct Debit payment the same as National Direct Debit Service/System (NDDS)?
Yes, this is the same service.”
The confusion means that, even if the director had been aware of the letters in February 2017 stating that NPCL’s Direct Debit had been cancelled, he might reasonably have believed that it had been reinstated because the company continued to make payments by the NDDS after that date. The FTT accepted that the director did not know about the letters cancelling the Direct Debit.
Thus, NPCL’s appeal was allowed and the default surcharge for period 12/17 was discharged.
To be a reasonable excuse, the excuse must not only be genuine, but also objectively reasonable when the circumstances and attributes of the taxpayer are considered. HMRC argued that a mistaken belief is not a reasonable excuse. However, the FTT disagreed, as a mistaken belief can be a reasonable excuse if the belief was objectively reasonable.
For commentary on the default surcharge, see In-Depth at ¶60-455.