Lime and Ginger Location Solution Limited v The Commissioners for HMRC [2025] UKFTT 329 (TC)

[2025] UKFTT 00329 (TC)Case No TC09457
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 6 December 2024Date Judgment date: 13 March 2025
Sitting in public in Taylor House, London
Appeal reference: TC/2023/08812
VALUE ADDED TAX – Late payment surcharges – Submission of no case to answer – Reasonable excuse
Before
TRIBUNAL JUDGE MALCOLM FROSTJOHN WOODMAN
Between
LIME AND GINGER LOCATION SOLUTION LIMITEDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentAndrew Young, of counsel, instructed by Lexlaw Solicitors for AppellantAmanda Baldwin, litigator, of HM Revenue and Customs’ Solicitor’s Office for RespondentsDECISION

Introduction

[1]This is an appeal against HMRC’s decision to issue a Value Added Tax (“VAT”) default surcharge under Section 59 VAT Act (“VATA”) 1994 for VAT periods ending 09/22 and 12/22.[2]HMRC also charged a Late Payment Penalty (“LPP”) for the period ending 03/23 but has since cancelled that penalty.[3]For the reasons set out below, we have dismissed the appeal in relation to 09/22 and allowed it in relation to 12/22.

Background

[4]The Appellant company is a business that offers mobile catering services to the film industry.[5]HMRC has imposed numerous default surcharges over two-year period. The first alleged period of default was the period ending 09/20, with almost all periods between that period and the periods under appeal being considered by HMRC to be in default. Surcharges have been issued for most of those periods.[6]The surcharges for the periods 09/22 and 12/22 are the subject of the present appeal. So far as we are aware, no appeal has ever been made in relation to the earlier surcharges.[7]We make more detailed findings about the various alleged defaults below.

Preliminary point

[8]On 7 November 2024 (a month before the hearing date) HMRC made an application for the admission of additional evidence.[9]The evidence was a report providing data from HMRC’s third party supplier of printing and postal services. The report was intended to evidence that the various notices required as a part of the default surcharge regime were printed and despatched as alleged by HMRC.[10]HMRC explained that the report was served later than desired because the relevant provider had become insolvent so that it was no longer providing reports. HMRC had received a data dump from the provider and processed it in order to produce the report.[11]The Appellant objected to the notice on the basis that:(1) HMRC ought to have served the report sooner;(2) No witness statement was provided and so there was no basis upon which to test the validity of the report[12]We indicated that we would admit the report and provide written reasons in our decision, which we do here.[13]HMRC’s explanation for the late service, although compelling, is not supported by a witness statement. Strictly speaking advocates should not give evidence. Therefore, in order to be conspicuously fair to the Appellant we disregard the explanation.[14]However, the report is short (3 pages) and simply provides key pieces of information in relation to each notice (for example the date of despatch and the postcode to which it was sent). It was provided a month prior to the hearing, which is ample time for the Appellant to consider the information and decide if it disagrees with any of it, or needs to carry out any further investigation, or adduce evidence in reply.[15]Mr Young, for the Appellant, did not indicate that any further time was needed to consider the report, nor that any other prejudice was suffered by the relatively late service.[16]In terms of the lack of accompanying witness statement, it is common practice in this Tribunal for documents to be included in a bundle to go before the Tribunal without a witness statement to support their provenance. This does not prevent a party from calling into question the validity of evidence by making submissions inviting the Tribunal to give evidence reduced or no weight, or providing independent evidence in rebuttal.[17]As such, the absence of a witness statement is no bar to our admitting the report and we will take on board any submissions that may be made as to the weight to be given to it in due course. If the Appellant wished to seek an adjournment in order to provide witness or other evidence in response then we would hear such an application but in the event the Appellant did not wish to put forward any such evidence.[18]The prejudice to HMRC of excluding the evidence would be to deprive them of clear evidence of key aspects of their case.[19]The prejudice to the Appellant of late admission appears to be nonexistent. Of course, if the evidence were not admitted at all, this would be helpful to the Appellant but it is the lateness of the admission we are concerned with. We do not consider that it is arguable that the report ought not have been admitted if it were provided within the case management timetable.[20]It is therefore consistent with the overriding objective to deal with cases fairly and justly that the report be admitted and we allow HMRC’s application.

The legislation

[21]The law on the default surcharge is primarily set out in s. 59 VATA.[22]Section 59(1) provides for the basic concept of a default: “(1) ...if, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period –(a) The commissioners have not received that return, or(b) The commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period, then that person shall be regarded for the purposes of this section as being in default in respect of that period.” (a) The commissioners have not received that return, or (b) The commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period,[23]The existence of a default gives rise to power for HMRC to issue a surcharge liability notice to a taxpayer. The effect of the notice is to give rise to a surcharge period. The surcharge period can be extended as a result of further defaults and the issue of extension notices by HMRC. This is provided for in ss s 59(2) and (3) VATA, as follows: “(2) Subject to subsections (9) and (10) below, subsection (4) below applies in any case where-(a) a taxable person is in default in respect of a prescribed accounting period; and(b) the Commissioners serve notice on the taxable person (a “surcharge liability notice") specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice. (3) If a surcharge liability notice is served by reason of a default in respect of a prescribed accounting period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for 1he purposes of this section, that existing period and its extension shall be regarded as a single surcharge period. “ (a) a taxable person is in default in respect of a prescribed accounting period; and (b) the Commissioners serve notice on the taxable person (a “surcharge liability notice") specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.[24]Any defaults within the surcharge period result in the taxpayer being liable to surcharges of a percentage of the outstanding VAT for the prescribed accounting period. The surcharge and percentages are provided for in ss 59(4) - (6) VATA: “(4) Subject to subsections (7) to (10) below, if a taxable person on whom a surcharge liability notice has been served—(a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and(b) has outstanding VAT for that prescribed accounting period, he shall be liable to a surcharge equal to whichever is the greater of the following, namely, the specified percentage of his outstanding VAT for that prescribed accounting period and £30. (5) Subject to subsections (7) to (10) below, the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT, so that— (a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent; (b) in relation to the second such period, the specified percentage is 5 per cent;(c) in relation to the third such period, the specified percentage is 10 per cent; and(d) in relation to each such period after the third, the specified percentage is 15 per cent. (6) For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference in subsection (4) above to a person's outstanding VAT for a prescribed accounting period is to so much of the VAT for which he is so liable as has not been paid by that day.” (a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and (b) has outstanding VAT for that prescribed accounting period, (a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent; (b) in relation to the second such period, the specified percentage is 5 per cent; (c) in relation to the third such period, the specified percentage is 10 per cent; and (d) in relation to each such period after the third, the specified percentage is 15 per cent.[25]Section 59(7) VATA provides for a reasonable excuse defence: “(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge—(a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or(b) there is a reasonable excuse for the return or VAT not having been so despatched, he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served). “ (a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or (b) there is a reasonable excuse for the return or VAT not having been so despatched,[26]Section 71 VATA 1994 specifies two situations that are not capable of constituting a reasonable excuse, as set out below. “71 Construction of section 59 to 70 (1) For the purpose of any provision of section 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 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.” (a) An insufficiency of funds to pay any VAT due is not a reasonable excuse; and (b) 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.”

Submission of no case to answer

[27]The hearing proceeded by HMRC first presenting their case. Ms Baldwin took us through her skeleton argument, which cross-referred to the relevant documents in the bundle in order to provide evidence to support the points being made.[28]After HMRC had presented their case, Mr Young sought to make a submission of no case to answer.[29]Such submissions are common in criminal proceedings, relatively rare in civil court proceedings and almost unheard of in tax tribunal matters.[30]My Young argued that the surcharges were criminal in nature within the meaning of Article 6 of the European Convention on Human Rights, relying on Janosevic v Sweden and Vastberga Taxi Aktiebolag (application 34619/97) and Han & Yau Martins & Martins Morris v Commissioners of Customs and Excise [2001] EWCA Civ 1048. As such, Mr Young argued, the Appellant ought to be able to rely on the presumption of innocence and submit that HMRC had not established an arguable case. Mr Young accepted that the standard of proof remained the ordinary civil standard of the balance of probabilities.[31]The substance of Mr Young’s submission was simply that HMRC had not discharged the burden of proof placed upon them.[32]At the hearing, we indicated we considered that there was a case to answer and that we would provide written reasons in our decision. We now provide those reasons.[33]Mr Young is correct that the surcharges are criminal within the meaning of the convention. However, no submissions were made before us as to how this impacts the procedure to be followed by the Tribunal.[34]In criminal proceedings, the test when applying a submission of no case to answer is that set out in R v Galbraith 73 CrAppR 124. It can be shortly summarised as considering whether the prosecution evidence, taken at its highest, is such that a jury properly directed could not properly convict upon it.[35]In ordinary civil litigation, when a defendant wishes to submit, following the completion of the claimant’s case, that there is no case to answer, the defendant is usually required to elect to call no evidence. The judge will then decide the case to the normal civil standard based on the evidence put forward (see Miller (t/a Waterloo Plant) v Cawley [2002] EWCA Civ 1100).[36]If a judge decides not to put a defendant to their election there is a need for considerable caution as the judge then has to put their mind to the facts of only one side of the case (Boyce v. Wyatt Engineering [2001] EWCA Civ 692). The Court of Appeal in Alexander v Rayson [1936] 1 KB 169 made the general observation (at 178) that it is not right that the judge of fact should be asked to express any opinion upon the evidence until it is completed.[37]The determination by a judge of fact of a submission of no case to answer without putting the defendant to any election to call no evidence has been likened to the determination of a pre-trial application under CPR Part 24.2 on the basis that the claimant has no real prospect of success (Bentley v Jones Harris & Co [2001] EWCA Civ 1724, per Latham LJ at para. 75)[38]In our view, in order to reflect the criminal nature of the penalty, we ought to adopt a process that is consistent with the approach taken in criminal courts following Galbraith, but adapted to come within the structure of the rules of this Tribunal.[39]Therefore, in order to give the Appellant the benefit of the presumption of innocence, we consider that we ought not to put the Appellant to an election as to whether to give evidence.[40]By analogy with the approach taken in Galbraith, we consider the submission by applying the test that is to be applied when deciding whether or not to strike out a party’s case under rule 8 of the Tribunal Rules. This test is whether or not there is a reasonable prospect of HMRC’s case succeeding.[41]In applying this test, as in a Galbraith submission, we take HMRC’s case at its highest.[42]The question to be answered is whether or not HMRC have, taking the evidence put forward at its highest, established that the default surcharges fall due.[43]We answered this question in the affirmative at the hearing. The reason for this is that HMRC had taken us through the basic facts of each default (the due dates for return and payment, the actual dates of returns and payment, along with the issue of the relevant surcharges). In the case of each fact put forward by HMRC, this was supported by reference to the appropriate item of evidence within the bundle of documents put before us. In taking this evidence at its highest, we need not consider whether the weight to be given to any such evidence might be diminished by any rebuttal evidence to be put forward on behalf of the Appellant.[44]We therefore had no doubt that HMRC had established that they had a case with a reasonable prospect of success.[45]The submission of no case to answer was therefore dismissed.

Findings of fact

[46]Following the unsuccessful submission of no case to answer, Mr Young called Mr Jan Zivny, director of the Appellant company. Mr Zivny gave evidence and was cross examined.[47]We are grateful for Mr Zivny’s clear evidence and desire to ensure the Tribunal had the full factual picture. Mr Zivny has clearly had to work very hard in trying circumstances in order to maintain his business through the COVID-19 pandemic.[48]The documents to which we were referred were a hearing bundle of 1208 pages, along with the report described in the preliminary issue above.[49]Mr Young appeared at some points to suggest that the evidence in the bundle was not to be properly considered to be evidence, perhaps because it was not directly supported by a witness statement. For the avoidance of doubt, we consider that such an argument has no merit.[50]This Tribunal has a very wide discretion to admit evidence pursuant to rule 15 and it is the well-established practice in matters before this Tribunal not to require all documents to be exhibited to a witness statement. It is of course open to the Appellant to invite the Tribunal to draw any inferences from the form of the evidence they consider appropriate. However, following an unsuccessful submission of no case to answer the Appellant did not raise any factual dispute as to the various due dates, payment dates, and issue of notices.[51]From the totality of the evidence put before us, we find the following facts[52]The Appellant company is a business that offers mobile catering services to the film industry. However, when the COVID-19 pandemic hit, filming activities came to a stop. The company placed a number of employees on the furlough scheme between April 2020 and August 2020. The company was unable to retain its staff and suffered significant reductions in business.[53]It is against this background that the first default period arose.[54]Period 09/20 covered the time period of 01 July 2020 – 30 September 2020. The due date for the VAT return and payment was 07 November 2020. The return was received on 07 November 2020 The VAT was paid to HMRC on 21 November 2020 by Faster Payment Service (“FPS”). The return was therefore on time but the payment was late. HMRC issued the Appellant with a Surcharge Liability Notice (“SLN”).[55]As the film industry began to resume its activities in early 2021, the company had a complete reversal of fortune. The industry recovered rapidly, with a sudden surge in demand and operational intensity.[56]Mr Zivny and the company were able to meet the resurgence in demand and generate very significant revenues. However, this came at the cost of considerable personal strain on Mr Zivny. Because of the loss of staff, Mr Zivny had to perform many roles himself, whilst at the same time identifying and training new staff.[57]Mr Zivny described the work as a ‘mixture of gastronomy and logistics’. He told us that a truck may have to arrive at a remote filming location and produce four to five hundred meals. He explained that it took two to three years to rebuild his teams and stabilise operations. Despite these challenges the business did very well, with significant revenues and amounts of VAT being collected.[58]We can readily accept (and find) that Mr Zivny was working extremely long hours in order to deal with the surge in available work and generate the revenues. This resulted in the considerable strain on Mr Zivny that played a part in VAT compliance falling behind.[59]The VAT compliance history in that period is consistent with the picture painted by Mr Zivny.[60]Period 03/21 covered the time period of 01 January 2021 – 31 March 2021. The due date for the VAT return and payment was 07 May 2021. The return was received on 19 May 2021. The VAT of £67,609.55 was paid to HMRC on 19 August 2021 by FPS. The return and payment were therefore both late. HMRC issued the Appellant with a Surcharge Liability Notice of Extension (“SLNE”) notifying the Appellant that the surcharge period was extended until 31 March 2022.[61]Period 06/21 covered the time period of 01 April 2021 – 30 June 2021. The due date for the VAT return and payment was 07 August 2021. The return was received on 08 February 2022. The VAT of £37,193 was paid to HMRC on 19 August 2021 by FPS. The return and payment were therefore both late. HMRC issued the Appellant with an SLNE notifying the Appellant that the surcharge period was extended until 30 June 2022.[62]Period 09/21 covered the time period of 01 July 2021 – 30 September 2021. The due date for the VAT return and payment was 07 November 2021. The return was received on 09 February 2022. The amount outstanding at the due date for 09/21 was £33,206.67. HMRC issued the Appellant with an SLNE notifying the Appellant that the surcharge period was extended until 30 September 2022.[63]Period 12/21 covered the time period of 01 October 2021 – 31 December 2021. The due date for the VAT return and payment was 07 February 2022. The return was received on 25 May 2022. The entire VAT sum due of £21,042.08 was outstanding on the due date. HMRC issued the Appellant with an SLNE notifying the Appellant that the surcharge period was extended until 31 December 2022.[64]Period 03/22 covered the time period of 01 January 2022 – 31 March 2022. The due date for the VAT return and payment was 07 May 2022. The return was received on 29 July 2022. However, no default surcharge notice (or extension) was issued by HMRC[65]Period 06/22 covered the time period of 01 April 2022 – 30 June 2022. The due date for the VAT return and payment was 07 August 2022. The return was received on 29 September 2022. The entire sum due of £38,170.65 was outstanding on the due date. HMRC issued the Appellant with an SLNE notifying the Appellant that the surcharge period was extended until 31 December 2022.[66]Period 09/22 covered the time period of 01 July 2022 – 30 September 2022. The due date for the VAT return and payment was 07 November 2022. The return was received on 05 November 2022. The VAT due was £146,389.94. On 07 December 2022, the Appellant paid two separate payments of £50,000.00 by FPS. On 08 December 2022, the Appellant paid £49,000 of which £46,389.94 was allocated to 09/22. HMRC assessed a surcharge of £21,985.49, being 15% of the tax outstanding at the due date. HMRC issued the Appellant with an SLNE notifying the Appellant that the surcharge period was extended until 30 September 2023.[67]Period 12/22 covered the time period of 01 October 2022 – 31 December 2022. The due date for the VAT return and payment was 07 February 2023. The return was received on 07 February 2023. The VAT due was £244,042.21. The VAT was paid to HMRC on 08 February 2023 by Clearing House Automatic Payment System (“CHAPS”). HMRC assessed a surcharge of £36,606.33 being 15% of the tax outstanding at the due date.[68]On 14 April 2023, the Appellant requested a review of the decision to issue the surcharges for the VAT periods 09/22 and 12/22.[69]On 31 May 2023, HMRC issued a review conclusion letter. The outcome of that review was to uphold the surcharges.[70]On 30 June 2023, the Appellant submitted a Notice of Appeal against the surcharges.

The issues

[71]The issues put forward by the parties as matters to be determined by this Tribunal are:(1) Whether the default surcharges charged to the Appellant for the VAT periods ending 09/22 and 12/22 were correctly issued(2) Whether the Appellant has a reasonable excuse for the defaults under appeal.(3) Whether the decisions to impose surcharges were proportionate.(4) Whether the Tribunal has jurisdiction to allow an appeal on the basis that the review decision was irrational.(5) Whether the Tribunal has a power to mitigate the surcharges.[72]We consider these issues in turn.

Whether surcharges were correctly issued

[73]It is common ground that the burden of proof lies on HMRC in respect of this issue.[74]In order for the surcharges to be correctly issued, the relevant provisions of s 59 VATA must be met. Pursuant to s. 59(4) VATA the Appellant must be:(1) a taxable person (this is common ground);(2) on whom a surcharge liability notice has been served;(3) in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice; and(4) have outstanding VAT for that prescribed accounting period.[75]The level of surcharge is then determined by the number of periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT.[76]In the present case, the surcharges imposed for both accounting periods under appeal were at the level of 15%. In order for HMRC to discharge the burden upon them, they must therefore demonstrate that the accounting periods under appeal fell after the third period of default.[77]If the Appellant were able to demonstrate a reasonable excuse for any of these earlier periods of default, the Appellant would not (pursuant to s. 59(7) VATA) be treated as being in default and the period would not count towards the periods of prior default which HMRC are obliged to demonstrate.[78]As can be seen from the facts we have found in this case, in both 09/22 and 12/22 the VAT had not been paid by the due date. We therefore conclude that the Appellant was in default for those periods.[79]Furthermore, and again following from our findings of fact, these defaults fell during a surcharge period (with the relevant notices being correctly served).[80]Finally, it follows from our findings of fact above that in relation to each of the periods of default under appeal that there had been (at least) three prior periods of default. No issue has been taken with any of the prior defaults. This means that the specified percentage at which the surcharge fell to be imposed was 15%.[81]As a result, we find that HMRC have discharged the burden upon them. The surcharges were correctly issued.

Reasonable excuse

[82]HMRC submitted, and we accept, that the proper approach to the question of reasonable excuse is that set out in Perrin v Revenue and Customs Commissioners [2018] UKUT 0156 (TCC) (“Perrin”), at [81]:
“81. When considering a "reasonable excuse" defence, therefore, in our view the FTT can usefully approach matters in the following way: (1) First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer's own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts). (2) Second, decide which of those facts are proven. (3) Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question "was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?" (4) [Not relevant to a VAT surcharge]”
[83]We consider the reasonable excuse position in relation to each period under appeal separately.

Period 09/22

[84]The reasonable excuse put forward by the Appellant can be summarised as follows:(1) The Appellant is in the business of providing mobile catering services to the film industry. As a consequence of the pandemic filming stopped. This caused the Appellant cash flow difficulties. As a consequence, the Appellant had difficulties in meeting its immediate financial obligations through no fault of its own.(2) As the business activity started to recover following the end of the pandemic, one of the Appellant’s two directors Jan Zivny was compelled to take on extra activities, e.g., driving the company’s vehicles whilst at the same time the Appellant’s other director Adrian Beschieru was unable to provide adequate support since he was in a state of exhaustion having been continuously treading water to keep the Appellant afloat.(3) As soon as the Appellant was able, the Appellant’s director Jan Zivny attempted to pay the return in full, albeit late. He discovered that the Appellant’s bank would not permit transfers of more than £50,000.00 per day and as a consequence paid the return in three instalments[85]In relation to this period, the due date for the VAT return and payment was 07 November 2022. The return was received prior to the deadline but no payment was attempted until 7 December 2022. The VAT due was £146,389.94. On 07 December 2022, the Appellant paid two separate payments of £50,000.00 by FPS. On 08 December 2022, the Appellant paid £49,000 of which £46,389.94 was allocated to 09/22.[86]In his evidence, Mr Zivny explained (and we find) that he had an administrator who had helped with tax compliance but that she had suffered from COVID-19 and was absent from the business for an extended period. In relation to the late payments, Mr Zivny told us (and we find) that his administrator had never had the power or ability to make payments of VAT and that he personally was the only person who was able to make the payments. Mr Zivny stated that this was because he wished to keep control of cashflow. He said that he wanted to keep finances private and not give others access to it.[87]Mr Zivny explained (and we accept) that when the two-metre social distancing rule that had been in place for much of the COVID-19 pandemic was lifted, people were pumping money into the film industry and “everyone started filming at the same time”.[88]In relation to his exhaustion, Mr Zivny explained (and we accept) that he was working fifty hours a week and was overwhelmed with work. He was short staffed and having to work 16-hour shifts doing driving and catering.[89]HMRC drew our attention to bank statements indicating that the balance on the Appellant’s business account on 4 November 2022 (the day before the VAT return for the relevant period was submitted) was £240,719.59. The Appellant made numerous payments out of the account on 07 November 2022 (the date the payment to HMRC was due) leaving a balance of £195,158.44 at the close of the day.[90]The VAT liability was £146,389.94.[91]We therefore find that the facts underpinning the first reasonable excuse put forward are not made out. The Appellant was not in a state of financial hardship that prevented it from paying the VAT due.[92]In relation to the argument that Mr Zivny was simply too exhausted to make VAT payments we find that the underlying facts are not made out. Although we accept that Mr Zivny was working extremely hard, Mr Zivny was able to make other significant payments and to carry on his business. We are not persuaded that he was physically or mentally unable to pay the VAT.[93]Furthermore, even if we were to accept that Mr Zivny was unable to pay the VAT, we do not consider this amounts to a reasonable excuse. It cannot be reasonable for a trader to rely on the fact that they have taken on a large amount of work as an excuse for not carrying out their tax compliance and payment processes. A trader is expected to make suitable arrangements to deal with all aspects of their business. If a trader does not have capacity to both accept additional work and make time to pay their taxes a reasonable trader would either make suitable arrangements to ensure their taxes are paid, or not accept the additional work.[94]The third point put forward above (daily payment limits) is not relevant to the question of whether the Appellant had a reasonable excuse for failing to make payment by the due date. This is an issue that may have delayed the payments once Mr Zivny attempted to make them, but the due date had already passed by this time.

Period 12/22

[95]In relation to this period, the due date for the VAT return and payment was 07 February 2023. The return was received on 07 February 2023. The VAT due was £244,042.21. The VAT was paid to HMRC on 08 February 2023 by CHAPS.[96]The excuse put forward is as follows:(1) The VAT was paid in full although 1 day late.(2) The primary issue arose from prolonged communication challenges between the Appellant’s main supplier and the Appellant’s accountants. Specifically, the documents received initially lacked essential accounting entries necessary for tax compliance. Consequently, there was a delay in initiating the processing of all accounting entries into the accountant’s software.(3) To illustrate the magnitude of the task, the file for the period 10-12/22 contained over 13 thousand items requiring manual processing. This substantial volume significantly extended the processing time, resulting in the VAT return being submitted on the afternoon of 07 February 2023. Mr Zivny was unable to make the full VAT payment on the day because bank’s branch was closed by that time.(4) Mr Zivny visited the bank the following day and paid the VAT in full.[97]Mr Zivny put forward the above matters in his evidence and was cross examined by HMRC. HMRC’s challenge essentially amounted to arguing that Mr Zivny (or his accountants) ought to have been able to deal with the situation sooner, or more quickly.[98]We accept Mr Zivny’s evidence on the point and find that the difficulties with processing the relevant information resulted in the VAT return being submitted after close of banking business on the due date. Furthermore, we find that Mr Zivny arranged for payment in full the next day.[99]In relation to the third limb of the Perrin test, HMRC submit that the matters do not amount to an objectively reasonable excuse. HMRC’s submission is (in essence) that the accountant ought to have been able to deal with the difficulty more rapidly by either approaching the problem differently, by beginning the manual processing work earlier, or by making arrangements with the bank to enable payment to be made more quickly once the manual work was complete.[100]We respectfully reject HMRC’s arguments on this point. The test to be applied is whether what the taxpayer actually did was objectively reasonable in the circumstances. HMRC may be correct to say that other courses of action may have resulted in no default occurring, but the existence of such alternatives does not render what the taxpayer did unreasonable.[101]The test does not seek to apply, with the benefit of hindsight, a requirement to have made the right choice at each stage. The question is whether the course of action chosen was reasonable.[102]We consider that the Appellant acted reasonably in trying to accommodate the data issue they encountered by undertaking a manual exercise. The approach resulted in the return being filed on time and the payment only being delayed until the next day. We consider that the relatively short delay caused by the approach chosen is a strong indicator that the approach was not unreasonable.[103]As a result, we find that there is a reasonable excuse for the default and so the surcharge in relation to this period (amounting to £36,606.33) must be cancelled.

Proportionality

[104]Mr Young put forward the argument on behalf of the Appellant that the surcharges were disproportionate.[105]Mr Young made it clear, that it was accepted that in HMRC v Trinity Mirror PLC [2015] UKUT 421 (TCC) it was held that the surcharge regime itself was a rational scheme. Instead, Mr Young suggests that it is the present application of the legislation that lacks proportionality.[106]In particular, Mr Young draws our attention to paragraph [70] of Trinity Mirror, in which the Upper Ttibunal (“UT”) (Rose J, Judge Roger Berner) considered that the gravity of the default must be assessed by reference to the relevant factors.[107]The test we are to apply is summarised in paragraph [63] of Trinity Mirror:
“The correct approach is to determine whether the penalty goes beyond what is strictly necessary for the objectives pursued by the default surcharge regime, as discussed in detail in Total Technology and whether the penalty is so disproportionate to the gravity of the infringement that it becomes an obstacle to the achievement of the underlying aim of the directive which, in this context, we have identified as that of fiscal neutrality.”
[108]Furthermore, we note that in paragraph [66] the UT said that a finding of disproportionality was likely to occur only in a wholly exceptional case.[109]Mr Young submits that the circumstances in the present case stem from the COVID-19 pandemic, which was wholly exceptional, and that those circumstances render the surcharges disproportionate.[110]We do not accept Mr Young’s submission on this point.[111]As a factual matter, the drop off in business caused by the COVID-19 pandemic had passed by the time of the defaults. The immediate background to the defaults was a sudden upturn in work due to the loosening of COVID restrictions.[112]Considering the proportionality of the 09/22 surcharge more generally, we note that this surcharge was imposed at the 15% level as a result of a background of repeated defaults. Indeed, the existence of a number of surcharges at the 15% level in periods prior to this period arguably demonstrates that the percentage was not sufficient to encourage the Appellant to comply with the regime.[113]Further, the amount of the surcharge, being £21,985.49 is not disproportionate to the level of turnover that the Appellant was generating from its activities. The COVID-19 pandemic was at this point not preventing the Appellant from generating the turnover that gave rise to the VAT liabilities, nor (as we have found) did it prevent Mr Zivny from making payments in a timely fashion.[114]Therefore, having regard to the need, in order to preserve the fiscal neutrality of the VAT system, to enforce prompt payment of VAT collected by a taxable person, the penalty cannot be regarded as so disproportionate to the gravity of the infringement as to constitute an obstacle to the underlying aim of the directive. Nor can the surcharge be regarded as disproportionate by reference to the European Convention on Human Rights. It has been arrived at by the application of a rational scheme that cannot be characterised as devoid of all reasonable foundation. The penalty cannot be regarded as plainly unfair.[115]We therefore dismiss Mr Young’s argument on this point.

Rationality

[116]Mr Young argues that this Tribunal has jurisdiction under s 84(10) VATA to allow the appeal on the basis that the review decision was Wednesbury unreasonable.[117]Section 84(10) VAT provides:
“Where an appeal is against an HMRC decision which depended upon a prior decision taken in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision.”
[118]We do not accept Mr Young’s submission. The present appeal is under s 83(q) VATA, which is an appeal against “the amount of any penalty, interest or surcharge”. The appeal is therefore against the amount of the penalty rather than an HMRC decision. Furthermore, any decision as to the amount of a surcharge does not depend on the nature of the subsequent review decision.[119]More generally, we do not agree with Mr Young that s 84(10) provides any basis for an Appellant to attack a decision by HMRC by raising public law questions as to the content of a subsequent review of that decision. Such a construction of the subsection goes against its plain words, which (on our reading) enable the Tribunal to look at relevant decisions prior to the decision immediately under appeal but have no forward-looking effect so as to enable consideration of a subsequent review.[120]In any event, we do not consider there is any realistic prospect of arguing that the relevant review decisions were irrational.

Mitigation

[121]Mr Young also argues that the power conferred on the Tribunal by s 70 VATA to mitigate penalties can be applied to the present surcharge.[122]The power under s 70 is expressly stated to apply to penalties under sections 60, 63, 64, 67, 69A and 69C. It does not apply to surcharges pursuant to s 59.[123]As a result, we reject the submission.[124]In any event, we do not consider there is any basis for the penalties to be mitigated.

Conclusion

[125]For the reasons set out above we:(1) Dismiss the appeal in relation to the surcharge imposed in respect of VAT period 09/22.(2) Allow the appeal in relation to the surcharge imposed in respect of VAT period 12/22. We consider that the Appellant has a reasonable excuse for the default. The surcharge is therefore cancelled.

Right to apply for permission to appeal

[126]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 13th MARCH 2025