The High Court allowed a taxpayer's appeal against the imposition of a surcharge for default in connection with a VAT return where, in the circumstances of the case, the taxpayer had a reasonable excuse for failing to despatch the sum shown to be due to Customs on the return.

Facts

The taxpayer was a company which carried on business in the wholesale supply of computer peripherals and other electronic products. At the relevant time it had a turnover of £79m and employed a financial controller, a management accountant and seven other staff in the accounting department. Two members of staff were involved in making the return, a part-qualified accountant and the financial controller. The former had primary responsibility for completing the details on the VAT return. She entered a figure of £2,213,095.70 in box 5 which was described as ‘Net VAT to be paid to Customs or reclaimed by you (Difference between boxes 3 and 4)’. But shortly after having done so, she realised that that sum should not have been despatched since the taxpayer had already made two payments on account in respect of that period, each in a sum slightly in excess of £246,308. Further she appreciated that the taxpayer believed it was entitled to deduct a further amount of £1,029,536.33 which represented VAT paid on imports. Accordingly, she deducted those sums from the original figure entered, leaving a balance of £690,943.37. All those deductions and the balance were noted in manuscript on the return just underneath box 5, with the sums to be deducted shown in brackets. The return was submitted to Customs and received by them on 28 January 2005, accompanied by payment of the sum of £690,943.37 which the taxpayer believed to be due.

There was no dispute that to give effect to her intention and the understanding of the taxpayer as to its liabilities she ought to have entered into box 5 a figure of £1,183,559.37 (£2,213,095.70 less £1,029,536.33) and then despatched a cheque for £690,943.37, as she did, representing £1,183,559.37 less the payments already made on account. Subsequently, the taxpayer made a voluntary disclosure to Customs claiming that a correction of £1,029,536.33 in respect of the VAT paid on imports was appropriate. The correction was the subject of continuing negotiation between the taxpayer and Customs and a correction in excess of £900,000 was subsequently agreed.

The taxpayer appealed, inter alia, against a surcharge liability notice issued pursuant to VATA 1994, s. 59(1) and 59A(1) in respect of its default for the period ending on 31 December 2004 on the ground that it had a reasonable excuse for not despatching the amount as entered on the return form. The VAT tribunal concluded that the taxpayer had no reasonable excuse for its default since the correction had been made in haste without adequate consideration whether it would result in a substantial underpayment and the taxpayer should have employed staff who were capable of calculating its VAT liabilities correctly. The taxpayer appealed.

Issue

Whether the taxpayer had a reasonable excuse for not despatching the sum it had written in box 5 less the payments it had made on account.

Decision

Kitchin J (allowing the appeal) said that the accurate completion of VAT returns was important to the efficient and effective administration of the VAT system. However, the particular circumstances of this case amounted to a reasonable excuse for the taxpayer failing to despatch the sum due to Customs in January 2005. It had committed a clerical error but attempted to correct that error in manuscript on the return. In doing so it identified immediately below box 5 the sum it believed to be due together with the sums already paid on account. Having made the manuscript alterations to the return, it had a reasonable excuse for acting as it did. This was not a case of a person seeking to explain or justify its failure to pay a sum which it thought it owed. The taxpayer had paid the sum which it thought was due. It furnished the return and payment in good time.

The tribunal's conclusion that the taxpayer should have employed staff capable of correctly calculating its VAT liabilities was not relevant to the issue it had to decide. The taxpayer did not put its case that way. The default arose not because the liabilities were calculated incorrectly but because of a clerical error in the completion of the return.

Moreover, the tribunal had fallen into error in finding that a correction that led to an underpayment of nearly £470,000 could not be excused on the ground that if no correction had been made there would have been an overpayment. At the date of the hearing, Customs had only accepted a correction of £559,000, and disputed the balance of around £470,000, but the matter was the subject of ongoing negotiation at that time and subsequently the vast majority of the correction had been accepted. More importantly, those matters were not relevant in any event. It was not in dispute that at the date of the return, the taxpayer believed that it was entitled to deduct the whole sum of £1,029,536.33 and that if the figure of £1,183,559.37 had been entered in box 5 there would have been no default. Therefore, there was no question of having to ‘excuse’ an underpayment of £470,000. It was reasonable for someone who had made a mistake that would lead to a large overpayment of VAT to correct it by a manual amendment to the return.

The tribunal's criticism that the correction was made in haste and without adequate consideration was not justified. In so far as the correction was made in haste, it was made in order to reflect what the taxpayer believed was due. It quite properly believed that it was entitled to deduct the whole sum of £1,029,536.33. Accordingly, the tribunal had fallen into error and its decision was wrong in law. This was not a case where the court was simply seeking to substitute its own view for that of the tribunal.

Chancery Division.
Judgment delivered 14 May 2007.