CMS Peripherals Ltd v Revenue and Customs

For VAT surcharge purposes, a reasonable excuse may arise where a taxpayer makes a clerical error in completing a return but promptly corrects it in manuscript and pays the amount it genuinely believes to be due. The relevant question is whether there was a reasonable excuse for failing to despatch the amount shown in the return, less payments already made, assessed at the date payment was due. The taxpayer’s staffing arrangements, or a later dispute about the precise amount of an allowable deduction, do not determine that question where the default resulted from a clerical completion error rather than an incorrect calculation of liability.

CMS appealed against two VAT surcharges imposed under the Value Added Tax Act 1994. Before the High Court, it challenged only the surcharge arising from an accounting period ending on 31 December 2004.

CMS had entered an incorrect figure in box 5 of its VAT return, then made manuscript deductions for payments on account and import VAT which it believed it was entitled to deduct. It paid the resulting balance. The VAT Tribunal held that CMS had no reasonable excuse. The issue was whether the Tribunal had erred in law in rejecting that explanation.

1. The appeal was allowed. The Tribunal’s decision was wrong in law, and CMS was awarded its costs of the appeal and of the hearing before the Tribunal.
2. The relevant enquiry under the Value Added Tax Act 1994 was whether CMS had a reasonable excuse for failing to despatch the amount entered in box 5, less the payments already made on account. That enquiry had to be assessed as at January 2005, when the sum was due.
3. CMS had paid the sum it believed was due and had submitted the return and payment in good time. The incorrect box 5 figure resulted from a clerical error which was recognised almost immediately. CMS then recorded manuscript deductions and the balance it believed remained payable.
4. The Tribunal was wrong to focus on the size of CMS’s turnover and the qualifications of the employees preparing the return. CMS did not rely on an inability to calculate its VAT liability. The default arose from an error in completing the return.
5. The Tribunal was also wrong to treat the later dispute over the amount of the import VAT correction as relevant. At the relevant date CMS believed that it was entitled to deduct the whole amount. Had the corrected figure been entered in box 5, there would have been no default.
6. In those circumstances, the clerical error and the prompt manuscript correction constituted a reasonable excuse. The Tribunal’s conclusion involved an error of law rather than a mere substitution of factual judgment.

• High Court (Chancery Division): Appeal allowed against the VAT Tribunal’s written decision dated 28 November 2006.
• VAT Tribunal: Appeal against the surcharges dismissed.