A company supplying coin-operated equipment to the leisure industry, Capital Coin, has won a case against HMRC over an appeal against a default surcharge for the late payment of VAT, where the First Tier Tribunal (FTT) judged that the unexpected, unforeseen and unadvised cancellation of the company's direct debit (DD) instruction was a reasonable excuse for late payment.

In the case, Capital Coin Machine Co Ltd [2014] TC 03144 [2014] UKFTT 003 (TC), the taxpayer company filed its VAT return electronically, but failed to pay the VAT due by the due date.

The taxpayer claimed not to have been aware that its DD mandate had been cancelled and was therefore expecting the payment to be collected by HMRC as usual. HMRC sent the taxpayer a letter a couple of months earlier to advise that the taxpayer's DD mandate had been cancelled and therefore an alternative method of payment should be used, but this letter does not appear to have been received by the taxpayer because HMRC was using an old address.

The Tribunal questioned why HMRC sent such a letter if, as HMRC claims, the DD mandate had been cancelled by the taxpayer. HMRC also said that when the taxpayer submitted its VAT return electronically it would have received a message telling it to pay electronically, whereas if a DD mandate is in place the message says that the VAT due will be debited direct from its bank account.

The internal emails available to the FTT were not clear enough to support HMRC's contention that the taxpayer cancelled the DD mandate and instead the Tribunal decided that it followed that the bank must have cancelled the DD. It seemed unlikely to the Tribunal that the taxpayer had instructed the bank to cancel the DD instruction and it was easy to understand that the taxpayer could read the computer acknowledgement and think that they were paying electronically by DD and therefore not take any further action.

The Tribunal therefore accepted that the unexpected, unforeseen and unadvised cancellation of the DD instruction was a reasonable excuse for the late payment of VAT and therefore the appeal was allowed.

Commenting on the case, Julie Clift, specialist tax writer at Wolters Kluwer, said:' In this case HMRC provided copies of internal emails, but because they contained grammatical errors and an illegible word they were not clear enough to support HMRC's contentions. Given that documentary evidence is often so important in cases that go before the Tribunal it is worth spending time making sure that telephone notes and emails are correct to ensure they support any potential case without ambiguity.

'It is worrying (and to the Tribunal 'surprising') that HMRC's statement of case said that they had not been officially notified of the taxpayer's change of address. This is even though a letter from the taxpayer dated more than four months before HMRC submitted their statement of case asked them to amend their records to the correct address.'