VAT Surcharge notice – HMRC gets hit for six
When businesses submit or pay their VAT returns late, HMRC is entitled to impose a default surcharge penalty.
The amount of the surcharge is a percentage of the unpaid VAT liability for the late return/payment and the amount of this percentage depends on the taxpayer’s history of lateness. The percentage starts at 2% and increases to 15%.
There are various defences which might be applicable, usually falling into one of two categories:
- Reasonable excuse for lateness (whether for the current quarter or a previous quarter which led to the higher percentage surcharge)
- Disproportionate level of the surcharge
Two recent cases highlight additional defences which might be applicable.
- Kingsdale Group Limited and Kingsdale UK Limited v Revenue and Customs Commissioners ( UKFTT 0236 (TC), published 14 April 2016)
- England and Wales Cricket Board Limited v Revenue and Customs Commissioners ( UKFTT 0348 (TC), published 20 May 2016)
The Kingsdale case refers to supplies which were thought to be standard rated and had been invoiced and accounted for accordingly. However, this rate was found to be incorrect and the VAT liability reduced accordingly.
The defence mounted by the taxpayer was that the surcharge imposed for the late period which included these supplies should be reduced to reflect the reduced VAT liability in the periods.
The Tribunal found in favour of the taxpayer.
The decision in the England and Wales Cricket Board Limited (ECB) case was that it had not received a Surcharge Liability Notice from HMRC and therefore the surcharge was invalid.
HMRC pointed to its computer records, but the Tribunal judge decided that the ECB’s systems for recording the receipt of post were sufficiently robust that they could be relied upon as evidence that the Surcharge Liability Notice had not been received.
Perhaps the last word should be reserved for another case, which the taxpayer lost, but where the Tribunal judge was scathing about the surcharge system in its current form.
“We are unaware of any other regulatory area where a fine of thousands, even tens of thousands of pounds may be levied for lodging an administrative document one day late or for paying tax one day after the due date. Exactly the same fine is due where the extent of the lateness is significantly different, say one month or even one year…we tend to agree that it is hard to justify such huge administrative fines as those levied in total here” (JSJ Metal Recycling Limited v Revenue and Customs Commissioners, Paragraph 70,  UKFTT 0310 (TC), published 12 May 2016).
Taxpayers should therefore continue to review their the surcharge they receive from HMRC, particularly as to whether there is a reasonable excuse, whether the amount is disproportionate, whether HMRC has correctly complied with its obligations and whether the VAT liabilities for the late period have been correctly calculated.