In Porter & Co (TC 07028), a decision released on 6 March 2019, a firm of solicitors’ appeal against VAT default surcharges proved to be unsuccessful. Reasons provided for the delay were unsubstantiated and the amount of the surcharges raised was held to be proportionate.
The judgement in this case is similar to earlier decisions made. However, it serves as a timely reminder for all businesses. Whether you manufacture widgets or provide professional services, you should get your VAT affairs in order and make VAT payments at the correct time, to ensure no penalties are suffered, even where a payment is received by HMRC one day late, as was highlighted in this case.
A default surcharge is a penalty levied on businesses that submit late VAT returns or payments.
There is no penalty for a first offence. However, a business that submits a VAT return late or makes a late payment is issued with a surcharge liability notice. This begins on the date of the notice and ends 12 months from the end of the latest period in default. If further VAT returns are submitted late during this period, a penalty based on a ‘specified percentage’ ranging from 2% to 15% will apply. The penalty increases up to a maximum of 15% with each default.
Porter & Co (“Porter”) had been in receipt of default surcharges for periods in 2010, following an appeal being unsuccessful, that the reason provided constituted a reasonable excuse. It later re-entered the surcharge regime in period 08/2012, following payment being received by HMRC several days late.
In respect of periods 05/2013 and 08/2013, partial payment of the outstanding VAT liabilities was made one day late, with the VAT returns having been filed on time. For period 05/2013, the payment balance had been received by HMRC 89 days after the due date!
A number of reasons had been put forward by Porter for the lateness of the payments made:
- There were problems with the company’s bank; and
- The business proprietor was on holiday and could not be contacted.
Furthermore, it later maintained that:
- The surcharge amount was “substantial in relation to the delay” and was therefore disproportionate; and
- That Porter would suffer “great financial hardship” should the appeal not be allowed.
HMRC submitted that:
- No evidence had been provided as to the alleged banking problems;
- Porter should have made alternative arrangements for payment of the VAT liability occurring during the holiday period; and
- In connection with proportionality, the amount of the default surcharge was fixed by Parliament and was not considered to be disproportionate in light of earlier Tribunal decisions.
The Tribunal considered whether any surcharge should be set aside where Porter had satisfied either of the two conditions set out in section 59(7), VATA 1994 – that it had:
- Despatched the VAT at such a time or in such a manner that it was reasonable to expect that it would be received by HMRC within the appropriate time limit; or
- Considered whether the conditions necessary for a reasonable excuse were present. These were:
- To establish the facts which the person stated as giving rise to a reasonable excuse;
- Decide if those facts were proven; and
- Decide objectively as to whether those proven facts do indeed amount to a reasonable excuse for the default.
In arriving at its conclusion, the Tribunal confirmed that the surcharges raised were appropriate and refused to entertain Porter’s appeal.
Who is potentially affected?
This case is relevant for any and all businesses which are VAT registered, to ensure all VAT returns and payments are made to HMRC in good time.
If you’re a business owner, an important point that you may be not aware of is that by submitting a VAT return late, your business can enter the default surcharge regime. You have effectively wasted the ‘free’ warning and possibly face a surcharge if any payment is late within the following 12-month period.
HMRC accepts that taxpayers may have a reasonable excuse in cases involving computer breakdown, illness or loss of key personnel. However, when looking to rely on a reasonable excuse as a “Get Out of Jail Free” card, neither the lack of funds to pay VAT, nor reliance being placed on another to perform a task, are accepted by HMRC as valid reasons.