News
Tribunal rules that VAT default surcharge was disproportionate
Posted on: 02 February 2010
The First Tier Tribunal has ruled that a VAT default surcharge of £131,881 imposed on a company for a delay of one day in submitting a VAT return and payment, was disproportionate. The surcharge amounted to about 16 per cent of the company's annual profit.
The Judge acknowledged that the timely payment of taxes was in the public interest, and that the state enjoyed a 'wide margin of appreciation' in determining appropriate penalties. However, he considered that if the penalty in this case had been determined by a court or tribunal, as opposed to a mechanical percentage, it was "unimaginable" that it would have been so high.
The Judge concluded that the penalty was wholly disproportionate, being "not merely harsh, but plainly unfair", distinguishing it from other cases in which taxpayers unsuccessfully argued disproportionality.
The Judge also noted that the absence of any mitigation provisions had been criticised in earlier cases, and that the new direct tax penalty regime now allows for a 'special reduction'. It is proposed that such a reduction will also be included in the new VAT penalty regime for late submission of returns and late payment of tax, which will replace the current default surcharge regime.
This is an important ruling, which should be noted by advisers and taxpayers in similar circumstances. However, HMRC has stated that it intends to appeal the decision.
Please contact Stephen James to discuss this case or any other VAT penalty or surcharge.
