VAT default surcharge appeal dismissed
01/07/2019

HMRC imposes a VAT default surcharge on businesses that submit late VAT returns. VAT registered businesses are required by law to submit their return and make sure that payment of the VAT due has cleared to HMRC’s bank account by the due date. The normal deadline for submission of a VAT return and making payment is one calendar month and seven days after the end of the relevant VAT quarter.

There is no penalty for a first offence, however a business that submits a VAT return late is issued with a surcharge liability notice that begins on the date of the notice and ends twelve 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 to a maximum of 15% with each default.

A recent First-Tier Tribunal heard an appeal by Secco Muro Limited following their receipt of two VAT default surcharges dating back to the April and July 2016 VAT quarters. The taxpayer appealed, claiming reasonable excuse due to cash flow difficulties. These difficulties were the combined result of a number of large customers failing to pay invoices due on time, coupled with a default by one significant customer that became insolvent and unable to settle their account.

The Tribunal was clear that an insufficiency of funds cannot be a reasonable excuse. However, based on precedent, a shortage of funds might comprise a reasonable excuse, especially where a significant customer defaults in payment. The Tribunal looked at this issue in more detail but ultimately dismissed the taxpayers appeal. The Tribunal felt that the insufficiency of funds was not an unforeseeable event given the circumstances as outlined to the court.

A further argument by the taxpayer that the penalties are a little unjust and unfair, was dismissed on the basis that HMRC has no discretion on the penalties levied as the percentages are clearly set-out in the underlying legislation.

Whilst there are some exceptions where a business had a reasonable excuse for submitting a late VAT return, the criteria is limited. To avoid these issues, it is imperative that VAT returns are submitted and paid on time as a delay of even one day can have significant knock-on consequences.


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