In Workstation Farnham18 the FTT has identified a “legislative bear trap” for taxpayers in the form of sections 59(7) and 59(8) VATA, in circumstances where HMRC decides not to collect small surcharges.
Section 59(1) VATA, provides (broadly) that a taxable person who (contrary to regulations under VATA) fails to furnish a return, or pay HMRC the amount shown on the return as payable, by the date required for a given accounting period, shall be regarded as being in default. Such a person can be served with a surcharge liability notice.
That person is, pursuant to section 59(4) and 59(5), liable to a surcharge at a specified percentage of the outstanding VAT due for the relevant period. This surcharge increases for each successive surcharge period:
- for the first prescribed accounting period, the specified percentage is 2%
- for the second, the specified percentage is 5%
- for the third, the specified percentage is 10%
- for the fourth and any subsequent periods, the specified percentage is 15%.
HMRC’s administrative practice is not to impose default surcharges in circumstances where the applicable percentage is 2% or 5%, where the amount of the surcharge is less than £400.
In Workstation Farnham, the taxpayer was late in paying its VAT for various periods, as follows:
Click here to view the table.
There was in fact a “time to pay” arrangement in place in relation to period May 2012, removing it from the schedule of defaults. The default for period November 2013 therefore became the third (rather than fourth) default in the cycle, and as a consequence the appropriate percentage was 5% rather than 10%. The applicable surcharge was therefore £376.16 – beneath HMRC’s administrative threshold.
The matter was referred to Judge Kevin Poole to determine whether it was appropriate for the appeal to be determined by the FTT, notwithstanding that there was in fact no extant default surcharge for the taxpayer to settle.
The judge commented that the issue was “a somewhat technical one”, but with “a number of practical implications”.
Section 59(7) VATA, provides that a person who would be liable for a surcharge will not be so liable if he satisfies HMRC or, on appeal, the tribunal, that in relation to a default material to the surcharge he either:
- had a reasonable expectation that the VAT return or VAT shown on the return would be received by HMRC within the time limit; or
- had a reasonable excuse for the return or the VAT not being so dispatched.
Section 59(8) provides that a default is material to the surcharge if it is a default “taken into account in the service of the surcharge liability notice” but for which the recipient “has not previously been liable to a surcharge”.
The effect of this provision was that the FTT had no jurisdiction to consider the second or third defaults (ie for periods May 2013 and August 2013). This is because whilst the appellant’s defaults for those periods were clearly taken into account in the service of the original surcharge liability notice (in that they resulted in a greater specified percentage), the taxpayer had been liable to the surcharges, regardless of whether or not he was in fact required to pay them.
In the present appeal, once the May 2012 period had been discounted, the appellant remained strictly liable for the fourth default, for the November 2013 period, despite not being asked to pay any surcharge. The appellant therefore had the right to appeal.
It is clear from the decision that the judge was somewhat frustrated by the “deficiency” in the legislation. Whilst he expected the FTT would be sympathetic to a taxpayer bringing a late appeal in relation to an earlier surcharge liability notice (for which no payment was required), he noted that this “cannot be guaranteed” and will “add a wholly unwelcome and entirely unnecessary extra complication to many such appeals”.
Any taxpayer who becomes aware of their liability to a VAT surcharge which is under the £400 administrative threshold, should consider whether it would be prudent to appeal the surcharge. Failure to do so could mean a higher percentage penalty in the event of a subsequent default.
To read the decision click here.