In K D Media Publishing Ltd v HMRC [2018] UKFTT 0494 (TC), the First-tier Tribunal (FTT) has held that a taxpayer who was entitled, under section 80, VATA, to a credit for overpaid VAT, was unable to offset that credit against payments of VAT following the overpayment but before the discovery of the overpayment.

Background

K D Media Publishing Ltd (the taxpayer) is a magazine publishing company. The taxpayer has been consistently late in paying its VAT and has regularly incurred VAT default surcharges as a result.

In February 2017, the taxpayer discovered it had paid too much VAT for the 11/15 VAT period and notified this error to HMRC in a letter dated 10 February 2017. HMRC accepted the position and subsequently adjusted the VAT due for that VAT period and also reduced the default surcharge for that VAT period as a result of the reduced VAT liability. This led to HMRC owing the taxpayer £16,071.25 for the 11/15 VAT period (the overpaid sum).

HMRC issued VAT surcharges to the taxpayer in respect of late payment of VAT for the VAT periods after the 11/15 VAT period.

The taxpayer argued that the overpaid sum that HMRC held for the 11/15 VAT period should be set against VAT periods after the 11/15 VAT period on the basis that HMRC effectively had an extra amount of VAT which had been paid and the amounts paid for each of the intervening VAT periods should be treated as reduced. This would reduce the default surcharges due as they would be calculated on the lower amount of unpaid VAT.

HMRC’s position was that it was not required to give credit until it was notified of the mistake by the taxpayer in February 2017. From notification of the error, HMRC applied the credit against the outstanding VAT and default surcharge at the relevant time which was the VAT surcharge which remained in respect of the 11/16 VAT period. HMRC contended that the credit could not be applied against the VAT which had been due for any earlier VAT periods as HMRC was not aware at the time this VAT became due that there was a credit available.

The taxpayer appealed.

FTT decision

The appeal was dismissed.

The FTT noted that section 80(2), VATA, only provided for a credit or repayment to be given on a claim being made. Accordingly, the FTT held that the VAT default surcharges had been properly imposed in accordance with section 59, VATA, as the credit resulting from the overpayment of VAT cannot be allocated against VAT which has already been paid prior to the date on which the credit arose.

In the view of the FTT, there is no suggestion under section 80, VATA, that a corrected overpayment is to be regarded as a liability upon HMRC which would compel it to back date the error.

The FTT distinguished Swanfield Limited v HMRC [2017] UKUT 88, in which the FTT held that a taxpayer was entitled to appropriate a payment to VAT that was not yet due, on the basis that no allocation had been made in this matter as the taxpayer had been unaware of the credit until it was discovered.

The FTT also concluded that the taxpayer had no reasonable excuse for its failure to pay its VAT on time for the relevant VAT periods and the default surcharges were not disproportionate given the purpose of the default surcharge regime.

Comment

This decision is consistent with the principle that VAT due in respect of each VAT period is a separate debt and there is no running VAT account between HMRC and taxpayers that spans VAT periods. Each VAT period must be looked at separately. In order to avoid default surcharges, taxpayers must ensure their returns and payment of VAT is made on time.

A copy of the decision can be viewed here