In January 2010, the First Tier Tribunal ruled that the default surcharge penalty was disproportionate and unduly harsh when compared with other penalties for the late payment of tax. This landmark decision opens the gates to claims from hundreds of businesses who have had to suffer the impact of this inflexible regime.

The Default Surcharge regime was introduced in 1986 to promote VAT compliance and imposes a sliding scale of charges for repeated late filing from 2 to 15%.

This case (Enersys Holdings UK Ltd) concerned five penalties for the late submission of balancing payments or returns. The Tribunal criticised the regime for the lack of symmetry between the length of delay and the amount of the penalty imposed as well as the absence of mitigation.

The outcome should mean that other VAT default surcharges should be recoverable. The recommendation is to make protective claims if relevant to you until the further appeals in the case are resolved.