VAT tribunal decision throws question mark over HMRC default surcharge, says James Cowper 
A VAT hearing at the First-Tier Tax Tribunal decision delivered on Wednesday (27 January) throws into doubt the ability of HMRC to add a ‘default surcharge’ to a company’s VAT bill following late payment.
The decision follows the late payment of VAT by just one day by the company Enersys. The company, who had previously made late payments, was automatically hit with a five per cent default surcharge of more than £131,000. Enersys successfully argued that the charge was a ‘disproportionate penalty’ and the entire charge was discharged.
Terry Dockley, VAT director at accountants and business advisers James Cowper, said: “This is a very interesting decision and one that throws a big question mark over the Revenue’s ability to apply a default surcharge on late payments.
“The Tribunal’s decision does not set a precedent and HMRC may well decide to appeal, but its decisions are extremely persuasive. Companies who already have their card marked by HMRC following previous late payments will want to follow this decision closely and may well be able to argue that a default surcharge is a disproportionate penalty.”
Terry adds: “There has always been the ability for companies to claim a ‘reasonable excuse’ for any delay in paying a VAT demand. However, a lack of cash or simply messing up has never been an acceptable excuse. This decision seems to suggest that companies can make a mistake and make more than one late payment without necessarily being hit with a large penalty.”
James Cowper also notes that HMRC will be introducing a similar regime to the default surcharge in relation to PAYE payments to apply from April 2010.
Terry adds: “As with the VAT default surcharge regime no penalty is incurred following the first late payment, but subsequent payments could incur a penalty of between up to fifteen per cent of the total demand.
“Whilst the Enersys decision relates to the late payment of VAT it is not particularly difficult to envisage a company successfully bringing the same argument following a penalty charge relating to the late payment of a PAYE liability.”
Terry Dockley, VAT Director, James Cowper LLP, Tel: 01865 200500 or email tdockley@jamescowper.co.uk
02.02.2010