In Global Switch Limited v HMRC [2017] TC06252, the First-Tier Tribunal agreed that a £297,845 surcharge, which was ultimately realised due to a £1,500 VAT error, was appropriate.
A VAT surcharge is due on late payments of VAT.
When a VAT return or VAT payment is late a 12-month VAT HMRC may open a surcharge period. If another VAT return or VAT payment is late within this 12-month surcharge period, the surcharge period is extended to 12-months from the latest offence. This is deemed to be one, longer, surcharge period.
If there is a period of 12-months in which no VAT returns or payments are late, the surcharge period closes.
If, after the offence which opens the VAT surcharge period, there is a late payment of VAT, a surcharge will apply. The surcharge will be the higher of £30 or:
- On the first late payment in that surcharge period, 2% of the late VAT
- On second late payment, 5%
- On third, 10%
- Any further, 15%.
No charge applies to late returns within the period where the payment is made on time, but it will extend the surcharge period.
- Global Switch Limited is the representative member of a large VAT group.
- It was late in making its June 2012 monthly payment, thereby opening a 12-month VAT surcharge period.
- Further late payments were made in March 2013 and December 2013.
- Between December 2013 and September 2016, two VAT returns were submitted late, September 2014 and September 2015, which meant the surcharge period was extended.
- The payment relating to the September 2016 return was a day late.
- The late September 2016 payment was £2,978,459 and was subject to a 10% surcharge.
Global Switch Limited appealed the surcharge on the basis it had a Reasonable excuse for the December 2013 late payment.
If the December 2013 late payment was subject to a reasonable excuse, it would mean the surcharge period closed in March 2014. This would mean the surcharge would reduce from 10% to 2%, though the taxpayer incorrectly believed it would be nil.
- HMRC carried out a VAT audit of the group in 2012 and identified £1,583 of errors, at a time when the turnover was £110million.
- The required adjustment paid was entered into the accounts as a payment in the VAT Control Account but the journal introducing the amount due to the Control Account was not. This meant there was a lower balance shown due for the next VAT return and this led to a late payment of £1,583 in December 2013. The total payment due was over £2million for this period.
- Global Switch Limited claimed this error constituted a reasonable excuse given the magnitude of the balancing payment compared to the amount that was late.
The FTT decided there was no reasonable excuse:
- The VAT Control Account did not consist of many entries.
- The mistake was made in March 2013 and if the account had been reconciled in the nine months before December 2013 it would have been spotted and corrected.
- The failure to identify the error fell below the standard required for an honest mistake to qualify as a reasonable excuse.
Global Switch Limited also appealed on the basis that the surcharge was Disproportionate to the infringement.
- Even though two of its returns were late, the VAT payments were on time.
- The underlying aim of the law it to ensure the VAT is paid on time.
- The returns were only filed a few days late in each case.
- The effect of these few days, where payment was made on time, was the near £300,000 surcharge, which the company argued was disproportionate.
The FTT disagreed:
- The failure to file two VAT returns cannot simply be disregarded
- The underlying aim is to ensure timely payment of VAT, but the timely filing of VAT returns is a necessary feature of that aim. It tells HMRC the correct VAT has been paid.
- A penalty which is partly based on the failure to file a return on time cannot be disproportionate.
The surcharge was upheld.
Comment
HMRC is presently consulting on reform of the late payment surcharge regime for VAT. The proposals should create a fairer system.
Links
Grounds for appeal: Reasonable excuse
External link: Global Switch Limited v HMRC [2017] TC06252
