VAT Cases & News

In Morrisroe UK Ltd v HMRC [2015] TC04577 the First Tier Tribunal (FTT) concluded that reliance upon a third party could be a reasonable excuse for failure to make a payment of VAT on time.

VAT penalty set aside

In C J Palau & R C Loughran v CRC (2014) TC 04251, the FTT allowed a taxpayer’s appeal against a penalty under Schedule 24 FA 2007 for an error in a document. The taxpayer had used the wrong form and there was no loss of tax.

In HMRC v Trinity Mirror PLC The Upper Tax Tribunal (UTT) has overturned the previous decision of the First Tier Tribunal (FTT) to set aside a late filing surcharge of £70,900 on the grounds of proportionality, concluding that whilst it might be considered harsh, it cannot be regarded as plainly unfair.

The facts of the case

These were not in dispute and were as follows:

• The company paid its balancing payment for the 06/07 VAT period one day late, and as a result was issued with a surcharge notice indicating that a further default prior to 1 July 2008 would result in a penalty.

• The company paid its balancing payment for the 12/07 VAT period one day late, and as a result HMRC levied a surcharge penalty in the amount of £70,906.44, being 2% of the amount due and not paid by the due date.

• The 2% surcharge for a first default within a surcharge period is in accordance with s59A VATA 1994.

The initial case was brought by the company on the grounds that whilst EU Directives empower member states to apply penalties as appropriate, that power must be exercised in accordance with the "principle of proportionality".

This means that:

1. penalties must not go beyond what is strictly necessary for the objectives pursued and
2. a penalty must not be so disproportionate to the gravity of the infringement that it becomes an obstacle to the underlying aims of the objective.

FTT decision

In reaching its decision to set aside the surcharge, the FTT considered a number of precedents including Enersys Holdings UK Ltd v. Revenue and Customs Commissioners in which a 5% surcharge of £131,881 was determined to be disproportionate.

FTT took a mathematical approach to compare the surcharge in Enersys with the Trinity surcharge; if £131,881 was disproportionate for a 5% charge, then anything in excess of £52,752 must be disproportionate for a 2% charge.

 Judgment of the UTT

In upholding the surcharge, the UTT considered the following:

1. That the FTT had erred in law by attempting to set any maximum penalty as this was effectively seeking to legislate, and that the tribunal had placed too much emphasis on the Enersys decision in seeking an arithmetical comparison; each case should be considered for proportionality based upon its own facts and what is disproportionate in one circumstance may not be disproportionate in another.
2. That the objective of the surcharge scheme is to impose a penalty for late payment and it does not penalise any further for subsequent delays in payment.  The UTT concluded that the penalty was based upon a modest percentage of the VAT unpaid by the due date and that it could not be considered to go beyond the objectives of the scheme.
3. That the objective of the EU directive is one of 'fiscal neutrality'.  This recognises that the burden of VAT falls not upon the company itself but upon the final consumer, and that the company is merely collecting and then paying over the tax.  The system requires companies to comply with its obligations, including paying over the tax it has collected on a prompt and timely basis.  The UTT concluded that a penalty of 2% could not be considered so disproportionate to the gravity of the infringement as to constitute an obstacle to the underlying aims of the objective.

Cases referred to

HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC)

Enersys Holdings UK Ltd v. Revenue and Customs Commissioners [2010] UKFTT 20 (TC).

Trinity Mirror PLC v Revenue & Customs [2014] UKFTT 355 (TC)

HMRC v Trinity Mirror PLC [2015] UKUT 0421 (TCC)

In Neil Garrod v HMRC (2015) TC04237, the first tier tribunal (FTT) cancelled a penalty imposed for failing to submit a VAT return electronically, deeming that the circumstances in which the penalty was raised meant it was done unlawfully.

VAT case is a reminder of position on staff benefits

French Connection v HMRC [2015] UKFTT 173 (TC) concerned a UK retailer which provided a clothing allowance to staff, which was then used to purchase clothing that they were required to wear whilst working.

HMRC argued that the supply gave rise to a VAT liability; conversely, the company argued that as the clothing constituted a uniform which was provided for a business purpose it should be exempt.

Decision

The First Tier Tribunal said it was irrelevant that the clothes might constitute a uniform, as the clothing supplied was part of the trading stock.  Business assets had therefore been provided for nothing which triggered a supply, and VAT had to be accounted for using replacement cost.

Comment

It is unlikely that retail clothes, suitable for wearing outside of work hours, would constitute a uniform in the true sense – i.e. an identical one that all staff wear.

Recap of rules

• Businesses supplying services are not usually charged to output VAT where a supply of services is made for no charge.
• Businesses supplying goods without charge (i.e. gifts) do have to account for VAT on the output.
• A limited exemption exists for circumstances where gifts for business purposes to any single person in a 12 month period do not exceed £50 in total.

In M Hodges v HMRC [2015] a taxpayer successfully reduced VAT penalties of £394,694 to £7,807. He was found guilty of dishonesty however HMRC had failed to exercise “best judgement” in assessing the VAT penalties as required by the law.