HMRC was this April meant to be introducing a Penalty Point system to replace Default Surcharges incurred for not paying and submitting your VAT returns on time. However this change has been delayed to January 2023. It’s still worth being aware of what the Default Surcharge penalty system could mean in terms of penalties if you get it wrong.
What’s brought this in to sharper focus has been the number of VAT Tribunal cases that have been heard on the subject and how virtually all have been lost by the Taxpayer. The purpose of this article is to provide some clarification and to consider if there is anything that can be regarded as a ‘reasonable excuse’ and thus escape a penalty.
We will of course update you on the new Penalty Point system as its introduced next year. Why not take a look at our VAT MOT – it’ll help you get everything roadworthy when it comes to VAT.
How the system works
The best way of avoiding a Default Surcharge (‘DS’) is to make sure your VAT return is submitted and paid on time.
So firstly, let us clarify deadlines and focus on the majority of businesses which complete quarterly VAT returns and use the period 1 January to 31 March as an example.
The VAT return and payment must be received by HMRC by the 7th day of the month which follows on from the end of the VAT return i.e. 7 May for the March VAT return.
‘Received’ in terms of the payment means in the HMRC bank account by 7 May at the latest.
The 7th day does not mean 7 ‘working’ days and if the 7th day falls on a weekend or on a Bank Holiday then the payment must be in the HMRC bank account by the Friday before the 7th. Bank Holidays often do cause an issue as if the 7th is a Bank Holiday the payment must be with HMRC by Friday the 4th.
Payments on account and Direct Debit
The position set out above is the position for the majority of businesses. However, if a business is in the Payments on Account regime, then there is no 7-day extension, and the March VAT return referred to above would need to be paid by 30 April.
If you wish to virtually guarantee you won’t be late then you can sign up to pay your VAT return by direct debit. This means that HMRC will remove any payment from your nominated bank account on or shortly after the 10th of the month. If HMRC don’t take the payment then it is not fault for late payment.
How exactly are the penalties levied?
So avoiding a DS in the first place is key but what happens if you are late? If you are late for the first time, you will get a ‘warning notice’ which basically tells you not to do it again. If any of your next 4 VAT returns are then paid late, you move in to the DS regime ‘proper’ and the surcharges start. These are as follows:
- then 5%
and then the maximum of 15%.The surcharge is based on the VAT payable so if it is a repayment return then no DS payment would apply.
It is important to note that you can however remove yourself from the DS regime if you submit and pay on time 4 VAT returns in a row.
It should also be noted that if you have entered in to a Time to Pay arrangement with HMRC to pay your VAT and this has been agreed by the due date, HMRC should not issues a DS.
How much could a penalty cost me?
HMRC can charge you a penalty of up to:
- 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy
- 30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days
- £400 if you submit a paper VAT return, unless HMRC has told you you’re exempt from submitting your return using your VAT online account or Making Tax Digital compatible software
This last penalty is to force businesses to comply with Making Tax Digital requirements.
There are events that even HMRC cannot fail to take in to account such as death and incapacity, a fire and similar catastrophic events. However, if none of these apply you are likely to be hit with a DS. You will then have to make a judgment as to whether to make an appeal.
As you can imagine there is an endless list of appeal cases covering many many different forms of appeal including reasonable excuse but in this article we have focused on HMRC’s recent run of success concerning whether the DS is ‘proportionate’.
Several years ago the Enersys case brought welcome success for Taxpayers when the Tribunal ruled that the penalty of £130,000 for being one day late was disproportionate. The comments made by the Tribunal were warmly received by Taxpayers when the Tribunal said there was indeed a public interest in the prompt payment of taxes but the surcharge imposed here was clearly disproportionate.
The joy was short lived as this changed when HMRC won the case concerning Total Technology which focused on proportionality and found that there was nothing fundamentally wrong with the DS regime in relation to proportionality. Following this success HMRC have used this ruling to great effect with most cases won on this basis.
There have been glimmers of hope with other recent cases, for example, Trinity Mirror won their DS case on the proportionality issue, but this was overturned on appeal.
The case of Blue Ocean Associates who incurred a surcharge of £277,000 for being one day late and failed in their appeal demonstrates the potential harsh implications of getting this wrong.
Is there any hope?
In the Trinity Mirror appeal although the ruling confirmed that the DS regime was not flawed, it did indicate that in ‘exceptional circumstances’ the proportionality argument could be successful. What these ‘circumstances’ are will need to be tested.
The recent case of the England and Wales Cricket Board shows that it is important to consider all possibilities. In this case HMRC were not able to prove that the Taxpayer had received the DS liability notices and therefore, without being ‘warned’, the DS could not be applied. Whilst this is a simplified version of events, it does show that going to Tribunal does by and large mean an unsuccessful trip, there can still be circumstances where a reasonable excuse argument can work.
The moral of the story here is that if you do incur a DS penalty then unless you have a reasonable excuse, you are unlikely to succeed with any appeal even with a proportionality argument. However, it is always worth exploring whether there is a case that can be built to protect from potentially significant penalties. Before making an appeal we recommend that you take advice to make sure you put yourself in the best possible position to succeed.
On a final note a new DS regime is due to be introduced so we wait and see how that will look and if it will be less severe. We’ll keep you posted but in the mean time get in touch if you want to discuss your VAT position.