Trinity Mirror wins VAT penalty appeal

One of the UK’s biggest newspaper publishers has won an appeal against a penalty of about £71,000 for paying its VAT one day late.

In Trinity Mirror v HMRC, Trinity Mirror, which publishes the Daily Mirror and Sunday Mirror, argued that the penalty for paying the balance of its VAT account one day late was disproportionate.

It also argued that the imposition of such a large penalty breached the European Union’s general principle of proportionality which requires that a penalty must not go beyond what is strictly necessary to obtain the objective being pursued by the State (the continuing compliance of taxpayers).

The first-tier tribunal agreed that the penalty was excessive...

Continued...

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Comments

How much was the VAT paid late?

the_Poacher | | Permalink

Surely the penalty is proportionate - to the VAT paid late. Hard to know if this is a fair result without knowing the VAT bill and why the company was late paying.

davidwinch's picture

2%    3 thanks

davidwinch | | Permalink

the_Poacher wrote:
Surely the penalty is proportionate - to the VAT paid late. Hard to know if this is a fair result without knowing the VAT bill and why the company was late paying.

The penalty was 2% of the tax paid late - which in round figures was £3.5m.

The history is set out in the FTT judgment (the link to the judgment is in the article). Basically the point seems to be that the taxpayer had a good history of compliance since 1986 but then a couple of payments were made one day late - leading to the imposition of a 2% penalty.

The tribunal considered this particular penalty to have been too severe in all the circumstances (although it might not have considered a penalty in the region of £50,000 too harsh). But the tribunal had no power to reduce the penalty - it could quash it entirely or let it stand. The tribunal quashed the penalty.

The tribunal seems to have asked themselves the question, "Was a penalty of £70,000 disproportionate?" and not the question, "Was a penalty of 2% of the tax paid late disproportionate?". If so, some readers might consider that the tribunal asked themselves the wrong question!

The tribunal did not hold that a 2% penalty will always be unacceptably harsh, but held that the penalty imposed in this case was unacceptable.

That IMHO creates a difficulty for HMRC insofar as penalties are 'automatic' because the tribunal effectively says that HMRC must not impose penalties that are disproportionate in the circumstances - which implies some sort of review of the penalty in a wider context, which seems at odds with a scheme of 'automatic' penalties.

David

Thanks

the_Poacher | | Permalink

Many thanks for the detailed response.

stepurhan's picture

The wrong question    1 thanks

stepurhan | | Permalink

davidwinch wrote:
The tribunal seems to have asked themselves the question, "Was a penalty of £70,000 disproportionate?" and not the question, "Was a penalty of 2% of the tax paid late disproportionate?". If so, some readers might consider that the tribunal asked themselves the wrong question!
I am one of those readers. The only reason that the payment seems excessive is because of the huge sums involved. But keeping those huge sums for longer has value. Keep that amount at 10% (reasonable interest for a deposit of that size?) and you get nearly an extra £1,000. That is just for the one extra day, not even considering the delay between getting the output VAT from customers and paying over the balance.

This is, in my opinion, a dangerous precedent. Bringing judgement, and very woolly judgement at that, into the level of penalties is a bad idea. The only place for judgement in flat rate penalties is whether there is a good excuse for failure. That does not appear to have been contested here, and in my opinion the penalties should have stood. Bear in mind that, even at this level, the 2% penalty is only applied on the second default. If an organisation of this size does not have systems to avoid mistakes repeating, then they should bear the cost.

On a related note, is it impossible to have direct debits of this size? I'd be happy to see the penalty waived on this occasion if the quid pro quo was setting up a direct debit to guarantee it didn't happen again.

Disproportionate

Ravenwood28 | | Permalink

Last year a client of mine went to the First-Tier Tribunal to appeal a 10% VAT surcharge levied on a two-day late vat payment. The penalty was just short of £6,000. Amongst our arguments were the following:

 

1. The VAT was still paid in full and in HMRC's bank account before a direct debit payment would have been. This was dismissed out of hand as irrelevant.

2. The penalty was inequitable since my client imports most of their supplies from overseas and therefore reclaims no input tax. Their VAT bill was higher than another, entirely similar company that buys in goods domestically. The penalty is therefore not geared to profits earned. The Judge could not comment on this and suggested we go to Brussels and challenge the Treaty of Rome.

3. Most importantly in this case, we stated that the penalty was disproportionate, amounting to over 25% of the company's retained profits for the year. We were informed by the Judge that the Total Technology case had already put an end to all disproportionate arguments and that all First-Tier Judges were under strict orders not to allow this kind of appeal. Our case was thrown out, realistically decided before we even arrived at the tribunal.

 

It seems odd that the £71,000 penalty (0.07% of the £108m profits posted by Trinity-Mirror last year), is disproportionate, but a £6,000 penalty representing 25% of a company's profits is not.

I would be very interested to hear from others who have suffered similar penalties as I fully intend to have this case re-opened in the light of this new First-Tier decision. I at least need to know why the tribunal system seems to believe that 'disporoportionate' and 'large' have exactly the same meaning...

stepurhan's picture

Appeal citing this decision

stepurhan | | Permalink

In all honesty, I don't see any of your arguments as having merit. To address the first two

  • The reason the deadline for direct debits is later is that HMRC can be sure of getting the right amount promptly. Your client chose not to use direct debit and take advantage of this. They could have accepted the disadvantage (payment automatically taken) to get the advantage (longer payment deadline). Why should they have one without the other?
  • The VAT rules are as they are. Importing is a business choice by your client and they must be aware of the difference. This argument is akin to saying they should pay less income/corporation tax because the only reason their profits are higher was due to their imports being cheaper than the domestic purchases.

But, while I still think the disproportionate argument is flawed for reasons I gave above, your client deserves equal treatment. If Trinity Mirror can win with this argument, it should be applied across the board. Appeal citing judgement in your case as incompatible with the Trinity Mirror judgement for this reason.

Thanks for the comments - I

Ravenwood28 | | Permalink

Thanks for the comments - I will certainly being pushing for an appeal on those grounds.

I can accept the advantage / disadvantage of the direct debit vs BACS argument, but would just like to clarify the import position - which is still an inequitable treatment of companies:

 

Company 1 sells £200,000 of goods domestically and buys £100,000 of goods domestically. The VAT return shows Output VAT of £40,000, input VAT of £20,000 and VAT Payable of £20,000. The profits are £100,000 (£200,000 sales less £100,000 costs) A VAT penalty is levied at say 10% and the company is charged a £2,000 surcharge. The surcharge amounts to 2% of the company's profits.

 

Company 2 sells £200,000 of goods domestically and buys £100,000 of goods from the EU with no reclaimable VAT. The VAT return shows Output VAT of £40,000, input VAT of £nil and VAT Payable of £40,000. The profits are still £100,000 (£200,000 sales less £100,000 costs) A VAT penalty is levied at 10% and the company is charged a £4,000 surcharge. The surcharge amounts to 4% of the company's profits.

 

Whilst there may be advantages to buying goods from overseas, my main point here is that current VAT legislation levies a higher penalty on importing companies than wholly domestic trading companies. In the case above, there is no monetary benefit from buying goods overseas, both companies show exactly the same profit, but one of them is paying twice the surcharge. To my mind, this is both inequitable and disproportionate.

 

Sadly, I can't see the implementation of this law being changed any time soon, but it is worth noting that the current legislation does unfairly penalise companies that trade outside the UK and may accidentally pay their VAT one day late.

 

 

stepurhan's picture

Nonsensical argument

stepurhan | | Permalink

Ravenwood28 wrote:
Whilst there may be advantages to buying goods from overseas, my main point here is that current VAT legislation levies a higher penalty on importing companies than wholly domestic trading companies. In the case above, there is no monetary benefit from buying goods overseas, both companies show exactly the same profit, but one of them is paying twice the surcharge. To my mind, this is both inequitable and disproportionate.
No, the current VAT legislation levies a higher penalty on people with higher VAT bills. There are lots of people that have higher VAT bills for different reasons. On the basis of your argument it is unfair that a business with few VATable inputs pays a higher penalty than one with loads of VATable inputs, even if they have the same level of turnover. Is it inequitable and unfair that certain trades therefore end up with higher penalties as a result? I think not.

I should also point out that a firm that is importing from overseas is actually bad for the balance of trade in the UK. Whilst I'm not calling for trade protection measures, you can hardly expect any government to actively encourage imports either.

But the fact is you can accidentally pay your VAT one day late without any penalty whatsoever. Penalties do not kick in until the second default, no matter what your turnover. To get to 10% penalties you have to be on at least your fourth default. To avoid the 10% penalty, all they had to do is not pay late four times in a row. The default escalation would then reset and they can start again. Forgive me for having precisely zero sympathy for someone who can rack up three defaults and still not understand the importance of paying on time.