Save content
Have you found this content useful? Use the button above to save it to your profile.

Is that penalty fair?

18th Jul 2014
Save content
Have you found this content useful? Use the button above to save it to your profile.

A huge number of VAT and Tax penalties are issued and appealed each year. Few of the decisions raise any significant point of wider significance. But, Total Technology (Engineering) Ltd. is one of those few, especially as the case was finally decided at the Upper Tier Tribunal, after HMRC lost at the First Tier. The First Tier reference is: [2011] UKFTT 473 (TC): the Upper Tier reference is: [2012] UKUT 418 (TCC).

The company was an employment agency, trading since 1973. The company saw significant growth in 2001-2008. Some accounting software issues arose in 2008 and 2009, meaning that there were delays in preparing VAT Returns. The software supplier was unable to resolve the issues, and finally the system was replaced. One Ground of Appeal was that the unreliability of the system provided a reasonable excuse for the defaults. This was rejected.

Further, errors generated by the system led to small differences between the net VAT due on the Returns, and the amounts paid. It was unclear exactly how these errors arose. However in respect of P05/08 and P11/08 defaults were triggered.

Total Technology also argued that the Surcharge was disproportionate, following an earlier decision in Enersys Holdings UK Ltd ([2010] UKFTT 20 (TC)). The Upper Tier considered, in some detail, the pros and cons of the Default Surcharge regime. Interestingly, it held that the lack of a maximum penalty ‘is a real flaw’ of the regime. This was effectively the issue that had assisted Enersys, overturning a Surcharge of £131,881 for a 1 day delay.

The company presented at the FTT a number of issues which, it argued, demonstrated that the penalty must be considered disproportionate.

  1. whether the default was “innocent” or “deliberate”;
  2. the number of days of the default;
  3. the absolute amount of the penalty,
  4. the “inexact correlation of turnover and penalty,”
  5. the absence of any power to mitigate; and
  6. the compliance history of the company.

The first five were based on Enersys, and the sixth raised in this case. The Upper Tier held that, even if taken together, these factors do not lead to the conclusion that the Default Surcharge is disproportionate.

The Upper Tier concluded (para 99) that the Default Surcharge regime itself is not disproportionate. However, due to its arithmetic methodology, it was possible that an individual penalty might be disproportionate.

At the opening the Upper Tier decision, a comment was made that HMRC were represented by Counsel, Peter Mantle, an experienced Tax Barrister. In contrast, the company were represented by their external Accountant.

We would have preferred it if it had been possible for representation to be provided for the Company equivalent to HMRC’s representation. But, understandably, the Company did not go to the considerable expense of obtaining such representation (even assuming that it could afford to do so) in the light of the sum at stake. This means that Mr Mantle’s arguments have been free from a real challenge from an opposing advocate.” (para 3)

Whilst it is not possible to guess at the outcome had the taxpayer been legally represented, the Upper Tier was clear that the taxpayer was at a disadvantage. In particular, the detailed analysis of the Default Surcharge regime on which the decision ultimately turned did not include any weighty counter arguments.

The end result is a decision that significantly strengthens HMRC’s hand in any penalty appeal, since the principles can be applied across the range of VAT and Tax penalties.

The issue of proportionality continues to be raised by taxpayers. But it is clear that, apart from very few cases, such an argument cannot succeed.

Tags:

You might also be interested in

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.