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Race horse in the stable

Reasonable excuse: FTT overturns big VAT penalty

2nd Jul 2018
Independent VAT Consultant
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The First Tier Tribunal has concluded that the taxpayer had tried to set up a correct direct debit instruction to pay its monthly VAT liabilities and therefore overturned a default surcharge. Neil Warren considers the case.

Have you ever made an online application for goods or services, come away from your computer screen convinced that everything is sorted, and then days or possibly weeks down the line, you discover that the entire process was a wasted exercise?  

This was the issue in the case of Godolphin Management Company Ltd (TC06515), where the taxpayer was convinced that she had successfully set up an online direct debit instruction (DDI) to pay VAT each month to HMRC.

Failed DDI

Godolphin, a thoroughbred racing stable, received a default surcharge liability notice for the VAT period June 2016 (the business was on monthly returns) which meant the next overdue payment within 12 months would be subject to a 2% surcharge, rising to 5%, 10% and 15% with each subsequent default.

But the DDI process did not work, meaning the August VAT was paid late on 18 October 2016. HMRC issued a 2% surcharge for £8,041.98. But worse was to come because the payment for September 2016 was made one day late on 8 November 2016, and this was an exceptionally high payment period – the surcharge amount was £217,436.

Taxpayer argument

Here are the two key facts, which led to the tribunal overturning the surcharge for August 2016, therefore meaning that the September 2016 surcharge was reduced from 5% to 2%, a massive reduction from £217,436 to £86,974.

  • The taxpayer had no reason to suspect that the DDI procedure had failed – there was no “error message” on the screen.

  • A conversation with HMRC some days later had apparently produced the comment from the officer that there had been some technical issues with the DDI system

The law

The taxpayer had three lines of attack to overturn the surcharges, two of which were successful:

  • A surcharge is overturned if the taxpayer has taken all possible steps to submit the return and pay tax with the expectation that this would be made on time (s59(7)(a), VATA1994).

  • A surcharge is overturned if the taxpayer had a ‘reasonable excuse’ for the lateness. HMRC said there was no reasonable excuse because the taxpayer had ”incorrectly set up” the DDI (s59(7)(b), VATA1994).

  • Proportionality – relevant to the September surcharge only. The taxpayer argued that the application of the law is overridden if the result is one that was clearly not intended by the legislators ie a surcharge of £86,974 for paying one day late is unfair.

Common sense

Where were HMRC coming from with their comment during the hearing that “genuine mistakes, honesty and acting in good faith are not reasonable excuses”? The answer is that the HMRC representative was directly quoting form HMRC Notice 700/50, para 6.3. But somewhat reassuringly, the judge dismissed the view that “there can be no reasonable excuse as a result of genuine mistakes”. Hurrah!

The court decided that all steps had been taken to ensure the VAT payment for August 2016 was made on time (by setting up the DDI) and a ‘reasonable excuse’ was also evident due to the failure of the DDI process.

Final twist

It was not all joy for the taxpayer. The argument that the surcharge for September 2016 was ‘disproportionate’ and should be withdrawn was not accepted by the judge. The problem with the proportionality argument is that the surcharge system has stood the test of time, and it is based on an escalating penalty according to the number of defaults in a 12-month period. So the system is fundamentally sound, which means the proportionality argument is rarely successful. The September 2016 surcharge was maintained at the reduced rate of 2% rather than 5%.


This case is a timely reminder that full concentration is needed with any online VAT procedure to ensure it achieves its intended outcome. There are usually several checking mechanisms eg a submission reference number is often issued at the end of a process. The onus is on the taxpayer to get things right.  

Replies (4)

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By RandDTaxUK
04th Jul 2018 09:48

HMRC also attempted to penalise us on this (2014-15) and there was a fault on their system then of which I made them aware. We had new bank details and the deadline for changing them was about 5 days prior to the payment date, which we met. But we had filed our return 7 days before. It appears the HMRC system attaches the DDI information to the 'collection instruction' when the return is made rather than doing this (as would be safer) in the 'too late to change' period between day -5 and payment day. I alerted them but don't know if this has been corrected so anybody changing bank details make sure you do it and let it register before doing the return.

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By ClareH
04th Jul 2018 11:57

Watch out for an automatically cancelled DDI from HMRC as this happened to a client who mostly reclaims input tax. (Client has mostly outside EU Sales) After about 5 quarters of reclaiming, we recevied a letter from HMRC saying they had cancelled to DDI as it was inactive. Luckily i remembered to set up the DD again before a VAT return with a liability to HMRC.

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By Charlie Carne
04th Jul 2018 20:41

Based upon the surcharges quoted, the VAT due was millions of pounds per month. Any business that size would presumably have a full-time accounts team who I would expect to spot that the direct debit did not pay out those millions in month 1 of the new DD, let alone in month 2 or 3.

I do, however, have sympathy for the fact that, due to the surcharge percentage rising with each return, a business that pays its VAT monthly (i.e. earlier than normally required) is more heavily penalised than a business on quarterly returns. The escalation should rise at the same rate for all businesses, regardless of how often they file a return.

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Replying to charliecarne:
By Democratus
05th Jul 2018 11:36


a full-time accounts team who I would expect to spot that the direct debit did not pay out those millions in month 1 of the new DD, let alone in month 2 or 3.

Quite right.

And that's why i set up DDs to pay HMRC 1 day early where i can, PAYE for instance, where i have 1 day to fix any issue. (never had to yet touch wood). Harder for VAT as they control the timing.

But spotting it at month 1 should have triggered a query as to why and sorted it before the next payment.

Still it is good to hear that “there can be no reasonable excuse as a result of genuine mistakes” dismissed.

Can i quote this back to HMRC in the future?

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