Independent VAT Consultant
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VAT horror story: £297,000 surcharge for one day late

15th Feb 2018
Independent VAT Consultant
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The default surcharge system can occasionally produce outcomes that seem incredibly harsh. Neil Warren explains the lessons from a surcharge case which the taxpayer lost.


Imagine you have paid your VAT liabilities on time for the last ten quarters but you slip up in the 11th quarter and make a payment one day late. As result HMRC issues a default surcharge against your business for £297,845. How could this happen?

That is what happened to Global Switch Ltd (TC06252), and there are many lessons to be learned from this highly unusual case.

Basic principles

The key point to be aware of is that a business has two responsibilities as far as the VAT default surcharge regime is concerned:

  • Pay the VAT on time: including monthly payments on account for larger companies, which included Global Switch Ltd.
  • Submit the VAT returns on time: this was the main problem for Global which led to the big penalty in question.

If you meticulously do these two things on time, the default surcharge regime will be as irrelevant to your business as winning this year’s Premier League football title will be to any team apart from Manchester City.

How did it happen?

The key point to remember about the default surcharge regime is that the level of the penalty rises each time there is a default; from 2%, 5%, 10% and finally to 15%. The business can’t reset the penalty level back to zero unless it has made all VAT returns and all VAT payments on time for a complete 12 month period.

The penalty trap for Global Switch had two triggers:

  1. The company entered the default surcharge regime in June 2012 due to a late payment. It received a surcharge liability notice for this period. This notice means the business doesn’t get a penalty for the misdemeanour but it will get a penalty if it slips-up again in the following 12 months.
  2. The company failed to exit the default surcharge regime because it also slipped up in the March 2013, December 2013, September 2014 and September 2015 periods. Therefore, Global Switch was still in the surcharge regime when it made a payment of £2,978,459 one day late for the September 2016 period. By this time the company was subject to a 10% surcharge.

Learning points

1. A late return counts as a default

The defaults made by Global Switch for the periods September 2014 and September 2015 were because the VAT returns were “filed a few days late”. There was no late paid tax – only late returns. Many advisers incorrectly think that the late return is irrelevant as long as the tax is paid on time.

Having submitted a late VAT return for September 2014, Global had to get everything right up to and including September 2015 periods. It didn’t, and it defaulted with another late return in September 2015.

2. Proportionality argument rarely wins

The taxpayer put forward a valid argument that a £297,000 penalty was very unfair for making a tax payment on 1 November 2016 rather than the due date of 31 October – one day earlier. The tribunal considered binding case law on the issue of proportionality, which concluded that Global’s default was not a “wholly exceptional case” so there was no proportionality issue.

In reality, the chance of winning a proportionality argument is as remote as a three-legged horse winning this year’s Grand National. The main reason is because the surcharge system is based on an escalating level of penalties for each default, so it is hard to argue that the basic principles are flawed.

3. A reasonable excuse needs an exceptional event

The taxpayer’s last throw of the dice was to claim that there was a reasonable excuse for the default in December 2013 period, namely that the underpayment of £1,853 out of a total payment of £2,377,764 was due to an error in the company’s VAT control account.

The tribunal were not sympathetic. It acknowledged that while the error was “genuinely and honestly made”, it was not a reasonable excuse for a default. The lesson here is that a reasonable excuse argument needs to relate to an exceptional event, eg illness, bereavement, computer breakdown etc.


I feel sympathy for the taxpayer in this case, but a strict application of the letter of the law meant there was very little room to appeal the massive penalty the company was charged. The only positive point is that this case should encourage us to redouble our efforts to make sure our clients always give top priority to submitting VAT returns and payments on time. Never under-estimate the shark infested waters of the nation’s favourite tax.


Replies (9)

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By Justin Bryant
26th Feb 2018 14:04

The real learning point here is that the modern UK tax system operates as numerous bear traps to essentially confiscate your hard earned wealth for basically innocent mistakes/oversights even if you are an otherwise perfectly law abiding person.

Furthermore, our various professional bodies don't seem to bother lobbying the Government to change all these outrageous injustices, which now include wholesale retrospective tax legislation etc.

Look at what the CIoT said recently about the (20 year retrospective) 2019 EBT loan charge at para 5.3 in the link below:

"5.3. The Government are right to challenge and counter abusive tax avoidance schemes, such as those involving disguised remuneration."

Whose side are they on here? Only 4 years ago the CIoT were saying the opposite as follows from the link below re APNs:

"Taxpayers should be entitled to organise their affairs in accordance with the prevailing law in the certain knowledge that it may be changed in the future but that its impact cannot be backdated. Retrospective legislation creates doubt and uncertainty to the detriment of the economy at large. We believe that these proposals can only create uncertainty for taxpayers..."

Notably, the CIoT has removed its 2010 policy paper criticizing retrospective tax legislation that used to be in the link below is now no longer on their website:

Interestingly, unlike the CIoT, the GAAR panel does not find EBT/EFRBS loans to employees abusive per se per section 8 of the link below:

Thanks (6)
Replying to Justin Bryant:
By moneymanager
26th Feb 2018 09:55

"bear traps" aided and abetted for the "self-assessing" tax payer by the absolute uselessness of

Thanks (3)
By SteveHa
19th Feb 2018 11:15

If you meticulously do these two things on time, the default surcharge regime will be as irrelevant to your business as winning this year’s Premier League football title will be to any team apart from Manchester City.

An analogy completely lost on me, I'm afraid.

Thanks (4)
By Ammie
26th Feb 2018 10:58

Lets not talk

- Football as I am still sore after yesterdays final. Remind me, how much do those guys get paid? No don't!
- HMRC penalties (pardon the unintended football pun), from an organisation that insists penalising the tax payer is not its aim and prefers not to. Really? Can be very hard work challenging them sometimes.

Thanks (0)
By pauljohnston
26th Feb 2018 11:05

The default surcharge scheme although inbedded in law is neither fair or proportinate.

I have recently had a client who is going for bankruptcy which means HMRC will collect nothing because of the disproportinate surcharge for late registration. In his case the supplier a large company registered for VAT went into liquidation before the vat on invoices issued by the client could be collected. THe total amount was £34000, £5,400 for late registration and the remainder for the VAT not collected. Whilst the £5400 was acceptable the remainder was not in my opinion since if the client had been registered the £28600 would have not been collected by HMRC but by the trader - he would have then paid this on with his VAT return.

As the advert says "You live and learn" but in this case HMRC gets nothing.

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By 625VA
27th Feb 2018 23:56

I agree with Justin. The ONLY reason for being a member of an Institute is for clients to feel that one is competent. The Institutes are led by weak people with no backbone - they do NOT support members. As for the HMRC....we have just received reply from HMRC re: an RTI filing error which HMRC have admitted is their mistake and they said it should be resolved in 12 months! As a profession, accountants are spineless - yes - true! How often do the Institutes go on a national march to protest outside Parliament? We are slaves to HMRC and will become more so.

Thanks (0)
Replying to 625VA:
By Eddystone
02nd Mar 2018 22:25

Quite agree. The only one who seems to have any backbone is Tony Margaritelli of the ICPA !

Thanks (1)
Adrian Lawrence
By AdrianLawrence
28th Feb 2018 12:46

Look on the positive side if you write a very grovelling letter begging for forgiveness and get let off, a situation I've been in before and it worked, then that letter could be the most valuable one you have ever written.

It's always worth asking to be let off, in my experience chances are 50:50

Thanks (0)
By BryanS1958
01st Mar 2018 10:10

I agree with Justin, the professional bodies just go along with anything the Government says. Instead of saying 'NO, knock this stupid idea on the head' to Making Tax Difficult (MTD) they are running workshops on it!

Thanks (1)