VAT default surcharge withdrawn

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Neil Warren examines a case where HMRC’s failure to deal with telephone calls from the taxpayer to request a time to pay arrangement was accepted as a reasonable excuse.

The case of Chameleon Technology UK Ltd (TC06765) related to a 10% default surcharge of £17,599 in relation to the company’s July 2016 VAT quarter. The taxpayer claimed there was a reasonable excuse for the late payment made up of two factors:

  • unusual trading circumstances linked to a typhoon in Asia (where the company bought its goods)
  • HMRC’s failure to speak to the company’s finance director when he repeatedly called to agree a time to pay arrangement, before the tax was due for payment.

I want to focus on this second factor because getting issues resolved with HMRC by telephone is a common problem for tax advisers.

Key tips to reduce a surcharge

Here are two important tips that will help reduce a default surcharge:

  1. pay as much tax as possible on time – a surcharge is only calculated on the amount of tax unpaid by the due date.
  2. agree a time to pay arrangement with HMRC’s Business Payment Support Service (BPSS) before the tax is legally due for payment, as this avoids a surcharge for the period in question.

The company’s finance director was aware that the company would have a short-term cash flow difficulty which was predicted to continue into September 2016. The VAT due for the July 2016 period was payable by 7 September 2016. The company managed to pay £30,000 on time which reduced the potential surcharge as in tip 1 above.

The finance director also put into action tip 2. He made calls to the company’s case manager in HMRC late payment department on 7 August and 12 August plus two other calls to the BPSS (which is a different division of HMRC).

It appears that the BPSS refused to discuss a time to pay deal because of the involvement of the late payment case manager, and the late payment case manager refused to discuss the problem because there was a time to pay arrangement still in place for the previous VAT period to April 2016. Finally, a time to pay agreement was made on 9 September, two days after the due date for the July quarter payment (7 September) and hence the reason for the surcharge.

Communication with HMRC

The taxpayer’s reasonable excuse appeal (under s59(7), VATA 1994) was allowed on both the issue as to why the company had cash flow difficulties, but also the poor communication of HMRC in dealing with the time to pay requests. To quote from the tribunal report:

“…had HMRC given the appellant’s request for a time to pay due and full consideration, an arrangement would or should have been put in place. For reasons which are not clear, the necessary dialogue did not happen, but given the fact that the appellant cleared a substantial amount of outstanding VAT very quickly we have to accept that the appellant had every incentive to agree an arrangement with HMRC. There would be no reason for them not to do so. HMRC were of course under no obligation to agree time to pay but the fact that the issue was never discussed due to no fault on the part of the appellant is in itself also a reasonable excuse.” (emphasis added by author)

Conclusion

My view is that speaking directly to HMRC officers to resolve issues will become even more difficult in the future. This is a common challenge with many large organisations, including banks, telephone suppliers and television companies. The best strategy is to fully record the details of every attempt to communicate with HMRC and, if possible, have a plan B in place if the telephone route fails.

The finance director of Chameleon followed this record keeping approach and was rewarded with success at the tribunal. Well done to him.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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31st Oct 2018 23:15

Good article and a timely reminder to businesses that they are allowed to appeal such matters.

The HMRC system that generates Default Surcharges can and does spew out incorrect surcharges.

In my extended time at HMRC there were many, many occasions where SLN’s and DS penalties were issued incorrectly. However, because a SLN doesn’t mean anything in its own right, businesses just accept them. Then when there is a genuine problem down the line, and a penalty is issued, it’s a lot harder to “walk back” the original SLN.

My advice, never ignore a SLN, always make sure it has been issued correctly and if you think it has been issued in error, challenge HMRC.
The same goes with any DS penalty issued, don’t assume it is correct.
And finally, as the appeal above demonstrates, always talk (or try to talk) to HMRC if there are problems paying or submitting a return. It’s better you call them, than they call you.

Thanks (2)