The VAT surcharge system imposes no penalty the first time a business submits its VAT return later than it should have done. Neither is there a penalty for the second and third defaults provided the surcharge (calculated at 2% and 5% respectively of the VAT due on the return) does not exceed £400.
It’s likely that many Finance Directors would ignore a surcharge liability notice (SLN) that does not have a demand for payment accompanying it. A recent case in the First-tier Tax Tribunal servers as a warning that such behaviour risks the imposition of a much bigger surcharge at a later date.
A business was repeatedly late in submitting its VAT returns. It ignored its first three default notices from HMRC. This led to them being on the receiving end of a surcharge calculated at 10% when it defaulted for a fourth time. The business acknowledged it was to blame for its latest default. It felt however, that it had a reasonable excuse for submitting it return late for at least one of the earlier periods. If the default notice for one of these earlier periods could be removed, it would result in the latest surcharge being calculated at 2% or 5%.
The tribunal, refused to hear an appeal against the earlier default notices, ruling that the defaults needed to have been appealed at the time – even though no monetary penalty was incurred. This was because the business was still actually ‘liable’ for a surcharge within the strict meaning of the law. This meant that any appeal (or request for HMRC to reconsider) must be made within 30 days of the issue of the SLN.
The tribunal judge accepted that prior periods could sometimes be considered if they were ‘material’ to a later surcharge which attracted a monetary penalty, but declined to do so on this occasion. This case provided a costly lesson to this business of the importance of acting in a timely manner where HMRC are concerned. The single way for a business to be sure of avoiding a similar situation is to appeal a SLN for which it feels it has a reasonable excuse as soon as possible, even if there is no monetary penalty.
Requesting HMRC or the tribunals to reconsider a surcharge can feel like something of a lottery, but, in the experience of our VAT specialists, it is always worth at least considering requesting the removal of a SLN on reasonable excuse grounds. Recent HMRC statistics show that about half of all surcharges are reduced or removed on appeal/reconsideration. So make sure you always challenge a SLN immediately if you believe that you have a reasonable excuse for that period. If you don’t, you may be missing your only opportunity to prevent a large penalty in a future period.
If you wish to discuss this case or any other VAT issue, please contact our Head of VAT Services, Gill Yates at 0845 177 5500 or using our on-line contact form.