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Andrew Needham of VAT Specialists Ltd reports on a recent VAT penalty case won by the taxpayer.

Tribunal Discharges Penalty

In a landmark decision, the Tribunal considered that the levying of a 5% penalty (totalling £131,881) as a consequence of a one-day delay in submitting a VAT return, was disproportionate to the offence and discharged the penalty.

VAT Return and Payment were One Day Late

The taxpayer, Enersys Holdings UK Limited (Enersys) had agreed non-standard tax periods. The late payment in question was due on 30 January 2008 but was received a day late.

No Reasonable Excuse But Principle of Proportionality Prevailed

In looking at "reasonable excuse", the Tribunal was satisfied that the late submission and payment of the return was an employee’s mistake. The Judge added that in such circumstances the legislation was clear that this cannot constitute a reasonable excuse.

The Tribunal then turned to look at the principle of proportionality. The Judge commented on the lack of discrimination by the VATman between accidental and deliberate lateness and how late the payment is made. The Tribunal also criticised the lack of correlation between the size and nature of a business with the penalty, which is calculated on net liability. For example, a labour-intensive business will have a higher net liability compared to a business with the same turnover, whose major cost components are taxable raw materials. Furthermore, repayment businesses escape monetary penalties completely.

As the default surcharge system is a domestic measure implementing a Community obligation it must be proportionate. Whilst accepting that the default regime normally produces a fair penalty the Tribunal did have reservations about the absence of a correlation between the length of delay and amount of penalty.

On this basis and looking at this individual penalty the Tribunal found that the penalty imposed on Enersys for payment one day late was wholly disproportionate, and allowed the appeal.

See the full case report: Enersys Holdings UK Limited v Revenue & Customs [2010] UKFTT 20 (TC)