Is it right that the default surcharge under VATA 1994 s 59 cannot be adjusted to take account of a later s 80 claim?
I feel sorry for KD Media Publishing in losing its First-tier Tribunal appeal on the quantum of default surcharges for late VAT payments (KD Media Publishing Ltd v HMRC [2018] UKFTT 494). It came up with an ingenious theory, but the tribunal rejected it. I am unconvinced by that rejection, though I might be persuaded if the reasoning was more detailed.
The appellant was a serial late-payer, and had amassed surcharges. In one period, the late net payable VAT was subsequently found to be excessive, so HMRC reduced the surcharge accordingly, along with the accumulated debt. The discovery of this error in HMRC’s favour occurred a few tax periods after the return in question, and this formed the basis for the appellant’s argument, which ran as follows:
Since it was later found that too much VAT had been paid, one should postulate that HMRC had always held that sum on account for the following return (though unwitting of that fact, of course). And as the following return was paid in full (albeit late), that meant the same sum was effectively paid on account of the next return (and so on, until the error was discovered and credited to the account). That must mean (so goes the argument) that each surcharge calculation should be reduced by the carried forward error in HMRC’s favour.
The tribunal considered the impact of VATA 1994 s 80, which deals with the correction of errors, and noted that there was no suggestion in this that the corrected overpayment was somehow regarded as a liability upon HMRC back to the date of the error. It seems to say (without addressing the point) that the correction is effective from the date of the s 80 claim, which had been made after the due date of the returns in respect of which the appellant sought a reduced surcharge.
The tribunal considered reg 40 of the VAT regulations (SI 1995/2518), which says, in effect, that the sum owed to HMRC for a return is what the return says it is; therefore, the quantum on which the default surcharge is based was accurate as per the return submitted. So, since s 80 claims have no backdated element, and reg 40 says that payment must be made of the box 5 figure on the return, the default surcharge under VATA 1994 s 59 cannot be adjusted to take account of the later s 80 claim.
The thing I find curious, however, is that there was no analysis of VATA 1994 s 59 itself, which is the provision for the default surcharge. This says that there is a penalty if (inter alia): ‘[HMRC has] not received the amount of VAT shown on the return as payable… [for] that period’. Considering the returns submitted after the incorrect return, but before the s 80 claim, does this mean that the payment by the taxpayer must be of the exact sum on the return to avoid the provisions, or can any sum that HMRC holds which is not applicable to that return be regarded nonetheless as being ‘an amount of VAT shown as payable’?
If we assume that an amount can be part of the full amount, and HMRC was later discovered to have held that sum by virtue of the taxpayer’s over-declaration, it is not obvious to me that the terms of s 59 are not engaged. Part of the sum owing on that return was held by HMRC (as it turned out), and was therefore pre-paid. Why should it not be taken into account? Why do we need an explicit hypothecation of the s 80 sums back to the original error to generate that situation? Section 59 does not appear to need it.
I am open to persuasion, but have not been persuaded yet.
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KD Media and the VAT default surcharge
Is it right that the default surcharge under VATA 1994 s 59 cannot be adjusted to take account of a later s 80 claim?
I feel sorry for KD Media Publishing in losing its First-tier Tribunal appeal on the quantum of default surcharges for late VAT payments (KD Media Publishing Ltd v HMRC [2018] UKFTT 494). It came up with an ingenious theory, but the tribunal rejected it. I am unconvinced by that rejection, though I might be persuaded if the reasoning was more detailed.
The appellant was a serial late-payer, and had amassed surcharges. In one period, the late net payable VAT was subsequently found to be excessive, so HMRC reduced the surcharge accordingly, along with the accumulated debt. The discovery of this error in HMRC’s favour occurred a few tax periods after the return in question, and this formed the basis for the appellant’s argument, which ran as follows:
Since it was later found that too much VAT had been paid, one should postulate that HMRC had always held that sum on account for the following return (though unwitting of that fact, of course). And as the following return was paid in full (albeit late), that meant the same sum was effectively paid on account of the next return (and so on, until the error was discovered and credited to the account). That must mean (so goes the argument) that each surcharge calculation should be reduced by the carried forward error in HMRC’s favour.
The tribunal considered the impact of VATA 1994 s 80, which deals with the correction of errors, and noted that there was no suggestion in this that the corrected overpayment was somehow regarded as a liability upon HMRC back to the date of the error. It seems to say (without addressing the point) that the correction is effective from the date of the s 80 claim, which had been made after the due date of the returns in respect of which the appellant sought a reduced surcharge.
The tribunal considered reg 40 of the VAT regulations (SI 1995/2518), which says, in effect, that the sum owed to HMRC for a return is what the return says it is; therefore, the quantum on which the default surcharge is based was accurate as per the return submitted. So, since s 80 claims have no backdated element, and reg 40 says that payment must be made of the box 5 figure on the return, the default surcharge under VATA 1994 s 59 cannot be adjusted to take account of the later s 80 claim.
The thing I find curious, however, is that there was no analysis of VATA 1994 s 59 itself, which is the provision for the default surcharge. This says that there is a penalty if (inter alia): ‘[HMRC has] not received the amount of VAT shown on the return as payable… [for] that period’. Considering the returns submitted after the incorrect return, but before the s 80 claim, does this mean that the payment by the taxpayer must be of the exact sum on the return to avoid the provisions, or can any sum that HMRC holds which is not applicable to that return be regarded nonetheless as being ‘an amount of VAT shown as payable’?
If we assume that an amount can be part of the full amount, and HMRC was later discovered to have held that sum by virtue of the taxpayer’s over-declaration, it is not obvious to me that the terms of s 59 are not engaged. Part of the sum owing on that return was held by HMRC (as it turned out), and was therefore pre-paid. Why should it not be taken into account? Why do we need an explicit hypothecation of the s 80 sums back to the original error to generate that situation? Section 59 does not appear to need it.
I am open to persuasion, but have not been persuaded yet.
