25 Mar 2018

Harsh VAT default surcharge decision

31 January 2018

A perfect storm


  • The default surcharge rules can produce harsh results.
  • The decision in Total Technology (Engineering) Ltd imposes a binding precedent on First-tier Tribunal judges.
  • The recent case of Global Switch Ltd establishes a new standard of unfairness.
  • A £1,500 VAT error resulted in a surcharge of almost £300,000.
  • The company’s arguments on disproportionality failed.
  • Timely filing of returns is a necessary feature of the VAT regime.

There is a legal saying: ‘hard cases make bad law’, which can be interpreted as basing a generally applicable legal principle on an extreme example is likely to create rather than solve problems. However, it is also true that ‘bad laws make hard cases’. I am regularly astonished by the harsh and capricious results that can be produced by the default surcharge rules in VATA 1994, s 59. In Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC), the Upper Tribunal listed and examined nine substantial criticisms of default surcharge and concluded that: ‘with the possible omission of an upper limit on the penalty which may be imposed, the regime viewed as a whole does not suffer from any flaw which renders it non-compliant with the principle of proportionality in the sense that it, or some aspect of it, falls to be struck down.’ This is a binding precedent for First-tier Tribunal judges, who have passages of the judgment on ‘copy and paste’ in response to appellants who plead that the ...

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