Businesses urged to pay VAT on time after court rules six figure fine for one day payment delay ‘proportionate’

Blue Ocean Associates Limited appealed to the First Tier Tax Tribunal after being hit with a VAT default surcharge of £277,185 for paying their quarterly VAT payment on 1 March 2012 rather than on 29 February 2012, the date on which the payment was due.

The company, a representative member of a VAT Group, had no “reasonable excuse” for the default, but argued that the surcharge was disproportionate because while the total output liability of the VAT Group for the four quarters up to and including 03/12 was in excess of £4 billion, the company and its subsidiary undertakings recorded a loss of some £9 million in the financial year ending 31 December 2012.

Bound by the decisions and principles established by previous Upper Tribunalcases, the First Tier Tribunal noted that a default surcharge penalty is not related to profitability, but is related to the unpaid tax.

In its decision, the tribunal cited HMRC’s argument that regardless of profitability, a taxpayer receives the money to pay its VAT liabilities from the person to whom it makes its supplies. So, regardless of its profitability, the taxpayer should be able to account for its VAT liabilities in all cases.

Jim Burberry, VAT partner at RSM said: “Every case is determined on its merits, but the tribunal’s decision underlines how important it is for companies to be on top of all their VAT payments to the taxman.

“This decision also suggests that it would be extremely hard to identify a situation in which the size of a penalty could be challenged on the basis of proportionality. This should serve as a warning to others, particularly businesses with significant VAT liabilities.”