Enersys Holdings UK Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 January 2010 |
| Date | 11 January 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00335.
[2010] UKFTT 20 (TC).
Judge Colin Bishopp (Chairman).
Michael Conlon QC and Hui Ling McCarthy, counsel, for the Appellant
Nigel Bird, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
The following cases were referred to in the judgment:
Ali (t/a Shapla Tandoori Restaurant) VAT No. 17,681; [2002] BVC 2,254
Anklagemyndigheden v Hansen und Søn I/S ECAS (Case C-326/88) [1990] ECR I-2911
C & E Commrs v Peninsular and Oriental Steam Navigation Co VAT [1994] BVC 57
C & E Commrs v SteptoeVAT [1992] BVC 142
Garage Molenheide BVBA v Belgium ECASECASECASECASVAT (Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] BVC 106
Gasus Dosier-und Fordertechnik v Netherlands HRC (Application No. 15375/89) (1995) 20 EHRR 403
Greengate Furniture Ltd VAT No. 18,280; [2004] BVC 4,013
Han & Yau v C & E Commrs VAT [2001] BVC 415
International Transport Roth GmbH v Home Secretary ELRWLR [2003] QB 7283; [2003] WLR 344
Louloudakis v Greece ECAS (Case C-262/99) [2001] ECR I-5547
Profile Security Services (South) Ltd v C & E Commrs VAT [1996] BVC 344
R (Alconbury Developments Ltd) v Secretary of State for the Environment, Transport and the Regions ELR [2003] 2 AC 295
Sony Ericsson Mobile Communications AB VAT No. 20,513; [2008] BVC 4,047
Wilson v Secretary of State for Trade and Industry ELR [2004] 1 AC 816
Default surcharge - Return submitted one day late because of error in determining correct date - Whether surcharge proportionate - Whether amount of penalty incompatible with Community law principle of proportionality.
The issue was whether a default surcharge issued to the appellant was incompatible with the Community law principle of proportionality.
The appellant was a member of a worldwide group of companies and the representative member of a UK VAT group. The appellant had permission to use non-standard VAT return periods designed to coincide with its management account dates. The due date for submission of the appellant's return for the quarter to December 2007 was 30 January 2008. Payments were made on account, but the return and balancing payment were received by the commissioners on the following day. A surcharge was imposed in the sum of £263,763 at the rate of 10 per cent of the tax due. However, the commissioners later discharged the penalty for an earlier period and the surcharge was amended to 5 per cent in the sum of £131,881.
The appellant brought to the attention of the tribunal the finding in Anklagemyndigheden v Hansen und Søn I/S (Case C-326/88) [1990] ECR I-2911 that where a Community regulation did not specifically provide any penalty for an infringement or referred for that purpose to national laws, regulations and administrative provisions the law required member states to take all measures necessary to guarantee the application and effectiveness of Community law. For that purpose, the member state was required to ensure that infringements of Community law were penalised under conditions analogous to those applicable to infringements of national law of a similar nature and importance and which, in any event, made the penalty effective, proportionate and dissuasive. The tribunal observed that there was no suggestion in this case that the UK adopted different approaches to breaches of Community and domestic law. The question was whether it had struck a proportionate balance between the effective and dissuasive, which in the UK would more usually be described as punitive and deterrent, aims of the penalty on the one hand, and reasonableness, that is avoiding excessive and unjustified harshness, on the other. The approach to be adopted by the national court, the tribunal in this case, was described in Wilson v Secretary of State for Trade and Industry [2004] 1 AC 816 where Lord Nicholls stated that the legislation must not only have a legitimate policy objective, but must also satisfy a "proportionality" test. The court must decide whether the means employed by the statute to achieve the policy objective was appropriate and not disproportionate in its adverse effect.
The appellant contended that the penalty which, when first imposed, amounted to an annual interest rate of 3,650 per cent was self-evidently disproportionate since it not only far exceeded a fair commercial rate but also bore no relation to the loss suffered by the commissioners. This argument was quickly rejected by the tribunal on the basis that the equation of the surcharge with interest was the wrong approach. However, the tribunal conceded the fact that the equivalent interest rate diminished as the delay in payment increased did lend some support to the appellant's contention that the surcharge was unduly harsh when compared with other penalties for the late payment of tax and with the penalty regimes in other countries. Although the appellant had disavowed any intention to attack the proportionality of the default surcharge system, it contended that it was difficult to see how a penalty which was fixed, without regard to the relative gravity of the offence, could be proportionate.
The commissioners cited C & E Commrs v Peninsular and Oriental Steam Navigation Co VAT[1994] BVC 57 in which it was stated during the High Court hearing that member states must inevitably have the very widest margin of appreciation for determining just what penalties were appropriate to underpin the efficient functioning of the VAT system. The court observed that nothing in the many authorities cited encouraged the view that it would readily regard a system of penalties as falling foul of the doctrine of proportionality. Accordingly, as the judge pointed out in that case, only most exceptionally could a court properly strike down legislation. The commissioners submitted that if the system was not disproportionate, the penalty must stand, even if it might be thought excessive.
Held, allowing the company's appeals:
1. A feature of the default surcharge system which had the potential to undermine its proportionality was the absence of a power to mitigate. Other such features were that the penalty was the same whatever the delay and the absence of an upper limit.
2. Taking the penalty in this case in isolation, though against the background of the public interest in the prompt payment of taxes, it was an inescapable conclusion that it was disproportionate.
3. It was difficult to dispute the appellant's contention that while the system for penalising other delays in the payment of taxes allowed for correspondence of the penalty with the period of lateness, mitigation and in some cases an upper limit, the default surcharge regime did not. Of most concern was the absence of a link between the penalty and the period of delay.
4. In the circumstances, the tribunal considered that it was unable to uphold the disputed surcharge. Since there was no power to impose a more reasonable penalty, the appellant would suffer no penalty at all.
1. The appellant, Enersys Holdings UK Limited ("EHUK") is a member of a worldwide group of companies, with an American parent, which manufactures and distributes stored energy products. It is the representative member of a number of UK-based companies, like itself subsidiaries of the American parent, which constitute a VAT group. EH Europe GmbH ("EHE"), a Swiss company, is another subsidiary which carries on some of its business in the United Kingdom, and it is separately registered here for VAT. The VAT group's accounts team deals with the VAT returns for both EHUK and EHE.
2. At the material time EHE was required to submit its returns by reference to standard calendar quarters, but EHUK had non-standard period ends. They are, or were, designed to coincide with its management accounts dates, the majority of which in fact fell at the ends of calendar months, though some did not. Non-standard periods were agreed by the Commissioners at EHUK's request. Both EHUK and EHE were required to submit returns for their three-month prescribed periods which ended in December 2007 - EHUK's on 30 December, and EHE's on 31 December. The due date for the submission of EHE's return and payment was 31 January 2008, but EHUK was required to submit its return and payment by 30 January, as directed by the Commissioners in exercise of the powers conferred on them by reg. 25(1)(c) of the Value Added Tax Regulations 1995.
3. EHUK's turnover is such that at the time relevant to this appeal it was required to make payments on account (see Value Added Tax Act 1994 section 28s 28 of the Value Added Tax Act 1994, the VAT (Payments on Account) Order 1993 and reg. 44 to 48 of the 1995 Regulations). A trader subject to the requirements must make interim payments of estimated amounts a month after the end of each of the first two months of each prescribed period, followed by a balancing payment, representing the remainder of the VAT due for that period, by the due date. One further consequence of being subject to the requirements is that the seven days of grace allowed by concession to other traders paying electronically are not available; cleared funds must be in the Commissioners' account by the due date.
4. EHUK's return and payment, due on 30 January 2008, were in fact received by the Commissioners on 31 January. This was not the first occasion on which EHUK had failed to pay on time, and it was accordingly within the default surcharge regime for which Value Added Tax Act 1994 section 59ss. 59, 59A and 59B of the 1994 Act provide. Such was EHUK's record that a penalty of 10% of the tax was imposed; it amounted to £263,763. The Commissioners later accepted that EHUK had a reasonable excuse for an earlier default, and discharged the penalty for that period. One consequence of the discharge was that the penalty for the January 2008 default was reduced to 5%, or £131,881. The present appeal is against...
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