Total Technology (Engineering) Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 November 2012 |
| Neutral Citation | [2012] UKUT 418 (TCC) |
| Date | 29 November 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 418 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Warren J, Judge Colin Bishopp.
Peter Mantle (instructed by the Solicitor to HM Revenue and Customs) for the appellants.
Michael Matthews of Matthews Pulman, Accountants, and Brian Phillips for the respondent.
The following cases were referred to in the judgment:
A v Secretary of State for the Home DepartmentUNK [2004] UKHL 56
Ampafrance SA v Directeur des Services Fiscaux de Maine-et-Loire; Sanofi Synthelabo v Directeur des Services Fiscaux du Val-de-MarneECASECASVAT (Joined Cases C-177/09 and C-181/99) [2002] BVC 664; [2000] ECR I-7013
Anklagemyndigheden v Hansen und Søn I/SECAS (Case C-326/88) [1990] ECR I-2911
CR Smith Glaziers (Dunfermline) Ltd v C & E CommrsVAT [2003] BVC 249
C & E Commrs v Peninsular and Oriental Steam Navigation CoVAT [1992] BVC 170
de Freitas v Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and HousingELR [1999] 1 AC 69
Dyrektor Izby Skarbowej w Bialymstoku v Profaktor Kulesza, Frankowski, Józwiak, Orlowski sp jECAS (Case C-188/09) [2010] ECR I-7639
EC Commission v GreeceECAS (Case C-156/04) [2007] ECR I-4129
Enersys Holdings UK LtdTAX [2010] UKFTT 20 (TC); [2010] TC 00335
1st Glass and Mirror Co LtdTAX [2011] UKFTT 30 (TC); [2011] TC 00907
Garage Molenheide BVBA v BelgiumECASECASECASECASVAT (Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] BVC 106; [1997] ECR I-7281
Gasus Dosier-und Fördertechnik GmbH v NetherlandsHRC (Application 15375/89) (1995) 20 EHRR 403
Goldsmiths (Jewellers) Ltd v C & E CommrsECASVAT (Case C-330/95) [1997] BVC 494; [1997] ECR I-3801
Greengate Furniture LtdVAT [2003] BVC 4,077; [2003] V & DR 178
International Transport Roth GmbH v Home SecretaryELR [2003] QB 728
James v UKHRC (Application 8795/79) (1986) 8 EHRR 123
Lindsay v C & E CommrsUNKWLR [2002] EWCA Civ 267; [2002] 1 WLR 1766
Louloudakis v GreeceECAS (Case C-262/99) [2001] ECR I-5547
R (on the application of Daly) v Secretary of State for the Home DepartmentELR [2001] 2 AC 532
R (on the application of Federation of Tour Operators) v HM TreasuryTAX [2008] BTC 8,025
Urbán v Vám- és Pénzügyorség Észak-alföldi Regionális ParancsnokságaECAS (Case C-210/10) 9 February 2012
W Emmett & Son LtdVAT [1991] BVC 896; (1991) VATTR 456
Wilson v Secretary of State for Trade and IndustryUNKELR [2003] UKHL 40; [2004] 1 AC 816
Value added tax - Default surcharge - Whether individual default surcharge proportionate - Whether default surcharge system proportionate - HMRC's appeal allowed - Value Added Tax Act 1994, Value Added Tax Act 1994 section 59s. 59 - European Convention on Human Rights, Protocol 1, art. 1.
This was an appeal by HMRC against a decision of the First-tier Tribunal ([2011] UKFTT 473 (TC); [2011] TC 01323) allowing an appeal by the taxpayer company against a default surcharge and discharging it.
The taxpayer appealed against a default surcharge of £4,260 imposed for the late payment of VAT due in period 06/09. The VAT due was £85,205 and payment was received by HMRC one day after the due date. The rate of surcharge was five per cent. The taxpayer contended that it had a reasonable excuse for the late payment and that the amount of the surcharge was disproportionate.
The FTT found against the taxpayer on the reasonable excuse issue and that finding was not challenged on appeal. But the FTT found, in favour of the taxpayer, that the surcharge was disproportionate. The FTT found that on the particular facts the penalty was not only harsh but plainly unfair. It noted in particular the lack of correlation between the single day of delay and the quantum of the penalty; the relationship between that quantum and the taxpayer's profits; the sudden jump in surcharge from zero to over £4,000; and the taxpayer's generally good compliance record both before and since the default period. Since the tribunal had no power to reduce the penalty it discharged it ([2011] UKFTT 473 (TC); [2011] TC 01323). HMRC appealed.
HMRC submitted that central to the issue of proportionality was whether the proper approach was to consider whether the default surcharge regime in VATA 1994, s. 59, viewed in the round, was incompatible with the principle of proportionality or to consider proportionality by reference to the facts and circumstances of an individual case and the particular penalty which the legislation rigidly imposed.
The features of the default surcharge regime said to result in possible unfairness were identified as follows: the regime did not distinguish between a trader who had made a trivial slip and a trader who deliberately failed to file a return and to pay on the due date; nor did it cater for degrees of culpability between those two extremes. A trader who was late but had a reasonable excuse was not subject to a penalty. Nor, however long he then delayed in payment, was he subjected to a penalty. In contrast, a trader who was late was subject to a penalty which could not be reduced even though his payment was only a single day late. The regime did not distinguish between traders who were a day late, a week late or even a month late, in contrast with some other regimes to be found in the UK tax system. The potential hardship to a trader was not a factor to be taken into account. In particular, the amount of the penalty was not related to profitability. The previous compliance record of the trader was not taken into account save in the negative sense that previous defaults within the preceding 12 months affected the amount of the penalty (as a percentage of the tax overdue). The correlation between the turnover of the trader and the size of the penalty was far from exact even where there was a failure to pay any of the tax due. There was no maximum penalty. There was no discretion to reduce or waive a penalty once imposed. Although the "reasonable excuse" exception provided some relief from the harshness of the regime, there were meritorious cases where a penalty should not be paid that could not be brought within that exception.
The countervailing factors relied on by HMRC were as follows: the simplicity of the system made it easily understood, as well as being relatively easy to operate. The surcharge was only imposed on a second or subsequent default, and after the taxpayer had been sent a surcharge liability notice warning him that he would be liable to surcharge if he defaulted again within a year. The penalty was geared to the amount of outstanding VAT. The percentage applicable to the calculation of the penalty increased with successive defaults if they occurred within 12 months of each other: that was a rational and reasonable response to successive defaults by a taxpayer. The reasonable excuse exception struck a fair balance.
Held, allowing HMRC's appeal:
1.It was open to the tribunal to consider the individual penalty without having first concluded that the system as a whole was disproportionate. HMRC's submission to the contrary was rejected. It seemed likely that, if the regime led to a result in a particular case which was disproportionate in the sense that the penalty did not reflect the gravity of the infringement in the material sense, then there had to be a flaw in the regime. But even if that was wrong and the "architecture" of the regime was unobjectionable, it remained necessary that the resulting penalty in a particular case was proportionate to the gravity of the infringement. The aim of the regime was a legitimate aim: the imposition of some penalty for making a late filing of a return and late payment of tax was clearly unobjectionable provided that it was proportionate to the gravity of the offence. Even if the structure of the surcharge regime was a rational response to the late filing of returns and late payment of VAT, it was, nonetheless, necessary to consider the effect of the regime on the individual case in hand. (Enersys Holdings UK Ltd [2010] UKFTT 20 (TC); [2010] TC 00335; Louloudakis v Greece (Case C-262/99) [2001] ECR I-5547 and Urbán v Vám- és Pénzügyorség Észak-alföldi Regionális Parancsnoksága (Case C-210/10) (9 February 2012) considered).
2.The fact that there was no maximum penalty was a real flaw at both the level of the regime viewed as a whole and potentially at the individual level of a taxpayer with a very large payment obligation. The absolute amount of the penalty had to be proportionate in the context of the aim pursued and in the context of the objectives of the directive. There had to be some upper limit, although it was not sensible for the tribunal in the present case to suggest where that might be. Given that a substantial, rather than purely nominal, penalty could legitimately be imposed it was plain that the penalty imposed on the taxpayer fell comfortably below any possible upper limit. (Enersys, Gasus Dosier-und Fördertechnik GmbH v Netherlands (Application 15375/89) (1995) 20 EHRR 403 and International Transport Roth GmbH v Home Secretary [2003] QB 728 considered.)
3.The absence of a power to mitigate did not result in the regime failing to comply with the principle of proportionality at the level of the scheme viewed as a whole. The regime contained a reasonable excuse exception which represented a significant safeguard. In so far as it applied in a particular case, it went further than a mere power to mitigate; rather, there was no penalty imposed at all. At the individual level, however, the question was whether the actual penalty was disproportionate in all of the circumstances and not whether there was a power to mitigate.
4.There was nothing in the VAT default surcharge which led to the conclusion that its architecture was fatally flawed. There were, however, some aspects of it which might lead to the conclusion that, on the facts of a particular case, the penalty was disproportionate. But in assessing whether the penalty in any...
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