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The Tax Chamber of the Upper Tribunal has released its decision on penalties for late VAT returns and payments and the principle of proportionality. HMRC, represented by Peter Mantle, won the appeal in Total Technology (Engineering) Limited. The decision is an important precedent because the integrity of the VAT surcharge provisions was in issue and grounds on which a penalty can be held disproportionate are considered.
The Upper Tribunal held that there is nothing in the VAT default surcharge which leads to the conclusion that its architecture is fatally flawed. It reversed the First-tier Tribunal’s decision that the penalty was disproportionate and had to be set aside; none of the reasons that the First-tier Tribunal had relied on lead to the conclusion that the VAT default surcharge regime infringes the principle of proportionality, or to the conclusion that the actual penalty imposed on Total did so.
After detailed analysis of ECJ and humans right case-law on proportionality, the Upper Tribunal concluded that it is open to tax tribunals to consider individual default surcharges without having first concluded that the default surcharge regime as a whole is disproportionate. The Upper Tribunal considered six features of the regime which might be said to result in unfairness. It concluded that there must be some upper limit on the penalty for a default which was proportionate, although it was not sensible for the Upper Tribunal, in this case, to suggest where that might be. The other features examined did not result in the regime failing to comply with the principle of proportionality at the level of the scheme as a whole. The absence of any power to mitigate the penalty was not such a flaw. On the facts of a particular case, a tribunal might be able to conclude that the penalty is disproportionate. But in assessing whether the penalty in any particular case is disproportionate, the tax tribunal must be astute not to substitute its own view of what is fair for the penalty which Parliament has imposed. The tribunal should show the greatest deference to the will of Parliament when considering the application of the VAT default surcharge scheme.
To view the decision, please click here.