Purever UK Ltd v Revenue and Customs (VAT - default surcharges - late filings and payments) [2025] UKFTT 273 (TC) (27 February 2025)

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Purever UK Ltd v Revenue and Customs (VAT - default surcharges - late filings and payments) [2025] UKFTT 273 (TC) (27 February 2025) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2025/TC09442.html Cite as: [2025] UKFTT 273 (TC)

DECISION

Introduction

1. This is a VAT case. It concerns the default surcharge regime which is a penalty regime which penalises a taxpayer for late delivery of a return or late payment of VAT.

2. The respondents (or "HMRC") have assessed the appellant (or "the company") to default surcharges ("the surcharges" each a "surcharge") for eight periods (03/21 to 12/22). The total amount of the surcharges is £232,988. These can be broken down as follows: £4,299.66 for period 03/21; £12,986.77 for period 06/21; £26,082.29 for period 09/21; £17,635.35 for period 12/21; £51,579.33 for period 03/22; £44,518.28 for period 06/22; £47,271.79 for period 09/22; and £32,914.41 for period 12/22.

3. The appellant does not deny that it is prima facie liable to the surcharges. However, it says that the reason for them, namely the inefficiency, negligence, and criminal behaviour of an employee ("the financial controller") amounts to a reasonable excuse. It also submits (although not in so many words) that the surcharges are disproportionate.

4. HMRC say that the company is prohibited from relying on the actions of the financial controller by dint of the statutory exclusion from the reasonable excuse provisions set out in section 71(1)(b) of the VAT Act 1994 ("VATA"). And in any case, even if the appellant could rely on the reasonable excuse provisions, there is no reasonable excuse on the facts of this case. They also submit that the surcharges are proportionate.

5. For the reasons given later in this decision, we agree with HMRC. In our view the company has no reasonable excuse and the surcharges are proportionate. And so, we have dismissed its appeal.

THE LAW

6. There was no dispute about the law which is set out in the first part of the appendix to this decision.

7. However, a helpful synopsis of the default surcharge regime was given by Judge Bishopp in Enersys Holdings [2010] UKFTT 20 TC0335.

"The first default gives rise to no penalty but brings the trader within the regime; he is sent a surcharge liability notice which informs him that he has defaulted and warns him that a further default will lead to the imposition of a penalty. A second default within a year of the first leads to the imposition of a penalty of 2% of the net tax due. A further default within the following year results in a 5% penalty; the next, again if it occurs within the following year, to a 10% penalty, and any further default within a year of the last to a 15% penalty. A trader who does not default for a full year escapes the regime; if he defaults again after a year has gone by the process starts again. The fact that he has defaulted before is of no consequence".

THE EVIDENCE AND THE FACTS

8. We were provided with a bundle of documents. Oral evidence on behalf of the appellant was given by Anthony Ponsford and Vikki King. From this evidence we find as follows:

The VAT background

(1) The appellant is a taxable person and has been registered for VAT with effect from 16 February 2009. It submits VAT returns on a quarterly basis and its normal method of payment has been via faster payment services ("FPS").

(2) The dates of submission of the returns relevant to this appeal, and payments related to those returns, is set out below.

(3) For the period 09/20 the due date for the VAT return and payment was 7 November 2020. The return was received by HMRC on 5 November 2020. The VAT was paid to HMRC between 10 September 2020 and 12 November 2020 in 14 instalments by electronic payments.

(4) For the period 03/21, the due date for the VAT return and payment was 7 May 2021. The return was received by HMRC on 20 April 2021. The VAT was paid to HMRC on 13 May 2021 by FPS.

(5) For the period 06/21, the due date for the VAT return and payment was 7 August 2021. The return was received by HMRC on 2 August 2021. The VAT was paid to HMRC on 11 August 2021 and 12 August 2021 by FPS.

(6) For the period 09/21, the due date for the VAT return and payment was 7 November 2021. The return was received by HMRC on 3 November 2021. The VAT was paid to HMRC on 10 November 2021 and 7 February 2022 by FPS.

(7) For the period 12/21, the due date for the VAT return and payment was 7 February 2022. The return was received by HMRC on 31 January 2022. The VAT was paid to HMRC on 7 February 2022, 8 February 2022, and 9 May 2022 by FPS.

(8) For the period 03/22, the due date for the VAT return and payment was 7 May 2022. The return was received by HMRC on 6 May 2022. The VAT was paid to HMRC on 9 May 2022, 10 May 2022, 11 May 2022 and 9 August 2022 by FPS.

(9) For the period 06/22, the due date for the VAT return and payment was 7 August 2022. The return was received by HMRC on 8 August 2022. The VAT was paid to HMRC on 9 August 2022, 10 August 2022, and 9 November 2022 by FPS.

(10) For the period 09/22, the due date for the VAT return and payment was 7 November 2022. The return was received by HMRC on 7 November 2022. The VAT was paid to HMRC on 9 November 2022, 11 November 2022 and 9 May 2023 by FPS.

(11) For the period 12/22, the due date for the VAT return and payment was 7 February 2023. The return was received by HMRC on 1 February 2023. The VAT was paid to HMRC on 8 February 2023 by FPS.

The company

(12) The company is part of an international group which has significant interests in Spain and Portugal. Its Board of Directors includes Mr Ponsford who is the managing director (he had previously been operations director) and also representatives from that international group.

(13) Mr Ponsford was an apprentice mechanical engineer; he has other qualifications such as a draughtsman (and a bricklayer) and has worked throughout his career in engineering. He has no formal financial, accounting, or tax training. He was, however, aware of the VAT regime, and of the fact that the company had a responsibility for submitting VAT returns and for paying VAT on time.

(14) Following an amalgamation with a sister company in 2014, the company's activities have comprised the manufacture and distribution of refrigerated units and doors for those units to, amongst others, customers in the pharmaceutical, catering, and mortuary businesses. The manufacturing is done on site in South Wales and the manufacturing activities require the employment of approximately 36 individuals.

(15) When the businesses were merged, the accounting function was undertaken by an in-house accountant whose responsibilities included the submission of VAT returns and the payment of the VAT. The accounts were and are audited by an external company. Up until 2020, there were only three members of staff employed in support functions (including Mr Ponsford).

(16) In 2020 it was decided that the company needed to provide more financial information to members of the group, and to achieve that, a financial controller should be employed. The decision to employ a financial controller was made by the directors of the company and the group finance director. The company went to an agency who put forward several names. Mr Ponsford's evidence was that they trusted the agency to conduct due diligence on the individuals who they put forward. Mr Ponsford and other members of the board interviewed the financial controller who was approximately 35 years of age and training to be a qualified accountant. Mr Ponsford also knew the company for whom the financial controller had previously worked.

(17) The duties and responsibilities of the financial controller included the preparation and submission of the VAT returns and ensuring that VAT was paid to HMRC on a timely basis. He also had to ensure compliance with all financial regulations, to lead manage guide and motivate a team, to provide management reports to the group to assist with key decision-making, to contribute to annual budgeting and planning process, and to prepare monthly reconciliations for accounts as well as assessments of monthly expenses.

(18) There was no formal appraisal process for the financial controller. Mr Ponsford would simply ask the financial controller from time to time at the end of the VAT periods whether the VAT position was "okay" and was assured that it was. There was no formal review at the end of each quarter to check VAT position. The discussions about VAT were also often conducted in the context of a discussion about broader financial issues. No formal time to discuss the VAT position was set aside by either Mr Ponsford or the financial controller.

(19) The VAT returns were compiled by the financial controller on a company laptop. It was his responsibility to submit those returns and to ensure the payment of the VAT was made on time. Mr Ponsford had no visibility of the financial controller's VAT reporting arrangements. He could tell the total outputs from the sales invoices. Through the bank statements he could see money going out (to HMRC). But he did not know and could not tell from the information available to him, whether the VAT returns and payments were being made on time.

(20) Any post that came into the company was sifted by the financial controller before it made its way to Mr Ponsford. The surcharge liability notices, which had been served in paper form, had not therefore come to Mr Ponsford's attention. He was therefore wholly ignorant of any surcharges which were being visited on the company.

(21) Prior to 2023, there was no indication that the financial controller was not on top of his job. After he had joined, the reporting of the company's financial position to its international colleagues improved considerably and more information was provided.

(22) However this improvement started to tail off, and Mr Ponsford also had concerns that the financial controller was not looking after his team, and that his time keeping was increasingly unsatisfactory.

(23) The group decided that the software platform which was being used by the company should be changed from Sage 50 to Business Central in order to align the position with the other members of the international group.

(24) In April 2023, Mr Ponsford conducted a performance review with the financial controller and raised concerns about the quality of the financial reporting to the other group companies and the management of the junior staff in the finance department. Following that review, the financial controller went on sick leave, returning only to run the May 2023 payroll.

(25) As the company was finding the transition from Sage to Business Central difficult, Mr Ponsford asked a colleague who was the business controller of the Spanish and Portuguese regions to assist. During his visit in June 2023, that individual spotted that the company had not submitted VAT returns or paid VAT on time. And also, that the financial controller had taken money from the company.

(26) This was reported to the police and Mr Ponsford's evidence was that he has been told by the police that the Crown Prosecution Service are taking the matter forward.

(27) Vikki Kelly was recruited to replace the financial controller. There are now more formal systems in place to deal with VAT. Business Central provides the information which enables her, at the end of each VAT quarter, to complete the VAT returns and crosscheck them against other financial information. She also double checks the VAT manually. The information is then uploaded onto the VAT return which is submitted along with payment, to HMRC. Mr Ponsford is now much more actively involved in the process of VAT returns and payment. He is sent an email by Vikki Kelly which identifies the VAT payable. There is then a discussion to ensure that there is sufficient money in the bank to pay it, and then payment is made by the due date.

(28) Since the departure of the financial controller, Mr Ponsford now ensures that he sees all post before it is then redirected to the appropriate person within the organisation.

DISCUSSION

Submissions

9. In summary Miss Abolude submitted as follows:

(1) The burden of proving that the surcharges are valid, and that valid surcharge liability notices had been properly served on the appellant rests with HMRC. In this case no challenge has been made to either the validity of the surcharges nor the surcharge liability notices.

(2) The onus therefore is on the appellant to show that it has a reasonable excuse. This is an objective test as set out in the Clean Car Company case.

(3) The appellant's sole ground for saying that it has a reasonable excuse is that the late submissions of the returns and late payments of the VAT were due to failings by the financial controller. However, reliance on the financial controller is statutorily prohibited from being a reasonable excuse by virtue of section 71(1)(b) VATA.

(4) But even if it could be considered as a reasonable excuse, there were insufficient checks and balances in place by the company to monitor the behaviour and activities of the financial controller. And so, there is no objectively reasonable excuse.

(5) The default surcharge regime is a proportionate regime, and its application in the circumstances of this case is proportionate.

10. In summary, Mr Ponsford submitted as follows:

(1) The sole reason why the returns and payments were late was because of the behaviour of the financial controller. It was reasonable for the company to leave responsibility of ensuring that the VAT returns were submitted on time and VAT payments were made on time, to the financial controller. He kept the fact that the company was receiving surcharge liability notices, and was not paying VAT on time, hidden from other company personnel.

(2) Whilst it was becoming apparent before April 2023, that the financial controller was not performing at a satisfactory level as regards the reporting of financial information to the international group, and in running his finance team, there was no indication that there was anything wrong with the VAT position. As far as Mr Ponsford was concerned, he had been told by the financial controller, whenever he asked, that the VAT was okay, and to the extent that he could verify this through the bank account payments and sales invoices, he was satisfied that he was being told the truth.

(3) It was not until June 2023 that it became apparent that the financial controller had behaved dishonestly both as regards the information he had given Mr Ponsford regarding the VAT position, and more generally in stealing money from the company.

Our view

11. We agree with Miss Abolude that it is for HMRC to show that the surcharges have been correctly calculated and properly imposed upon the appellant by virtue of the issue and service of valid surcharge liability notices.

12. We are satisfied from the evidence we have seen, and we find as a fact, that the surcharges have been so correctly calculated and that valid surcharge liability notices imposing the surcharges were properly and timeously served on the appellant.

Reasonable excuse

13. It is, therefore, up to the appellant to show that it has a reasonable excuse for these defaults and/or the surcharges are disproportionate.

14. We also agree with Miss Abolude that the criteria for establishing a reasonable excuse are set out in the decision of the VAT Tribunal in The Clean Car Company Limited v C & E Commissioners [1991] VATTR 239 ("Clean Car") and we can do no better than quote from the passage where the Tribunal (HH Judge Medd OBE QC) said:

"So I may allow the appeal if I am satisfied that there is a reasonable excuse for the Company's conduct. Now the ordinary meaning of the word 'excuse' is, in my view, "that which a person puts forward as a reason why he should be excused".

A reasonable excuse would seem, therefore, to be a reason put forward as to why a person should be excused which is itself reasonable. So I have to decide whether the facts which I have set out, and which Mr Pellew-Harvey [for the Appellant] said were such that he should be excused, do in fact provide the Company with a reasonable excuse.

In reaching a conclusion the first question that arises is, can the fact that the taxpayer honestly and genuinely believed that what he did was in accordance with his duty in relation to claiming input tax, by itself provide him with a reasonable excuse. In my view it cannot. It has been said before in cases arising from default surcharges that the test of whether or not there is a reasonable excuse is an objective one. In my judgment it is an objective test in this sense. One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do? Put in another way which does not I think alter the sense of the question: was what the taxpayer did not an unreasonable thing for a trader of the sort I have envisaged, in the position the taxpayer found himself, to do? ... It seems to me that Parliament in passing this legislation must have intended that the question of whether a particular trader had a reasonable excuse should be judged by the standards of reasonableness which one would expect to be exhibited by a taxpayer who had a responsible attitude to his duties as a taxpayer, but who in other respects shared such attributes of the particular appellant as the tribunal considered relevant to the situation being considered. Thus though such a taxpayer would give a reasonable priority to complying with his duties in regard to tax and would conscientiously seek to ensure that his returns were accurate and made timeously, his age and experience, his health or the incidence of some particular difficulty or misfortune and, doubtless, many other facts, may all have a bearing on whether, in acting as he did, he acted reasonably and so had a reasonable excuse. Such a way of interpreting a statue which requires a court to decide an issue by judging the standards of the reasonable man is not without precedent of the highest authority, though in a very different field of the law. (See DPP v Camplin ([1978] 2 All ER 168)".

15. However, she submits that we cannot consider the financial controller's failings to be a reasonable excuse in the first place, because of the provision of section 71(1)(b) VATA.

16. That subsection provides:

"...where reliance is placed on any other person to perform a task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse".

17. To our minds, this raises two issues. Firstly, whether an employee embedded in an organisation, is an "other person", where that employee is part and parcel of the organisation, (bearing in mind that a company can only operate through a human agency) and so, in essence, is the same person. Secondly, if the reason for the failing is not dilatoriness or inaccuracy, but something else (for example the other person being knocked down by a tram on the morning of the day on which the return needs to be submitted) whether that can potentially be a reasonable excuse (subject to the conditions set out in Clean Car).

18. Both of these issues were considered in the High Court case of Profile Security Services Ltd v CCE [1996] STC 808 ("Profile Security") which is binding on us.

19. The facts in that case have similarities to this. In Profile Security late payments of VAT were a result of failings by an employee who took steps to conceal the true reasons for those late payments. That employee made no personal gain and did not deplete the company's funds but was "dishonest after the penalties have been incurred" because he concealed the surcharges from his employer.

20. It was submitted on behalf of the taxpayer that the employee could not be an "other person", but even if he was then the company was not seeking to excuse its default on the grounds of dilatoriness or inaccuracy but on the basis of the individual's dishonesty (had the directors known the first default they would at least have ensured that there were no further defaults). And that dishonest concealment was a reasonable excuse.

21. In Profile Security, the Judge made it clear that the words "any other person" bear their ordinary meaning and does not restrict reliance to outside advisers. A trusted employee to whom the relevant tasks are delegated is an "other person". The Judge went on to say that "it would, in my judgement, be just as if not more desirable to exclude reliance upon a person in a position such as [the employee] as it would be to exclude reliance upon an outside accountant who would delay in similar circumstances. The company should have more control over its own servant than over an outside adviser" (emphasis added).

22. Secondly, on the facts of that case, whilst it was accepted that the employee dishonestly concealed his delayed payments, there was no personal gain, but the cause of the failing to pay the VAT on time was because of his culpable or inexcusable delay caused by a lack of appreciation of the effect of non-compliance with the gyro scheme. There was no dishonesty in that respect.

23. In other words, the Judge accepted that dishonesty could, potentially, comprise a reasonable excuse even though the employee was any other person, but on the facts of the case, there was no connection between the dishonesty on one hand and the failure to pay on time on the other. That failure was due to the dilatoriness or inaccuracy on the part of the individual.

24. Indeed, the Judge went on to say (albeit obiter) that even if dishonesty was the root cause of the failure of the directors to have done something after the first deceit, and that could provide them with a reasonable excuse, common sense led away from that conclusion, "otherwise all that the directors need say is that they were misled by dishonesty in a trusted employee, which they did not detect, in order to avoid their liability for surcharge".

25. There are clear and obvious parallels between the facts of this case and the facts of Profile Security.

26. Firstly, and we are bound by this, the financial controller is any other person for the purposes of section 71 (1) (b) VATA.

27. This means that if the reason for the late filings and payments was due to that person's dilatoriness or inaccuracy, there cannot be a reasonable excuse by virtue of the statutory exclusion.

28. In this case, as in Profile Security, responsibility for VAT compliance has been delegated to a trusted employee. As things turned out, this trust was misplaced. And, as in that case, we find that the financial controller had covered up their failings to file the returns on time and to pay the VAT on time, by suppressing knowledge of existence of the surcharge liabilities notices and telling Mr Ponsford that the VAT position was satisfactory as and when he was asked if that was the case.

29. But there is no evidence that, to the extent that this was dishonest behaviour, it was the cause of the defaults. It seems to us, on the evidence before us, that the financial controller did not obtain any personal gain from the late filings or the late payments (although he may have stolen money from the company, something which is still sub judice) and any dishonesty was in the cover-up rather than in the original failure. He was given responsibility for ensuring that the company's VAT returns and payments were made on time and he failed to discharge that responsibility. We may perhaps never know why this was the case. But there is no evidence which allows us to infer that those failings were due to anything other than the dilatoriness or the inaccuracy of the financial controller.

30. The question of whether there is a reasonable excuse requires us to consider an objective test. Was, what the company did (or failed to do), a reasonable thing for a responsible trader conscious of and intending to comply with its obligations regarding tax, but having the experience and other relevant attributes of the taxpayer (in this case taking into account the position of Mr Ponsford and his fellow directors) at the relevant time?

31. This is finely balanced, but we think that there was more that a reasonable taxpayer, in the company's position, could and should have done to check that the financial controller was fulfilling his VAT compliance responsibilities to the company and to HMRC.

32. On the upside, as far as the company is concerned, the financial controller had been vetted by the recruitment agency, and Mr Ponsford knew the financial controller's previous employer. Although not qualified, the financial controller was working towards his accounting qualifications, and there was no indication during the period in question that he was not wholly competent. To the extent that Mr Ponsford could check through the sales invoices and the bank statements, VAT was being paid to HMRC. It was therefore a reasonable presumption that the returns were also being submitted. And whenever he asked the financial controller, Mr Ponsford was assured that the VAT was okay. There was nothing which put Mr Ponsford on notice that VAT returns and payments were not being made on a timely basis.

33. On the downside, the amount of VAT for the periods in question was significant. They varied between approximately £214,000 and £343,000. The financial controller was not fully qualified. Even though he might have been checked by the recruitment agency, that, of itself, is not evidence of competence or integrity. There seemed to be no probationary period during which the financial controller's activities were monitored. It seems he was simply flung into the deep end and, as far as VAT was concerned, given sole responsibility for VAT compliance. He alone seemed to have control of the post room and was thus able to hide the existence of the surcharge liabilities notices. He alone compiled the VAT returns and was responsible for payment of the VAT. There was no formal regime in place to check the returns and payments on a quarterly basis other than the verbal exchanges between Mr Ponsford and the financial controller. There was no formal appraisal process which enabled the company (through the agency of Mr Ponsford) to review the financial controller's ongoing performance (although we accept that this would have been a somewhat blunt instrument to monitor VAT compliance on a quarterly basis).

34. We accept that Mr Ponsford has no formal tax compliance training. But it is clear that he was fully aware of the obligations that the company had towards the VAT regime, and it is equally clear that he was concerned to ensure that the company complied as evidenced by his conversations with the financial controller.

35. The internal controls have been tightened up and there is now a second pair of eyes regime for VAT. Mr Ponsford, because he has been bitten by this experience, has made sure that he is now involved in the process of submitting returns and making payment.

36. But in our view, even without this experience, the company should have put in place a regime which enabled the financial controller's autonomy over the VAT compliance process, to be audited, if not on a quarterly basis, at least more regularly than only once in the three years between 2020 and 2023. Indeed, had the financial controller from the Spanish and Portuguese companies not spotted the VAT situation in June 2023, it might have continued thereafter.

37. The company is not required to have a perfect system in place. The question is whether the system it had in place was objectively reasonable. In our view it was not objectively reasonable to devolve responsibility for VAT compliance to the financial controller, on day one on the basis of the checks that had been carried out by the recruitment agency. There should have been a probationary period during which the competence of the financial controller was checked on a regular basis, given the amount of VAT which was being paid by the company, and Mr Ponsford's awareness that the company had to submit VAT returns and pay VAT on time. This would not have required any particularly sophisticated understanding of the VAT system. It would simply have been an audit of the dates on which the VAT returns have been submitted, and the dates on which the VAT had been paid.

38. We wholly accept that Mr Ponsford was deceived by the financial controller. But the failure to put in place a regime which would have made this deceit apparent early in the financial controller's employment, which is essentially the root cause of the problem, leads us to conclude that the company does not have a reasonable excuse for the surcharges.

Proportionality

39. In their decision in Total Façade Solutions Ltd v HMRC [2017] UKFTT 412 Judge Popplewell and Mrs Norah Clarke undertook an extensive review of the case law relating to proportionality and the context of the default surcharge regime. That review is reproduced in the second part of the appendix to this decision.

40. As can be seen from the principles set out in that extract, it is clear that the default surcharge regime is a proportionate regime i.e. it does not go beyond what is strictly necessary for the objective pursued, namely ensuring fiscal neutrality through the timely payment of VAT at each stage of a supply chain.

41. However, the application of the regime to the circumstances of a particular taxpayer can be disproportionate, but only if that application is without reasonable foundation or not merely harsh but plainly unfair.

42. It is also worth recalling the principle set out in Total that since the surcharge is for failing to pay and file by a due date, and not for delay in paying after that date, the fact that a trader is only one day late in paying does not per se render an otherwise proportionate surcharge, disproportionate.

43. In absolute terms, the maximum surcharge during the period in question is £51,579.33. This is a significant sum. It is 15% of the VAT payment for that quarter (£343,862.23). But when it is seen in the context of the value of the supplies made in that quarter (supplies of approximately 1.7 million net of VAT) it is only some 3% of those net outputs.

44. We do not think that such a sum (nor indeed any of the other surcharges) whilst it might be considered harsh, cannot be considered as being plainly unfair.

45. We therefore find that the application of the default surcharge regime to the appellant is not disproportionate.

DECISION

46. For the foregoing reasons we dismissed this appeal.

RIGHT TO APPLY FOR PERMISSION TO APPEAL

47. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

NIGEL POPPLEWELL

TRIBUNAL JUDGE

Release date: 27^th February 2025

APPENDIX

VAT LEGISLATON

1. The legislation for the default surcharge regime is found primarily in section 59 VATA the relevant parts of which are set out below:

59 - The default surcharge

59(1) Subject to subsection (1A) below if, by the last day on which a taxable person is required in accordance with regulations under this Act to furnish a return for a prescribed accounting period -

(a) the Commissioners have not received that return; or

(b) the Commissioners have received that return but have not received the amount of VAT shown on the return as payable by him in respect of that period, then that person shall be regarded for the purposes of this section as being in default in respect of that period.

59(1A) A person shall not be regarded for the purposes of this section as being in default in respect of any prescribed accounting period if that period is one in respect of which he is required by virtue of any order under section 28 to make any payment on account of VAT.

59(2) Subject to subsections (9) and (10) below, subsection (4) below applies in any case where -

(a) a taxable person is in default in respect of a prescribed accounting period; and

(b) the Commissioners serve notice on the taxable person (a "surcharge liability notice") specifying as a surcharge period for the purposes of this section a period ending on the first anniversary of the last day of the period referred to in paragraph (a) above and beginning, subject to subsection (3) below, on the date of the notice.

59(3) If a surcharge liability notice is served by reason of a default in respect of a prescribed account period and that period ends at or before the expiry of an existing surcharge period already notified to the taxable person concerned, the surcharge period specified in that notice shall be expressed as a continuation of the existing surcharge period and, accordingly, for the purposes of this section, that existing period and its extension shall be regarded as a single surcharge period.

59(4) Subject to subsections (7) to (10) below, if a taxable person on whom a surcharge liability notice has been served-

(a) is in default in respect of a prescribed accounting period ending within the surcharge period specified in (or extended by) that notice, and

(b) has outstanding VAT for that prescribed accounting period,

he shall be liable to a surcharge equal to whichever is the greater of the following, namely, the specified percentage of his outstanding VAT for that prescribed accounting period and £30.

59(5) Subject to subsections (7) to (10) below, the specified percentage referred to in subsection (4) above shall be determined in relation to a prescribed accounting period by reference to the number of such periods in respect of which the taxable person is in default during the surcharge period and for which he has outstanding VAT, so that-

(a) in relation to the first such prescribed accounting period, the specified percentage is 2 per cent;

(b) in relation to the second such period, the specified percentage is 5 per cent;

(d) in relation to each such period after the third, the specified percentage is 15 per cent.

59(6) For the purposes of subsections (4) and (5) above a person has outstanding VAT for a prescribed accounting period if some or all of the VAT for which he is liable in respect of that period has not been paid by the last day on which he is required (as mentioned in subsection (1) above) to make a return for that period; and the reference in subsection (4) above to a person's outstanding VAT for a prescribed accounting period is to so much of the VAT for which he is so liable as has not been paid by that day.

59(7) If a person who, apart from this subsection, would be liable to a surcharge under subsection (4) above satisfies the Commissioners or, on appeal, a tribunal that, in the case of a default which is material to the surcharge -

(a) the return or, as the case may be, the VAT shown on the return was despatched at such a time and in such a manner that it was reasonable to expect that it would be received by the Commissioners within the appropriate time limit, or

(b) there is a reasonable excuse for the return or VAT not having been so despatched,

he shall not be liable to the surcharge and for the purposes of the preceding provisions of this section he shall be treated as not having been in default in respect of the prescribed accounting period in question (and, accordingly, any surcharge liability notice the service of which depended upon that default shall be deemed not to have been served).

59(8) For the purposes of subsection (7) above, a default is material to a surcharge if -

(a) it is the default which, by virtue of subsection (4) above, gives rise to the surcharge; or

(b) it is a default which was taken into account in the service of the surcharge liability notice upon which the surcharge depends and the person concerned has not previously been liable to a surcharge in respect of a prescribed accounting period ending within the surcharge period specified in or extended by that notice.

59(9) In any case where -

(a) the conduct by virtue of which a person is in default in respect of a prescribed accounting period is also conduct falling within section 69(1), and

(b) by reason of that conduct, the person concerned is assessed to a penalty under that section,

the default shall be left out of account for the purposes of subsections (2) to (5) above...

2. Also relevant are sections 70 and 71 VATA and section 108 Finance Act 2009. These are set out in the following paragraphs:

3. Section 70 VATA provides:

(1) Where a person is liable to a penalty under section 60, 63, 64, 67 or 69A or under paragraph 10 of Schedule 11A, the Commissioners or, on appeal, a Tribunal may reduce the penalty to such amount (including nil) as they think proper.

(2) ...

(3) None of the matters specified in subsection (4) below shall be matters which the Commissioners or any Tribunal shall be entitled to take into account in exercising their powers under this section.

(4) Those matters are -

(a) the insufficiency of the funds available to any person for paying any VAT due or for paying of the amount of the penalty;

(b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT;

4. Section 71(1) VATA provides:

For the purposes of any provision of section 59 ... which refers to a reasonable excuse for any conduct:

(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b) where reliance is placed on any other person to perform a task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse.

PROPORTIONALITY

"51. We have reviewed a number of cases dealing with proportionality. These are:

(1) Paraskevas Louloudakis v Elliniko Dimosio (Case C-262/99) [2001] ECR I-5547 ("Louloudakis")

(2) The Commissioners for HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC), [2013] STC 681 ("Total Technology")

(3) The Commissioners for HMRC v Trinity Mirror plc [2015] UKUT 421 (TCC) ("Trinity Mirror")

(4) International Transport Roth GmbH v Secretary of State for the Home Dept [2003] QB 728 ("Roth")

(5) James v UK (Application 8793/79) (1986) 8 EHRR 123 ("James")

(6) R (on the application of Lumsden and others) (Appellants) v Legal Services Board (Respondent) [2015] UKSC 41 ("Lumsden")

52. From these we have derived the following principles:

(1) Proportionality is a general principle of EU law which is enshrined in article 5 (4) of the Treaty on European Union. Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties (Lumsden at [24].

(2) In the context of its application to penalties, the principle of proportionality is that:

(A) penalties may not go beyond what is strictly necessary for the objective pursued; and

(B) a penalty must not be so disproportionate to the gravity of the infringement that it becomes an obstacle to the freedoms enshrined in the Treaty (Louloudakis at [67]).

(3) In the field of VAT, the freedoms enshrined in the Treaty means the underlying aims of the EU Directives which govern VAT (the "Directive") (Trinity Mirror at [14]).

(4) The objective of the surcharge in enforcing the collection of tax is itself a natural consequence of the essential aim of the Directive to ensure the neutrality of taxation of economic activities (Trinity Mirror at [56]).

(5) The underlying aim of the Directive for this purpose is the fiscal neutrality which protects taxable persons since VAT is intended to tax only the final consumer (Trinity Mirror at [59]).

(6) And given that this is achieved by the collection and deduction at each stage of the supply chain, ensuring the timely payment at each stage is a necessary consequence of that aim (Trinity Mirror at [60]).

(7) The correct approach, therefore, is to determine whether the surcharge goes beyond what is strictly necessary for the objectives pursued by the default surcharge regime (Trinity Mirror at [63]).

(8) The application of the doctrine of proportionality can apply to the surcharge regime as a whole, or at the application of that regime to a particular taxpayer's circumstances (Total at [74]).

(9) The margin of appreciation given to law makers in implementing social and economic policy should be a wide one and the courts will respect the law makers judgment as to what is in the public interest unless that judgment is manifestly "without reasonable foundation" (James at [46]) or "not merely harsh but plainly unfair" (Roth at [26]).

(10) The principles of "devoid of reasonable foundation" or "not merely harsh but plainly unfair" can be applied to a case relating to a particular taxpayer just as much as it can be applied to the regime as a whole (Total at [93], Trinity Mirror at [72]).

(11) A UK court should be cautious in the extreme in saying that national legislation has overstepped the mark in setting the level of surcharge (Total at [73]).

(12) The default surcharge regime viewed as a whole is a rational scheme (Trinity Mirror at [65]).

(13) A penalty (if it is not a fixed rate penalty) must vary according to some objective criteria. The use of the amount unpaid as an objective criterion is an appropriate if not the most appropriate criterion (Trinity Mirror at [65], Total at [90]).

(14) But this is only so if the amount of the surcharge for a failure to file or pay is itself proportionate to that failure (Total at [88]).

(15) Since the surcharge is for failing to pay and file by the due date, and not for delay in paying after that date, the fact that a trader is only one day late in paying does not, per se, render an otherwise proportionate surcharge, disproportionate (Total at [88]).

(16) The absence of any financial limit does not render the regime disproportionate; but may, in a wholly exceptional case, (dependent on its own circumstances), render its application to a particular case, disproportionate (Trinity Mirror at [66])".

First-tier Tribunal (Tax)