VAT Cases & News

In HMRC v Trinity Mirror PLC The Upper Tax Tribunal (UTT) has overturned the previous decision of the First Tier Tribunal (FTT) to set aside a late filing surcharge of £70,900 on the grounds of proportionality, concluding that whilst it might be considered harsh, it cannot be regarded as plainly unfair.

The facts of the case

These were not in dispute and were as follows:

• The company paid its balancing payment for the 06/07 VAT period one day late, and as a result was issued with a surcharge notice indicating that a further default prior to 1 July 2008 would result in a penalty.

• The company paid its balancing payment for the 12/07 VAT period one day late, and as a result HMRC levied a surcharge penalty in the amount of £70,906.44, being 2% of the amount due and not paid by the due date.

• The 2% surcharge for a first default within a surcharge period is in accordance with s59A VATA 1994.

The initial case was brought by the company on the grounds that whilst EU Directives empower member states to apply penalties as appropriate, that power must be exercised in accordance with the "principle of proportionality".

This means that:

1. penalties must not go beyond what is strictly necessary for the objectives pursued and
2. a penalty must not be so disproportionate to the gravity of the infringement that it becomes an obstacle to the underlying aims of the objective.

FTT decision

In reaching its decision to set aside the surcharge, the FTT considered a number of precedents including Enersys Holdings UK Ltd v. Revenue and Customs Commissioners in which a 5% surcharge of £131,881 was determined to be disproportionate.

FTT took a mathematical approach to compare the surcharge in Enersys with the Trinity surcharge; if £131,881 was disproportionate for a 5% charge, then anything in excess of £52,752 must be disproportionate for a 2% charge.

 Judgment of the UTT

In upholding the surcharge, the UTT considered the following:

1. That the FTT had erred in law by attempting to set any maximum penalty as this was effectively seeking to legislate, and that the tribunal had placed too much emphasis on the Enersys decision in seeking an arithmetical comparison; each case should be considered for proportionality based upon its own facts and what is disproportionate in one circumstance may not be disproportionate in another.
2. That the objective of the surcharge scheme is to impose a penalty for late payment and it does not penalise any further for subsequent delays in payment.  The UTT concluded that the penalty was based upon a modest percentage of the VAT unpaid by the due date and that it could not be considered to go beyond the objectives of the scheme.
3. That the objective of the EU directive is one of 'fiscal neutrality'.  This recognises that the burden of VAT falls not upon the company itself but upon the final consumer, and that the company is merely collecting and then paying over the tax.  The system requires companies to comply with its obligations, including paying over the tax it has collected on a prompt and timely basis.  The UTT concluded that a penalty of 2% could not be considered so disproportionate to the gravity of the infringement as to constitute an obstacle to the underlying aims of the objective.

Cases referred to

HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC)

Enersys Holdings UK Ltd v. Revenue and Customs Commissioners [2010] UKFTT 20 (TC).

Trinity Mirror PLC v Revenue & Customs [2014] UKFTT 355 (TC)

HMRC v Trinity Mirror PLC [2015] UKUT 0421 (TCC)

In Neil Garrod v HMRC (2015) TC04237, the first tier tribunal (FTT) cancelled a penalty imposed for failing to submit a VAT return electronically, deeming that the circumstances in which the penalty was raised meant it was done unlawfully.

VAT case is a reminder of position on staff benefits

French Connection v HMRC [2015] UKFTT 173 (TC) concerned a UK retailer which provided a clothing allowance to staff, which was then used to purchase clothing that they were required to wear whilst working.

HMRC argued that the supply gave rise to a VAT liability; conversely, the company argued that as the clothing constituted a uniform which was provided for a business purpose it should be exempt.

Decision

The First Tier Tribunal said it was irrelevant that the clothes might constitute a uniform, as the clothing supplied was part of the trading stock.  Business assets had therefore been provided for nothing which triggered a supply, and VAT had to be accounted for using replacement cost.

Comment

It is unlikely that retail clothes, suitable for wearing outside of work hours, would constitute a uniform in the true sense – i.e. an identical one that all staff wear.

Recap of rules

• Businesses supplying services are not usually charged to output VAT where a supply of services is made for no charge.
• Businesses supplying goods without charge (i.e. gifts) do have to account for VAT on the output.
• A limited exemption exists for circumstances where gifts for business purposes to any single person in a 12 month period do not exceed £50 in total.

In M Hodges v HMRC [2015] a taxpayer successfully reduced VAT penalties of £394,694 to £7,807. He was found guilty of dishonesty however HMRC had failed to exercise “best judgement” in assessing the VAT penalties as required by the law.

In Dazmonda Ltd t/a Sugar & Spice v HMRC TC 03473, the FTT held that, when an adult entertainment club allowed dancers to use booths at its premises, there was a standard rated single composite supply of services rather than an exempt supply of land.

In HMRC v Secret Hotels2 Limited [2014] UKSC 16, the Supreme Court held that a holiday company (SH2) was an agent for a disclosed principal (or “intermediary”), rather than a principal; and was not liable for the £7.1 million of VAT that HMRC had claimed.

• Secret Hotels2 (SH2) marketed and arranged holiday accommodation through an online website.
• 94% of its sales of hotel rooms were made to travel agents, with the rest made directly to holiday makers.
• Hoteliers, who wished their hotels to be marketed by SH2, entered into a written agreement ("the accommodation agreement”) with SH2 containing a number of provisions. The hotels were then advertised on the website.
• The accommodation agreement was very much in favour of SH2, but this reflected the powerful negotiating position of the large company (backed up, for instance, by Lastminute.com).
• Bookings were made using the website and customers paid in full (the” gross sum”) before the holiday. SH2 then paid a lesser sum (the “net sum”) to the hotelier, which was invoiced by the hotelier at the end of the holiday.

HMRC argued that SH2 was a “travel agent” and liable to account for VAT; whereas SH2 claimed that it was solely an “intermediary”, with the difference between the gross sum and net sum being its “commission”. If SH2 were correct, under the “reverse charge mechanism”  it would be foreign hotelier who would account for VAT, rather than SH2.

The court held that it needed to identify the nature of the relationship of SH2, the hotelier and the customer by first considering the effect of the contractual documentation and only then consider whether its conclusion was changed by the commercial facts. It decided that the accommodation agreement (and the surrounding facts) both showed that SH2 was an agent for a disclosed principal.

Links:

Supreme Court judgment 

Court of Appeal judgment  in which the tribunal found in favour of HMRC.

UT judgment in which the tribunal found (correctly) in favour of Secret Hotels2.

FTT judgment in which the tribunal found in favour of HMRC.