UK: Why Appeal A VAT Surcharge Notice Where No Monetary Penalty Is Levied?

The surcharge system does not impose a penalty when a business submits a VAT return late for the first time, nor for the second and third defaults provided the surcharge (calculated at 2% and 5% respectively of the VAT due on the return) does not exceed £400.

Waived penalties are always good news, and it is all too easy for a busy FD to ignore a surcharge liability notice (SLN) that is not accompanied by a bill from HMRC. However, a recent case in the First-tier Tax Tribunal reminds us that this risks the imposition of a much bigger surcharge in the not too distant future.

A company ignored its first three default notices from HMRC, only to be hit with a surcharge calculated at 10% when it defaulted for a fourth time. While the company accepted it was to blame for its latest default, it argued that it had a reasonable excuse for at least one of the earlier periods and the removal of those would mean its latest surcharge should only have been calculated at 2% or 5%.

The tribunal, refusing to hear an appeal against those periods, ruled that such defaults must be appealed at the time - even if no monetary penalty is incurred. This is because the business is still 'liable' for the surcharge within the strict meaning of the law, so any appeal (or request for HMRC to reconsider) must be made within 30 days of the issue of the SLN.

The judge did concede that previous periods could sometimes be considered if they were 'material' to the later surcharge which did attract a monetary penalty, but declined to do so in this case. The only way for a taxpayer to be sure of avoiding this situation is to appeal a SLN for which it feels it has a reasonable excuse straight away, even if there is no monetary penalty.

Asking HMRC or the tribunals to reconsider a surcharge in this way is a hit and miss process but, in the experience of our VAT specialists, it is always worth an attempt to reduce a surcharge by having a previous default removed on reasonable excuse grounds. Recent HMRC statistics show that around half of surcharges are reduced or removed on appeal/reconsideration. However, success is far from guaranteed, so make sure you always challenge a SLN at once if you think you have a reasonable excuse for that period. If you don't, you may be missing your only opportunity to ward off a big penalty in a future period.

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