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Kingsdale Group and the default surcharge regime

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The default surcharge regime encourages timely payment of VAT returns. A vast number of cases have appeared, over the years, concerning the application of this penalty regime, but the case of Kingsdale Group [2016] UKFTT 0236 (TC) is unique, and could be overlooked by practitioners who view default surcharge cases as overly familiar territory.
The case concerned a return that had been paid late but which also overstated the tax due, because exempt supplies had wrongly been classified as taxable. The tribunal describes these amounts as ‘exempt tax’, but I will use the more pejorative, but straightforward, description of ‘bogus tax’. 
A point of relevance, as will be seen below, was that the taxpayer agreed with HMRC that no refund of the bogus tax could be made to it, because it had passed the burden of it to its customers, and could not reimburse them. Thus, the unjust enrichment provisions had applied.
Notwithstanding this, the taxpayer was aggrieved when HMRC demanded a default surcharge valued on the bogus tax, as well as the genuine tax. HMRC, however, said that the surcharge had to apply to the tax that had appeared on the return which had been paid late.
The tribunal said that it found the point difficult to decide. I respect that, but the analysis that the tribunal provided appeared fairly watertight to me.
VATA 1994 s 59(6) provides for a penalty to apply to ‘outstanding VAT’. This is ‘so much of the VAT for which he is so liable as has not been paid by that day’. There is no definition of ‘VAT’ provided, but there is no reason to think that it would include bogus tax. There is no reason to assume, for instance, that the reference to ‘VAT for which he is so liable’ must refer to everything included in box 1 of the VAT return, irrespective of its accuracy. It must surely relate to the net VAT actually due on taxable supplies, and which therefore the taxpayer was liable to pay to HMRC. It is difficult to see how this could be regarded as relating to bogus tax.
The decision also takes a side road when it looks at the provisions whereby ‘VAT’ shown on a tax invoice can be collected as a debt due to the Crown where it is not genuine VAT. The default surcharge provisions only refer to ‘VAT’, whereas the provisions for collecting bogus VAT clearly do not convert those sums into the genuine article, otherwise they would not need classification as a debt due to the Crown. In any case, the reason HMRC did not refund the bogus VAT was not because it had been mentioned on an invoice, but because it could not be refunded in turn to the customers (unjust enrichment). It would have been ironic if the mere fact that the taxpayer had issued a tax invoice to a non-taxable customer (not a requirement) gave rise to a different treatment than if he had not issued an invoice.
But, the most striking aspect of the case was the implication that HMRC would happily have reduced the default surcharge so it only matched genuine VAT had there been a basis for refunding it to the taxpayer, namely where there was no unjust enrichment. This, it appears, was the bone of contention with HMRC. If the bogus tax could not be returned to the taxpayer, then they saw that as a form of ‘VAT’, and thus subject to the default surcharge. It is startling that this really got past their initial case review. The unjust enrichment provisions are targeted on ensuring that customers do not bear the brunt of a bogus tax charge, to the advantage of business. They have nothing to do with the true definition of ‘VAT’. And the mere fact that there had been a mistake of that kind, and that the hapless customers had borne the brunt, should not mean an increased penalty charge on the business which made the error.
The decision is plainly correct, and reveals a flaw in HMRC’s powers of analysis. 
Issue: 1309
Categories: In brief , VAT , default surcharge