Default Surcharges - When is VAT not really VAT?

A recent Tribunal case threw up some interesting questions about VAT charged in error and how this affects default surcharges for late returns.

In “Kingsdale”, over a period of some years, the taxpayer had charged VAT on supplies which HMRC eventually agreed, after involvement and support from Centurion, should have been exempt for VAT. However, for various reasons, Kingsdale was not in a position to refund the overcharged VAT to its customers so no adjustments were made to the previous VAT returns.

Kingsdale was in the default surcharge regime because it had submitted late returns and payments. Surcharges are calculated on the net tax due but in this case, the net tax showing on the returns was inflated because they included the VAT on supplies that were later ruled to be exempt.

Kingsdale argued successfully in the Tribunal that surcharges should not be levied on that element. The VAT charged incorrectly was not outstanding tax and as such should not be included in the calculation of the default surcharge.
Taxpayers who have been subject to default surcharges for late returns and payments might want to review the circumstances to see if they are in a similar position.

It is also worth noting however that Kingsdale took a further argument that for a period where the return and payment were only one day late, the imposition of the surcharge was disproportionate. Kingsdale lost on this point which further underlines the need to strictly observe the due dates for VAT returns and payments.

If you would like to discuss this issue further, please get in touch with your usual contact at Centurion or Julie Rawlinson-Smith 07805 134091 or julie.rawlinsonsmith@centurionvat.com