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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Default Surcharge: Discretion, reasonable excuse and mitigation: Discretion and mitigation


HMRC has the discretion not to record a default or issue a surcharge assessment. Thequestion of when and how discretion should be applied in individual cases was raised inthe case of Dollarland Holdings plc LON/92/887.

In this case eighteen surcharges totalling £225,062 were imposed on three subsidiarycompanies of Dollarland Holdings plc between periods 10/90 and 04/92. The trader sought toestablish reasonable excuses based on insufficiency of funds due to high interest ratesand the severity of the recession. The tribunal chairman, Theodore Wallace did not agreethat there was a reasonable excuse.

The appellant argued that

  • The Commissioners (at that time) had discretion on the imposition of surcharge and had not exercised this discretion.
  • The Tribunal has jurisdiction to review the exercise of discretion and should quash the surcharges.
  • The Commissioners’ (at that time) power was not validly exercised.
  • The Tribunal should exercise its discretion to quash the surcharges.

The Tribunal considered the nature of the Commissioners’ (at that time) powers ofdiscretion and referred to Lord Justice Nolan’s comments in the case of J B Steptoethat the Commissioners (at that time) are not bound to impose a surcharge on every personwho becomes liable to be surcharged and have discretion whether to do so or not.

The Chairman considered whether the Commissioners (at that time) had properly exercisedtheir power of discretion and concluded that the Commissioners (at that time) had not.

However, he conceded that if the Commissioners (at that time) had given properconsideration to their power to assess each default there is no possibility that thediscretion would have been exercised other than to impose the surcharges.

Dollarland’s appeal to High Court

The trader appealed to the High Court on the grounds that the Commissioners (at that time)had failed to exercise their discretion. The Commissioners (at that time) argued that theTribunal had

  • no jurisdiction to review their discretion to impose surcharges
  • wrongly concluded that the discretion had not been exercised
  • even if discretion was not exercised properly surcharges were still appropriate.

The High Court decision agreed with the Commissioners (at that time) on all threecounts and the traders appeal was dismissed. The Tribunal had accepted that theCommissioners (at that time) were fully entitled to exercise their discretion on thisbasis and the judge agreed.


The subject of mitigation was debated fully during the passage of the default surchargelegislation and again in 1993.

On both occasions Parliament decided that neither the Department nor the VAT Tribunalsshould have the power to reduce surcharges due to mitigating circumstances.