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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Default Surcharge: Reviews and appeals: The principle of proportionality and the view of tribunals

The principle of proportionality has its origins in European law. It is described as the principle under which citizens may only have imposed on them, for the purposes of the public interest, obligations that are strictly necessary for those purposes to be attained.

In the case of Finaplan Ltd and Bean Power and Co the Commissioners (at that time) imposed surcharges for a series of defaults for accounting periods between December 1992 and December 1993.

The trader lodged an appeal to the VAT tribunal on the grounds that the surcharge system was unfair, did not discriminate between degrees of lateness, there is no mitigation, reliance on a third party is excluded from reasonable excuse and refusal by a major customer to pay promptly severely restricts ability to pay VAT culminating in surcharge after surcharge being incurred.

The trader’s representative also argued that by progressively reducing the severity of the system, both Parliament and the Commissioners (at that time) have demonstrated that until October 1993 at least, it was disproportionately severe.

The Commissioners (at that time) contended that the principle of proportionality does not form part of UK law, that Member States are permitted to impose obligations which they deem necessary for the correct levying and collection of tax, and in any event the default surcharge is proportionate to the alleged “offence” in that its progressive nature bites more on the persistent offender.

The Tribunal chairman, Mr A W Simpson, accepted this submission and considered that it was not unreasonable to the point of disproportional for Parliament to have enacted these measures and not to have allowed mitigation.

The conduct that the surcharge is evidently intended to discourage is being late to some extent. Neither is it unreasonable for Parliament to consider that a person ought to remain responsible for his own return, no matter whom he instructed to prepare it. Late payment by a major customer is a matter for the trader himself and there is at least a basis for reasonable excuse.

The subject of ‘proportionality’ was considered in more detail in the Greengate Furniture Ltd case, see VCP10570.