Tag Archives: surcharge mitigation

Constable VAT Focus 14 February 2019


Check When a Business Must Follow the Rules for Making Tax Digital for VAT

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The CIOT have released a useful illustration of when businesses must register for the Making Tax Digital pilot for VAT. Our analysis can be found here.






1. Evidence in Criminal Prosecutions

This case concerned the EU law around the collection of VAT as well as the general EU principle of effectiveness. The main case focusses on a Bulgarian VAT offence but the questions before the CJEU in this instance concerned whether EU law must be interpreted as precluding a national court from applying a national provision excluding evidence which was obtained illegally.

Petar Dzivev and others were charged with having committed fraud in Bulgaria and sought to profit by not paying over tax owed to the Bulgarian tax authorities. A Bulgarian Court ordered that telecommunications between Mr. Dzivev and others involved should be intercepted.

It is common ground that the Court which authorised the interception did not have the necessary jurisdiction to do so, therefore the interceptions were not in accordance with the law of the Charter of Fundamental Human Rights.

The CJEU held that in cases such as this, EU law cannot require a national court to disapply a procedural rule preventing the state’s reliance on illegally obtained evidence. It was observed that even in situations where only this type of evidence is capable of proving that the offences were committed, EU law still may not prevent a national court from excluding evidence obtained illegally.

Constable Comment: In this instance the right to privacy given to individuals under the Charter of Fundamental Human Rights was given priority over the ability of the state to effectively collect taxes under the principle of effectiveness. It is not a surprising result but it is demonstrative of the EU’s tendency to confer rights on individuals over member states.




2. Agent or Principal?

This case concerned whether or not Mr Bryn Williams was acting as an agent or a principal in relation to the taxi business which he operates. He takes bookings for and tenders for contracts with local authorities who provide cab travel. He sends his drivers out to complete the contracts he signs.

HMRC contended that he acts as a principal, supplying taxi services to local authorities and, in turn, receiving taxi services from drivers, all for a consideration. They stated that Mr. Williams owns some of the cars himself and he bears the running costs of the contracts, which were negotiated without driver input. Mr. Williams argued that he was an agent, highlighting various factors pointing to this such as the fact that drivers could negotiate fess with him and keep their cars at home.

As with all agent or principal cases, regard was given to the material aspects of the operation as opposed to the strict wording of contracts. The Tribunal considered the nature of the connection between the driver and the local authority who Mr. Williams paired up. A typical agency situation would involve Mr. Williams negotiating on behalf of a driver, ultimately to form a contract between the driver and the local authority.

It was found that when Mr. Williams was negotiating the contracts with the local authorities there was no pre-determined driver meaning that there was no relationship between the local authority and the driver. Therefore it was held that Mr. Williams must be acting as a principal as there was no driver on whose behalf he was acting.

Constable Comment: This case shows the delicate balance of factors that determine whether someone is an agent or a principal. Due regard must be had to the contracts in place but also the commercial reality of the transaction. This case highlighted some useful areas of consideration and if your business operates in a similar way to Mr William’s, it is essential to ensure it is operating correctly to avoid unexpected VAT bills in the future.



3. Reasonable Excuse: Default Surcharge

This case concerned Ms. Chandler, a VAT registered sole trader who used the Flat Rate Scheme (FRS) to account for her VAT. In 2015 HMRC visited her and discovered that she had failed to increase the FRS percentage used in line with both statutory increases and the expiration of the “first year reduction” of 1%. HMRC sought to penalise Mr. Chandler but she contended that the default surcharge should not apply to her as HMRC had not taken all payments made by Ms. Chandler into account.

Ms. Chandler had made payments to HMRC but had made them to the wrong account; she had previously traded using a different registration number and mistakenly paid her VAT liability into this account meaning the funds were suspended and held by HMRC. HMRC did not accept this as payment, asserting that in order for a payment to be effective it had to be credited to the correct account. The Tribunal found this to be incorrect. It was found that the VAT regulations only require VAT to be paid to the Controller: which taxpayer account is not mentioned.

Despite this, there were still some historic accounting periods which attracted a default surcharge. For these periods Ms. Chandler argued that she had a reasonable excuse for the lack of funds which rendered her incapable of making payments to HMRC. Whilst an inability to pay cannot constitute a reasonable excuse, the Tribunal is willing to accept that the underlying cause of a lack of funds may indeed constitute such an excuse. Accepting that a fraud committed against Ms. Chandler constituted a reasonable excuse for the remaining periods, the Tribunal held that all surcharges against her were cancelled.

Constable Comment: This case is a useful example of where there is a reasonable excuse for having made late payments to HMRC. Whilst HMRC and the Tribunals are normally reluctant to accept a lack of funds as an excuse for late payment, in this instance there was a clear reason for the insufficiency of funds, the effects of which were being felt later.


If these cases raise any points that you would like to clarify or discuss, or you have any other VAT related concerns, please do not hesitate to contact Constable VAT and we will be pleased to assist.