VAT default -but who's at fault

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In the latest UK200Group blog post, Paul Hawksley, Partner at TWP Accounting LLP, discusses what can go wrong when a direct debit payment is set up incorrectly.

Paul Hawksley
How many direct debits do you have coming out of your current account each month and could you name them all? For most of us, it’s like trying to name all 50 States of America; you might get 90% of the way there, but you’re bound to forget a few. In an age where cash is most definitely no longer King and we are relying on automated banking services more than ever, it seems we are also finding it harder to keep track of the monies passing in and out of our accounts. And whilst it is perhaps less of a problem to have that old £5 direct debit to Cats Protection League flying out of your account each month unnoticed, how confident is the average taxpayer in spotting when something hasn’t been paid?

Spare a thought then, for whichever poor soul had the responsibility for setting up the VAT direct debit at Godolphin Management Company Ltd (TC6515). Per the details of this HMRC case, the taxpayer received a default surcharge liability notice for the VAT period June 2016 and, in order to avoid being burned again, set up a direct debit in August 2016 accordingly. Or at least, they thought they did. Having taken all the required steps to set up this payment instruction, they had no reason to believe that their August VAT bill would not be settled on the due date. Unfortunately, something somewhere went horribly wrong and the direct debit was not set up correctly. A 2% surcharge was applied.

However, as a result of the failed instruction, the September VAT payment was also made late, by just 1 day, and HMRC then issued Godolphin with a 5% late payment surcharge. A frustrating moment for any business, but more so, given that the surcharge amounted to £217,436. Ouch!

The taxpayer appealed, and they were able to show that they had made every effort to ensure that both liabilities were paid on time. They also pointed out that they had received no error notification to inform them that something had gone wrong when setting up the direct debit.

The First-tier tribunal had some sympathy for the situation and cancelled the August surcharge, which in turn reduced the September surcharge to 2%, or a still not insignificant, £86,974.

What can be learned from this? The taxpayer made every effort to set things up correctly, which the court acknowledged, but they still came away with a hefty surcharge. It could be argued that they should have followed up their direct debit instruction with a phone call to HMRC to ensure that it had been set up correctly, but how many of us would think it necessary to do so? What is clear is that the onus remains on the taxpayer to ensure that payments are made on time, and that relying on automation is not an excuse and therefore is not without risk.

Paul Hawksley of TWP Accounting

Tags: UK200

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