"The first default gives rise to no penalty, but brings the trader within the regime; he is sent a surcharge liability notice which informs him that he has defaulted and warns him that a further default will lead to the imposition of a penalty. A second default within a year of the first leads to the imposition of a penalty of 2% of the net tax due. A further default within the following year 15 results in a 5% penalty; the next, again if it occurs within the following year, to a 10% penalty, and any further default within a year of the last to a 15% penalty. A trader who does not default for a full year escapes the regime; if he defaults again after a year has gone by the process starts again. The fact that he has defaulted before is of no consequence."
“For the purposes of any provision of section 59 … which refers to a reasonable excuse for any conduct: (a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and (b) where reliance is placed on any other person to perform a task, neither the fact of that reliance nor any deleteriousness or inaccuracy on the part of the person relied upon is a reasonable excuse.”
“the test of whether there is a reasonable excuse is an objective one. In my judgment it is an objective test in this sense. One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself in at the relevant time, a reasonable thing to do?”
“42. The doctrine of proportionality is central to our discussions later in this decision. In relation to it and its application to the issues in this case, we have reviewed the following cases (all of which, save Enersys, are binding on us): Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jowiak, Orowski (Case C-188/09 )[2010] ECR I-7639 ("Profaktor") Paraskevas Louloudakis v Elliniko Dimosio (Case C-262/99 )[2001] ECR I- 5547 ("Louloudakis") The Commissioners for HMRC v Total Technology (Engineering) Ltd[2012] UKUT 418 (TCC) ,[2013] STC 681 ("Total Technology") The Commissioners for HMRC v Trinity Mirror plc[2015] UKUT 421 (TCC) ("Trinity Mirror") International Transport Roth GmbH v Secretary of State for the Home Dept[2003] QB 728 ("Roth") James v UK (Application 8793/79)(1986) 8 EHRR 123 ("James") Wilson v SoS for Trade and Industry[2003] UKHL 40 [2004] 1AC816 ("Wilson") Molenheide and others[1997] ECR I-72181 ("Molenheide") 20 R( on the application of Lumsden and others) (Appellants) v Legal Services Board (Respondent)[2015] UKSC 41 ("Lumsden") Enersys 43. From them we have derived the following principles: (1) Member States are obliged to take all legislative and administrative measures to ensure collection of VAT (Profaktor at [21]). This is required to ensure that the tax is collected accurately thus ensuring the normal functioning of the VAT system by, in turn, ensuring tax neutrality (Profaktor at [21]). (2) The measures may not, however, go further than is necessary to achieve the objective of levying and collecting the correct amount of tax (Profaktor at [26]). (3) In the absence of harmonisation of European Union Legislation relating to sanctions which may be applied for non-compliance with such legislative measures, Member States are empowered to choose sanctions which seem to them to be appropriate (Profaktor at [29]). (4) But they must exercise that power in accordance with the principle of proportionality (Profaktor at [29]). (5) Proportionality is a general principle of EU law which is enshrined in article 5 (4) of the Treaty on European Union. Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties (Lumsden at [24]. (6) The principle of proportionality is therefore applicable to national measures which are adopted by a Member State in exercise of its powers relating to VAT (Molenheide at [48]). (7) It is for the national court to determine whether such national measures are compatible with the principle of proportionality (Molenheide at [49]). (8) In deciding whether the measures or their application is appropriate and not disproportionate, the court must exercise a value judgment by reference to the circumstances prevailing when the issue is to be decided. It is the current effect and impact of the legislation which matters, not the position when the legislation was enacted or came into force (Wilson at [62]). (9) Proportionality as a general principle of EU law involves a consideration of two questions: first, whether the measure in question is suitable or appropriate to achieve the objective pursued; and secondly, whether the measure is necessary to achieve that objective, or whether it could be attained by a less onerous method (Lumsden at [33]) 25 (10) As is the case for other principles of public law, the way in which the principle of proportionality is applied in EU law depends to a significant extent upon the context (Lumsden at [23]. (11) In the context of its application to penalties, the principle of proportionality is that: (A) penalties may not go beyond what is strictly necessary for the objective pursued; and (B) a penalty must not be so disproportionate to the gravity of the infringement that it becomes an obstacle to the freedoms enshrined in the Treaty (Louloudakis at [67]). (12) In the field of VAT, the freedoms enshrined in the Treaty means the underlying aims of the EU Directives which govern VAT (the "Directive") (Trinity Mirror at [14]). (13) The objective of the default surcharge penalty (the "penalty") in enforcing the collection of tax is itself a natural consequence of the essential aim of the Directive to ensure the neutrality of taxation of economic activities (Trinity Mirror at [56]). (14) The underlying aim of the Directive for this purpose is the fiscal neutrality which protects taxable persons since VAT is intended to tax only the final consumer (Trinity Mirror at [59]). (15) And given that this is achieved by the collection and deduction at each stage of the supply chain, ensuring the timely payment at each stage is a necessary consequence of that aim (Trinity Mirror at [60]). (16) The correct approach, therefore, is to determine whether the penalty goes beyond what is strictly necessary for the objectives pursued by the default surcharge regime (Trinity Mirror at [63]). (17) But a penalty must not become an obstacle to the underlying aims of the Directive (Total at [72]). (18) An excessive penalty will impose a disproportionate burden on a defaulting trader and distort the VAT system as it applies to him (Total at [72]). (19) For example, the imposition of a flat rate penalty might be proportionate as far as a penalty regime is concerned; but disproportionate in respect of its application to a specific small trader. It might go beyond what is necessary in relation to such trader and would distort the VAT system as far as that trader is concerned. The burden would bear more heavily on him than on a larger trader (Total at [76]). (20) The application of the doctrine of proportionality can be at a high level (is the penalty regime as a whole disproportionate?), or at an individual level (does the penalty regime that applies in a particular case, disproportionate?) (Total at [74]). (21) The margin of appreciation given to law makers in implementing social and economic policy should be a wide one and the courts will respect the law makers judgment as to what is in the public interest unless that judgment is manifestly "without reasonable foundation" (James at [46]) or "not merely harsh but plainly unfair" (Roth at [26]). (22) The principles of "devoid of reasonable foundation" or "not merely harsh but plainly unfair" can be applied to a case relating to a particular taxpayer just as much as it can be applied to the regime as a whole (Total at [93], Trinity Mirror at [72]). (23) A UK court should be cautious in the extreme in saying that national legislation has overstepped the mark in setting the level of penalty (Total at [73]). (24) But a national measure will not be proportionate if it is clear that the desired level of protection could be obtained equally well by measures which were less restrictive of a fundamental freedom (Lumsden at [66]). (25) The default surcharge regime viewed as a whole is a rational scheme (Trinity Mirror at [65]). (26) A penalty (if it is not a fixed rate penalty) must vary according to some objective criteria. The use of the amount unpaid as an objective criterion is an appropriate if not the most appropriate criterion (Trinity Mirror at [65]), (Total at [90]). (27) But this is only so if the amount of the penalty for a failure to file or pay is itself proportionate to that failure (Total at [88]). (28) Since the penalty is for failing to pay and file by the due date, and not for delay in paying after that date, the fact that a trader is only one day late in paying does not, per se, render an otherwise proportionate penalty, disproportionate (Total at [88]). (29) The absence of any financial limit does not render the regime disproportionate; but may, in a wholly exceptional case, (dependent on its own circumstances), render its application to a particular case, disproportionate (Trinity Mirror at [66]).”