First-tier Tribunal (Tax)

[2010] UKFTT 327 (TC)

TC00612

Appeal number: TC/2009/16842

Tax: Construction Industry Scheme – failure to lodge monthly returns – penalties – no reasonable excuse – level of penalty – Appeal allowed in part.

FIRST-TIER TRIBUNAL

TAX

                                                  BRIAN LEWIS                                 Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

                        TRIBUNAL: JOHN M BARTON, WS (Judge)                                                                                         JAMES D ROBERTSON, BA, CA (Member)       

The Tribunal determined the appeal on 23 April 2010 without a hearing under the provisions of Rule 26 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (default paper cases) having first read the Notice of Appeal dated 18 November 2009, HMRC’s Statement of Case submitted on 22 February 2010 and the Appellant’s Reply dated 23 March 2010.

© CROWN COPYRIGHT 2010

DECISION

1.       The Tribunal dismisses the appeal against 122 penalties each of £100 imposed under s 98A(2)(a) and s 98A(3)(a) of the Taxes Management Act 1970 (“TMA”) and modifies to £100 each, the remaining 11 penalties imposed under s 98A(2)(b)(ii) of TMA. 

2.       The total of the penalties is £13,300.

Preliminary

3.       On 18 November 2009, Brian Lewis (“Mr Lewis”) lodged an appeal against a decision of HMRC to impose 141 separate penalties totalling £38,400 in respect of his failure to lodge 12 consecutive monthly returns under the provisions of the Income Tax (Construction Industry Scheme) Regulations 2005 (“CIS Regulations”).

4.       Subsequently, HMRC cancelled the eight penalties for the period to 5 May 2007 totalling £1,000, leaving 133 penalties totalling £37,400.

5.       Neither party requested a hearing and the Tribunal, sitting in Inverness, considered the appeal on the basis of the papers.

6.       The following documents were before the Tribunal

(a)     Letter from HMRC dated 20 August 2009 with intimation of penalties.

(b)     Reply from McGuire & Farry dated 28 August 2009.

(c)     Letter from HMRC dated 1 October 2009

(d)     Letter from McGuire & Farry dated 5 Ocober 2009 requesting a review.

(e)     Review letter dated 23 October 2009.

(f)      Notice of Appeal dated 18 November 2009.

(g)     HMRC Submission

(h)     Letter from McGuire & Farry dated 23 March 2010 with submission for Mr Lewis.

Material Facts

7.       The material facts were as follows –

8.  Mr Lewis works as a ventilation engineer.   During May 2007, he entered into a large contract based at the Royal Victoria Hospital, Belfast.   In the same month, Mr Lewis took on a subcontractor to help with the workload.   The subcontractor did not supply his tax reference to Mr Lewis.   Mr Lewis agreed to pay the subcontractor gross. This agreement continued in good faith until the end of the contract in March 2008.   Mr Lewis is now in dispute with the subcontractor as to who should pay the tax.

9.  Regulation 4(1) of the CIS Regulations, which came into effect on 6 April 2007, requires that where contract payments are made, the contractor shall submit returns not later than 14 days after the end of every tax month.

10.  Mr Lewis failed to lodge any returns for the months ending 5 May 2007 to 5 April 2008 inclusive.     

11.     The outstanding returns were all submitted on 22 May 2009.

Issues

12.  The first question for the Tribunal was whether the penalties were properly imposed.

13.  From May 2007, Mr Lewis traded within the Construction Industry Scheme and employed a subcontractor.

14.  Under the CIS Regulations, a contractor must register when they are about to take on their first subcontractor, regardless of whether that subcontractor is due to be paid gross or under deduction.

15.  These Regulations further provide that all payments made by contractors to subcontractors must take account of the subcontractors' tax status. If the subcontractor is registered for net payment the contractor is required to make a deduction, which the contractor then pays.   The contractor is also required to make a monthly return to HMRC.

16.  Mr Lewis failed to meet his obligations under the CIS Regulations.    In particular, twelve monthly returns due for the period from 6 April 2007 to 5 April 2008 were submitted late and were not received until 22 May 2009.

17.  Section 98A(2) Taxes Management Act 1970 provides for penalties to be charged where a contractor fails to submit a return by the due date.

18.  A total of 141 penalties were issued for the late returns, amounting in total to £38,400. Subsequently HMRC cancelled 10 penalties due for the period ended 5 May 2007. The remaining 133 penalties amounted to £37,400.

19.  Mr Lewis did not challenge the basis on which the penalties had been charged; and the Tribunal is satisfied that the 133 penalties relating to the period from 6 May 2007 to 5 April 2008, were properly imposed in accordance with Section 98A(2).

20.  Section 118(2) Taxes Management Act 1970 (“TMA 1970”) provides that where a person had a reasonable excuse for not doing anything required to be done, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse ceased.

21.   On behalf of Mr Lewis, it was explained that the subcontractor failed to supply his tax reference and that he was not aware of the subcontractor’s status under the CIS Regulations.    However it was pointed out by HMRC in their submission that in the absence of a tax reference, there is a verification process whereby HMRC will advise the contractor as to what deductions should be made from payments.  The Tribunal accordingly finds that neither the absence of a tax reference for a subcontractor or knowledge of the subcontractor’s status is not a reasonable excuse for failing to file monthly returns on time.

22.   Reference was also made to pressure of work as a reason for Mr Lewis continuing the arrangement with his subcontractor, but it is not accepted that this constitutes a reasonable excuse for having failed to file his monthly returns on time.

23.   Further, there was also a reference to “recent stress related health problems”.  The impression which was conveyed was that this was a reason for having the whole matter brought to an early conclusion; and in the absence of any further specification, the Tribunal does not find such health problems to be an excuse for his continuing failure to file monthly returns.

24.   In the letter of 23 March 2009,it was stated that the basis of Mr Lewis’ appeal related to the proportionality issue whereby the level of the penalty was excessive in the overall circumstances.   It had also been submitted on behalf of Mr Lewis that the penalties were hugely excessive and did not reflect or represent a measured response to a non wilful error by the taxpayer; also that the amount of the penalties, if levied, would have the effect of bankrupting him.  The unpaid tax was said to be £5,100.    HMRC contended that the penalties had been correctly charged in accordance with the legislation and there was no provision within that legislation to test proportionality, reference being made to the case of Barnes v Hilton Main Construction (2005) 77 TC 255.

25.   At this point, it is appropriate to distinguish between the penalties (totalling £12,200) imposed in respect of the initial period of twelve months, and the further penalties (totalling £25,200).    The authority for the initial penalties is contained in ss 98A(2)(a) and 98A(3)(a) of TMA 1970.  Subsection 98A(2)(a) directs that any person who fails to make a return in accordance with the provision shall be liable

to a penalty or penalties of the relevant monthly amount for each month (or part of a month) during which the failure continues, but excluding any month after the twelfth or for which a penalty under this paragraph has already been imposed…..

Subsection 98A(3)(a) declares that the relevant monthly amount

where the number of persons in respect of whom particulars should be included in the return is fifty or less, is £100……..

The legislation makes no provision for the mitigation of these penalties (other than s 118(2) of TMA 1970 which has already been considered above).

26.  The case of Barnes v Hilton Main Construction related to the refusal to renew a subcontractor’s Construction Industry Scheme certificate.    The General Commissioners had allowed the appeal on the basis that the refusal would have disproportionate consequences, namely, that the taxpayer’s business would have to close, and that this would be a disproportionate result.    In reversing that decision, Lewison J. observed –

There may be social, economic and administrative arguments for and against the imposition of such a burden or there may be other solutions to perceived injustices in the statutory scheme, but they are matters for debate and legislation not for interpretation by a court. In those circumstances I consider that the General Commissioners' application of a test of proportionality was not a test that the legislation allowed them to apply.

27.  The Tribunal penalties chargeable under ss 98A(2)(a) and ss 98A(3)(a) of TMA 1970 were formulated by Parliament, and in the opinion of the Tribunal, the foregoing observations can equally be applied to these particular penalties.  The Tribunal accordingly has no discretion in relation to the penalties totalling £12,200 imposed by these provisions and these penalties must therefore stand.

28.   However, where a failure continues beyond 12 months, ss 98A(2)(b) of TMA 1970 provides for a separate penalty “not exceeding £3,000”.   That expression allows for a measure of discretion, which is open to review by this Tribunal.

29.   In the present case, HMRC had imposed one penalty of £300 (subsequently withdrawn), one penalty of £600, one penalty of £900, one penalty of £1,200, one penalty of £1,500, and seven penalties each of £3,000.  

30.   Having regard to the aggregate of the fixed penalties exigible under ss 98A(2)(a) and ss 98A(3)(a), the Tribunal considers the further penalties totalling £25,200 to be excessive, particularly as the circumstances related to a single series of returns involving only one contractor.   Nevertheless it requires to be recognised that in relation to 11 returns, the failure had continued for more than 12 months; and a penalty of £100 under ss 98A(2)(b) has therefore been substituted for each of those returns, a total of £1,100.

31.   To summarise, the penalties remaining are £12,200 charged under ss 98A(2)(a) and ss 98A(3)(a), and £1,100 charged under ss 98A(2)(b), a total of £13,300.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

      MR JOHN M BARTON, WS

TRIBUNAL JUDGE

RELEASE DATE: 9 July 2010