First-tier Tribunal (Tax)

[2010] UKFTT 409 (TC)

TC00679

Appeal number: TC/2009/16830

Penalties for non-submission of yearly CIS 36 Returns – No loss of tax to HMRC – Whether reasonable excuse – no – Whether HMRC should have exercised a discretion to mitigate the penalties under Section 102 TMA 1970 – Hardship and proportionality

FIRST-TIER TRIBUNAL

TAX

JOHN SILLITOE Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Michael S Connell (Judge)

Sitting in Brighton on 12 April 2010

The Tribunal considered the appeal on 12 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 (with enclosures) dated 30 November 2009, HMRC’s statement of case (with enclosures) submitted 21 January 2010 and the Appellant’s reply by his agents Morgan Griffiths LLP Chartered Accountants dated 16 February 2010

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal against two penalties of £1,200.00 each in respect of non-submission of a CIS 36 Return for the periods 2004-05 and 2005-06.

2.       The Appellant is a contractor within the Construction Industry Scheme. In the years 2004-05 and 2005-06 the Appellant failed to notify HMRC that he had commenced making payments to sub-contractors and also failed to operate the Construction Industry Scheme Regulation 40A of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 which requires a contractor to make a CIS 36 return of payments to sub-contractors after the end of each tax year. The return must be submitted no later than 44 days after the end of the tax year. Failure to submit the return on time may incur a penalty under section 98A Taxes Management Act 1970. In the case of a failure to make a return where the number of persons in respect of whom particulars should be included in the return is 50 or less a single penalty of £100.00 per month is levied.

3.       The Appellant claimed a deduction of £14,427.00 in his 2005-06 self-assessment return in respect of sub-contractor costs. As the Appellant was not registered with HMRC as a contractor he was asked for details of the sub-contractors to whom the payments had been made. The Appellant initially claimed that his wife had wrongly classified the deduction of £14,427.00 as sub-contractor costs and that in fact they were direct labour costs. HMRC determined that the work carried out had in fact been within the Construction Industry Scheme (CIS) and that therefore CIS 36 returns should have been submitted. HMRC requested information with regard to payments made to sub-contractors during the period 2004-05.

4.       HMRC said that the payments made to the sub-contractors should have been liable to tax deduction at 18% and that the Appellant was liable for any tax that should have been deducted irrespective of whether or not the deductions had been made. Eventually it was clarified that the sub-contractors had paid their own tax and that consequently a double taxation allowance would be made pursuant to Regulation 9(5) of the CIS Regulations. However, HMRC advised that the penalties imposed of £1,200.00 for 2004-05 and £1,200.00 for 2005-06 were statutory penalties and that a contractor can only avoid a failure penalty if he is able to establish a “reasonable excuse” during the entirety of the period of default. Having reviewed the circumstances of the Appellant’s case HMRC decided that the penalty charge under s 98 A (2) should be pursued.

5.       The Appellant appealed on the grounds that firstly he would suffer hardship. He said that the construction industry was in economic downturn, that he had no certainty of income beyond four weeks and that he had a non-working wife and two young children to support. The Appellant also said that one of the sub-contractors had taken his income and expense details to the HMRC help desk in Welshpool and that his return was completed incorrectly by an HMRC officer. This resulted in the claim for tax by HMRC in respect of payments made to sub-contractors being wrongly calculated, which in turn led to his accountants having to submit revised returns, therefore incurring unnecessary accountancy costs in rectifying the errors which had been made by HMRC. Secondly he said that the penalty was disproportionate. He said that it was a genuine error on his part with no loss of revenue to HMRC. He referred to the case of Edwards v Bairstow and Harrison. The Appellant said that his non-compliance with the CIS system was entirely unintended and arose from an ignorance of a relatively new HMRC compliance procedure. He said there was never any intention of avoiding his tax responsibilities and that all tax liabilities had in fact been paid as and when they fell due. Thirdly he said that there had been maladministration and complicity on the part of HMRC because he had correctly disclosed the relevant payments in the self-employment section of his 2004-05 and 2005-06 self-assessment returns and that HMRC could have identified the fact that tax had not been deducted and CIS Returns not been submitted within the relevant period. According to the Appellant this omission on the part of HMRC led to the error being made in two years rather than just one. The information was available to HMRC from 13 October 2005, the date the Appellant submitted his 2005 self-assessment return. He said that had HMRC identified the problem promptly then the 2006 CIS Return would have been issued and completed by the due date, i.e. 19 May 2006. For this reason the Appellant made an offer to HMRC to pay the penalty for 2004-05 but not the penalty which had been imposed for the year 2005-06. However it is not the responsibility of HMRC to ‘cross check’ returns made by a tax payer.

6.       The Appellant also referred to HMRC’s guidelines contained in EM5310 – “Penalties : Mitigation”. This guideline states that HMRC may in their discretion mitigate any penalty pursuant to s 102 TMA 1970. The guideline however states that s 102 is entirely discretionary and applies only to penalties that have already been determined. Final mitigation will only be considered after the penalty has been determined and the tax payer has exhausted (or abandoned) all appeal rights. HMRC say that mitigation will then be considered in three circumstances. Firstly where there has been some sort of HMRC maladministration. Secondly where to enforce payment of the penalty would cause the tax payer genuine and absolute hardship and thirdly where there are other exceptional circumstances such as the penalty being wholly disproportionate to the offence.

7.       HMRC responded that the Appellant’s offer to pay £1,200.00 in full and final settlement was not accepted and issued a formal penalty determination for £2,400.00 in respect of each year 2004-05 and 2005-06.

8.       The Appellant appealed to the Tribunal on the grounds that HMRC had not given due consideration to the grounds on the basis of which the appeal had been made as set out in letters from the Appellant’s agent dated 6 March 2009 and 30 April 2009. These are outlined in paragraphs 5 and 6 above.

9.       It was clear from the appeal papers that the Appellant agreed that he should have operated the CIS scheme throughout 2004-05 and 2005-06. He felt however that he should not be charged a penalty for 2004-05 on the basis that he had reasonable excuse throughout the period of default being that when completing the tax returns for that year and the subsequent year he did not have knowledge of the “new Sub-Contractor in the Construction Industry Scheme” due to the fact that he had been a sole trader for some years and had previously treated any labour paid as direct labour. He registered with HMRC for the Construction Industry Scheme in 2006-07 and thereafter fully complied with all his obligations.

10.    Where a person appeals against a penalty they are required to have a reasonable excuse which existed for the whole period of default. The law does not define a reasonable excuse but HMRC takes the view that it is an exceptional event beyond the persons control which caused or contributed to the default. In the context of failure to lodge a CIS Return HMRC would in general accept circumstances which were firstly beyond the contractors control, secondly made the failure unavoidable and thirdly included evidence that the failure was remedied without unreasonable delay. Section 118 (2) of TMA 1970 provides as follows :

‘for the purposes of this Act a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board of the Tribunal or Officer concerned may have allowed; and 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 unless the excuse ceased and, after the excuse ceased he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse ceased’.

11.    Dealing with the question of whether the Appellant had a reasonable excuse for his failure to file an end of year CIS 36 return, it is necessary to consider the relevant legislation and regulations. The applicable legislation was s 559 ICTA 1988 (repealed by FA 2004 with effect in relation to payments made on or after 6 April 2007) which dealt with deductions to be made on account of tax from payments made to sub-contractors. The applicable regulations were the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993. Under regulation 8 a contractor must pay to HMRC within fourteen days of the end of every income tax month all amounts which he is liable under s 559 to deduct from payments made by him during that income tax month. Under the regulations the contractor must render a return to HMRC not later than forty four days after the end of the tax year – ie 19 May - with particulars of amounts paid and deductions.

12.    The Construction Industry Scheme has been in operation for many years and therefore was not “new” as referred to by the Appellant. The CIS applies to workers who are self-employed for a particular contract and are not employees. Employment status depends on general law and it is for the contractor to determine when engaging a sub-contractor whether the worker is self-employed or an employee. HMRC provide guidance and leaflets to explain the general principles. Additionally contractors can only pay sub-contractors who have registered with HMRC. For the purpose of verifying registration a system of registration cards and tax certificates existed.

13.    The Appellant accepts that he was operating the CIS scheme without realising it during 2004-05 and 2005-06. He had been in the construction industry as a sole trader for many years and therefore should have been aware of his obligations under the scheme. It was his responsibility to acquaint himself with the relevant regulations before making payments to sub-contractors. The Appellant refers to the case of ‘Edwards v Birstow and Harrison’ which HMRC correctly say is not relevant to present issues.

14.    The Appellant says that the penalties are wholly disproportionate to the offences.  He does not make reference to the European Convention on Human Rights (‘ECHR’) which was incorporated into domestic law by the Human Rights Act 1998.  Article 1 of the First Protocol to the ECHR is headed ‘Protection of Property’.  It provides as follows :

‘every natural or legal person is entitled to the peaceful enjoyment of his possessions.  No-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law’. 

‘The preceding provisions shall not however in any way impair the right of the state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties’. 

The Appellant may be suggesting that the penalties are a disproportionate infringement of his rights which are protected by the ECHR.  The Tribunal’s view is that the penalties are fully compliant with the ECHR and the Human Rights Act 1998.  It is clear that Article 1 of the First Protocol does not impair the right of the state to enforce such laws as it deems necessary to secure payment of taxes.  There are strict penalties imposed for non-compliance of obligations under the CIS Regulations and Section 559 ICTA 1998 which were designed to avoid the previously notorious practise of sub-contractors receiving payments gross and then not accounting for their tax liabilities.  The fixed penalties are £100.00 per month for each month of non-compliance with regard to failure to submit the end of year CIS 36 return, resulting in penalties over a 12-month period of £1,200.00.  Under the current CIS Regulations in respect of payments made to sub-contractors on or after 06 April 2007, monthly rather than yearly returns are required and therefore pre April 2007 penalties are considerably less than those levied under the new regulations.  In the Tribunal’s view the penalties could not be said to be disproportionate or outside the wide margin of appreciation which states enjoy under the ECHR.

15.    Taking into account the relevant legislation and the facts of the case the Tribunal decided that the Appellant had not shown that he had reasonable excuse for his failure to submit the required end of year forms CIS 36. In consequence the Tribunal was satisfied that the fixed penalties of £1,200.00 charged for each of the years 2004-05 and 2005-06 under s 98(A) (2) (a) TMA 1970 have been correctly raised.

16.    The Decision Notice was issued to the parties on 15 July 2009 and did not include any findings and reasons for its Decision. This Decision Notice now issued includes full findings of fact and reasons for the Decision as requested under Rule 35 (4) by one of the parties.

17.    The Appellant has a right to apply for permission to appeal against this Decision pursuant to Rule 39. 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.

MICHAEL S CONNELL

TRIBUNAL JUDGE

RELEASE DATE: 23 August 2010