First-tier Tribunal (Tax)

[2010] UKFTT 589 (TC)

TC00839

Appeal number: TC/2010/01945

Income Tax determinations and penalties for failure to submit end of year subcontractors return - Whether letter of offer deemed to include all tax liabilities

FIRST-TIER TRIBUNAL

TAX

MR. STUART HUGHES Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Miss J. Blewitt (TRIBUNAL JUDGE) Mrs A. Christian (MEMBER)

Sitting in public at Manchester Civil Justice Centre on 14 October 2010

Mr J. Dable, Counsel for the Appellant

Mr T. O’Grady, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       The matters under appeal before the Tribunal are determinations of tax made under Regulation 13 Income Tax (Construction Industry Scheme Regulations) 2005 and penalties charged under Section 98A (2) (a) Taxes Management Act 1970 for the years ended 5 April 2003, 5 April 2004, 5 April 2005, 5 April 2006.

2.       By Notice dated 10 February 2010 the Appellant appealed against the penalties and determinations. The grounds relied upon relate to the interpretation of a letter of offer from HMRC to the Appellant dated 11 August 2006. It is submitted on behalf of the Appellant that his subsequent acceptance of settlement encompasses and debars HMRC from seeking any further tax for the years reviewed.

3.       By way of background, an enquiry was opened into the Appellant’s personal self assessment Income Tax return for the year ended 5 April 2004. In reviewing the Appellant’s cashbook, the enquiry officer, Mr Durrigan, found that certain payments to subcontractors had been paid gross and therefore did not satisfy the requirement of the Construction Industry Scheme (“CIS”) that 18% tax be deducted from such payments and accounted for to HMRC. This issue was raised in a meeting between Mr Durrigan and the Appellant on 29 November 2005, a note of which was contained within the bundle provided to the Tribunal. Mr Durrigan confirmed to the Appellant that his failure to adhere to the statutory requirements of the CIS would be reported to the Employer Compliance Unit and advised that they would no doubt make contact with the Appellant.

4.       It was clear to the Tribunal from the record of the meeting that Mr Durrigan was solely dealing with the issue of Income Tax Self Assessment Compliance as distinct from the Appellant’s statutory requirements under the Construction Industry Scheme. A referral to the Employer Compliance Unit was subsequently made and on 22 December 2006 a notification under Regulation 41 Income Tax (Subcontractors in the Construction Industry) Regulations 1993 was issued to the Appellant stating HMRC’s intention to undertake a review of the Appellant’s contractor records.

5.       Mr Durrigan had in the meantime continued with the enquiry into the Appellant’s self assessment for Income Tax and concluded that uplifts to the profits originally reported by the Appellant as a self employed sales consultant needed to be made, with additional Income Tax and Class 4 National Insurance contributions chargeable thereon. A letter of offer in respect of these liabilities was signed by the Appellant on 11 August 2006 and accepted by Mr Durrigan on behalf of HMRC on 15 August 2006 at which point the enquiry into the self assessment return for the year ended 5 April 2004 was concluded.

6.       It was submitted by Mr Dable, Counsel instructed by the Appellant that this letter of offer encompassed all of the Appellant’s tax liabilities, including those arising from the Construction Industry Scheme.

7.       A further meeting took place between the Appellant and HMRC on 2 February 2007. As Mr Durrigan’s involvement with the Appellant had ended with the conclusion of the enquiry, it was Mrs Mainwood, who had issued the notification in respect of the Appellant’s contractor records and who met the Appellant. The Tribunal was referred to a record of the meeting contained within the bundle in which the Appellant accepted that he had not been aware of the scheme and consequently had paid his workers in full. It was fairly recognised by Mrs Mainwood on behalf of HMRC that there may be a double taxation claim under Regulation 9 (4) of Income Tax (Construction Industry Scheme) Regulations 2005 and consequently she requested all of the Appellant’s records in order to give the issue proper consideration.

8.       There was further correspondence and contact between the parties, resulting in a provisional computation by Mrs Mainwood contained in a letter to the Appellant’s agent Mr Patel, dated 19 July 2007. The computation showed the Appellant’s liabilities as a contractor and was based upon Mr Durrigan’s assessment of payments to contractors for 2003-2004 as 58% of the total cost of sales. In the same letter and in a further letter dated 20 August 2007, Mrs Mainwood reiterated requests for details of the subcontractors who were paid gross in order to take into account the Appellant’s claim of double taxation.

9.       The Appellant’s agent, Mr Patel responded on 31 August 2007 submitting that the letter of offer signed by the Appellant on 11 August 2006 and accepted by Mr Durrigan on behalf of HMRC on 15 August 2006 settled all outstanding liabilities under the Taxes Acts and consequently all matters had now concluded. The Tribunal was referred to the correspondence between the parties which was contained within the bundle and in which Mr Patel for the Appellant asserted that all matters had been settled by the letter of offer. HMRC rejected such an assertion and continued to try to assess the CIS tax due. The Tribunal noted that Mrs Mainwood also made a further request for details of payments to subcontractors in order to consider the Appellant’s double taxation claim.

10.    On 28 July 2008 determinations for the years 2002-2003 to 2005-2006 were issued to the Appellant. Based upon the limited information available to HMRC, the determinations were calculated as 38% of the total cost of sales figures; that being the actual figure of payments to subcontractors for 2003-2004.

11.    On 2 October 2008 penalties were issued to the Appellant for the failure to deliver end of year contractor returns under Regulation 40A of Income Tax (Subcontractors in the Construction Industry) Regulations 1993 for the years 2002- 2003 to 2005-2006.

12.    An analysis of payments made by the Appellant to subcontractors during the relevant period was subsequently provided by Mr Patel on behalf of the Appellant, to HMRC on 1 May 2009. These figures were accepted by HMRC and a revised computation of the CIS tax due, penalties and interest which was sent to the Appellant’s agent on 2 September 2009. On 6 October 2009 Mr Patel replied to HMRC raising the issue of double taxation and on 8 October 2009 Mrs Mainwood responded by letter in which she explained that due to the lack of response to seven previous requests for information to assist in the consideration of a double taxation claim, the claim had been refused and Regulation 13 determinations issued. Mrs Mainwood explained that once determinations have been issued under the Income Tax (CIS) Regulations 2005 the Regulations prevent any further consideration of a double taxation claim.

13.     The argument raised by the Appellant in correspondence to HMRC that the Regulation 13 determinations issued are excessive and should be reduced to reflect the figures provided by the Appellant was accepted by HMRC and the Tribunal was invited to uphold the determinations in the amended figures. The Appellant also claims relief for double taxation under Regulation 9 (4) Income Tax (CIS) Regulations 2005. The principle submission in support of the Appellant’s appeal is that the tax arising from the determinations and penalties for failure to submit end of year contractor returns are not due as all liabilities were settled by HMRC’s acceptance of the Appellant’s letter of offer.

14.    Mr Dable on behalf of the Appellant expanded upon the Appellant’s contentions in oral submissions to the Tribunal. Mr Dable submitted that the letter of offer constituted a binding contract between HMRC and the taxpayer and consequently precludes HMRC from taking any further action in respect of tax outstanding and in doing so they have acted ultra vires. In the alternative and applying a very subtle distinction, it was asserted that the letter of offer could be viewed as a contract of settlement. The Tribunal was referred to correspondence from HMRC to the Appellant dated 16 June 2005 in which it was stated that the enquiry “...will cover the whole of your return.” The Tribunal was invited to accept from this statement that from the outset the enquiry included CIS liabilities. Mr Dable submitted that further correspondence between HMRC and the Appellant dated 26 July 2005 in which Mr Durrigan had included observations relating to subcontractors as part of his enquiry and the discussions on the topic during the meeting between Mr Durrigan and the Appellant on 29 November 2005 lend support to this contention. It was submitted that there was no basis for distinguishing Mr Durrigan’s authority from that of any other HMRC officer in looking into the CIS issue. Mr Dable asserted that the Appellant had no reason to believe that all matters would not be addressed by Mr Durrigan and HMRC failed to make clear to him that the offer to settle did not include all liabilities. The Tribunal noted correspondence dated 21 July 2006 from HMRC to the Appellant’s then agent Mr Bonnick and a certificate of full disclosure both of which, it was submitted, suggest that all of the Appellant’s tax affairs had been considered within the enquiry which led the Appellant to believe that all matters had been settled at the end of the investigation.

15.    Mr Dable invited the Tribunal to consider the offer of settlement, which was devised and worded by HMRC as opposed to the Appellant and/or his advisers. The document states:

 “The tax and the Class 4 National Insurance Contributions on the statements below are unpaid, wholly or in part, because of my failure to meet all my obligations under the Taxes Acts. On the basis that no proceedings are taken against me for those liabilities, or for the penalties or interest on them and for the time granted...I Mr S. A. Hughes...offer the sum of £7,640.00 (the said sum) less £1,000 which I have already paid...”

The terms of payment are set out above the Appellant’s signature and a table is produced at the foot of the document entitled “Statement of Income Tax and National Insurance Contributions.”

16.    It was submitted that the Appellant should have the benefit of any doubt over the construction of the agreement and that the inclusion of the word “tax” should be given a wide definition to include the Appellant’s CIS liabilities. Mr Dable argued that the phrase “Taxes Acts” does not limit the agreement to statutes with the word “tax” in the title but rather it incorporates all legislation applicable to tax. Furthermore Mr Dable submitted that the use of the phrase “all my obligations” covers all of the taxpayer’s liabilities.

17.    It was submitted by Mr Dable that HMRC should have made the Appellant aware that settlement did not include the CIS liabilities and that it is fanciful for HMRC to suggest that any member of the public would not have considered all matters concluded within the settlement.

18.    The Tribunal was invited to consider the delay of over 12 months before the Appellant was made aware of his outstanding liabilities, which it was argued caused prejudice to the Appellant,  and the inaccurate and “off the cuff” estimates calculated by HMRC despite having access to the Appellant’s records. Mr Dable accepted that ignorance of the law is not a reasonable excuse but sought to distinguish the departmental differences within HMRC as a matter which does not impinge on the Appellant and one upon which the Appellant could not be expected to be aware of. As such, Mr Dable argued that the Appellant was entitled to rely upon this as a reasonable excuse.

19.    The Tribunal was also asked to bear in mind that there had been no loss to the public purse as the subcontractors have accounted for the tax and therefore HMRC are pursuing the same tax twice. It was also stated on behalf of the Appellant that a public interest point arises as HMRC have dishonoured the binding contract with the Appellant which could impact on future settlements and concerns that HMRC would renege on such agreements.

20.    In reaching its decision the Tribunal considered all of the submissions and documentation carefully. The principle argument of the Appellant relates to the agreement signed by the Appellant on 11 August 2008. The Tribunal found as a fact that Mr Durrigan had opened an enquiry under Section 9A TMA 1970 into the Appellant’s personal self assessment return. As a result of the enquiry it was agreed by Mr Bonnick, acting on behalf of the Appellant, that additional profits to those declared would be assessable. Correspondence contained within the bundle between HMRC and Mr Bonnick clearly shows the proposals suggested by Mr Durrigan for settling the enquiry, and Mr Bonnick’s agreement on behalf of the Appellant on condition that no adjustments were made for the years 1998-1999 and 2000-2001. A letter from Mr Durrigan to Mr Bonnick dated 21 July 2006 summarises the position in respect of additional duties, penalties and interest. Subsequently Mr Durrigan provided the letter of offer which was duly signed by the Appellant and accepted by HMRC. The question for the Tribunal is whether, as asserted by the Appellant, this letter should be deemed to include all of the Appellant’s outstanding liabilities. The Tribunal find as a fact that it did not. The document is worded in the following way:

“The tax and the Class 4 National Insurance Contributions on the statements below are unpaid, wholly or in part, because of my failure to meet all my obligations under the Taxes Acts. On the basis that no proceedings are taken against me for those liabilities...

The Tribunal found that the reference to “the statements below” refers to the table headed “Statement of Income Tax and National Insurance Contributions.” The table sets out the additional profits to be assessed as had been summarised in correspondence between HMRC and Mr Bonnick for the Appellant in reaching agreement. The Tribunal found that it must therefore follow that the reference to “failure to meet all my obligations” refers to the Appellant’s failure to submit an accurate personal tax return and pay the correct amount of Income Tax and National Insurance Contributions. The document makes no reference to CIS liabilities. The Tribunal was invited by Mr Dable to apply a wide definition to the wording “Taxes Acts”, however we found that it would be an affront to common sense to interpret the wording as including liabilities arising under a wholly separate regime, governed by different legislation, which had not been the subject of the enquiry, which had played no part in negotiations between the parties and to which no reference is made within the document. To interpret the agreement otherwise would, in the Tribunal’s view, be taking it wholly out of context. The Tribunal found that the words “On the basis that no proceedings are taken against me for those liabilities...” confirm that settlement was agreed solely in respect of the liabilities set out in the table on the document, namely Income Tax and National Insurance Contributions arising from the additional profits as agreed between the parties.

21.    Mr Dable sought to argue that the Appellant had believed that all matters were concluded within the settlement and was prejudiced by the delay in HMRC’s pursuit of CIS tax. The Tribunal considered the record of the meeting between the Appellant and HMRC on 29 November 2005 in which Mr Durrigan had advised the Appellant that he would refer the CIS issue to a separate department. The Tribunal found that the clear indication from the record of the meeting was that Mr Durrigan would not be dealing with or enquiring any further into the CIS matters. The Appellant was advised that he would be contacted by the relevant department in respect of this matter, and whilst the Tribunal accepted that a significant amount of time passed before the Appellant was contacted, there was no prejudice apparent to the Tribunal as a result of this delay. Furthermore, the Tribunal noted that the Appellant did not appear to have taken any steps to clarify his position, either with his own tax advisers or with HMRC, despite the responsibility upon a taxpayer to ensure all obligations are satisfied. The Appellant signed the agreement himself, and the Tribunal found as a fact that in doing so it is entirely reasonable to infer that he had understood the nature and ambit of the settlement. There can be no doubt that the interest and penalties set out in the letter of offer relate to the additional duties agreed. The Tribunal found no basis upon which the Appellant could have assumed that his liabilities as a contractor were included within the settlement which was confined to his role as sales consultant.

22.    The Tribunal did not accept that the settlement precluded HMRC from taking any further action in respect of separate tax outstanding nor had there been any breach of the agreement, whether it was considered a binding contract, contract of settlement or otherwise. The Tribunal considered the submissions of Mr Dable that HMRC had made a number of inaccurate and “off the cuff” estimates of CIS tax due. The Tribunal did not accept that this was in fact the case. It is clear that initial calculations were no more than estimates based on the limited information provided by the Appellant to HMRC and the conclusions reached by Mr Durrigan during the enquiry. The computation provided by Mrs Mainwood on 18 September 2007 included interest on the estimate previously provided. Subsequently, following a meeting between HMRC, the Appellant and his agent at which further information was given to HMRC, Mrs Mainwood was able to revise the calculation in line with the figures provided by the Appellant which and on 14 February 2008 reduced the amount of CIS tax owed. The calculation provided on 16 June 2008 referred to in the Appellant’s skeleton argument is based on the same calculation, however does not include interest. Mrs Mainwood calculated a further computation on 2 September 2009 after the Appellant’s agent provided further figures upon which to base the computation, which again resulted in a reduction to CIS tax owed. The calculation referred to by Mr Glasonbury, HMRC’s Reviewing Officer, is based on the computation of Mrs Mainwood dated 2 September 2009 but does not include interest owed. The Tribunal found that there could be no criticism of HMRC, which had been provided with the information required to produce an accurate computation in a piecemeal fashion, however had consistently reviewed and revised the computation whenever information was received from the Appellant and/or his agent.

23.    The Tribunal did not accept that a public interest point arose on the basis that it could not be said that HMRC had reneged on the agreement reached nor did the Tribunal agree that any member of the public would have reached the conclusion that all matters had been dealt with; it seemed to the Tribunal that such an assumption would have no basis or reasoning to support it. Whilst it may be that the Appellant was unaware of departmental differences within HMRC, the Tribunal found that the Appellant had been advised by Mr Durrigan of the fact that a referral to the appropriate department would be made and this could not be deemed to be a reasonable excuse. The Tribunal took the view that the fact that there was no loss to the public purse was not a relevant consideration in determining the issues in this case.

24.    The Tribunal found that Mr Durrigan did not, in fact, have the authority to deal with the CIS issues, having opened his enquiry under Section 9A TMA 1970. The power to enquire into compliance with the Construction Industry Scheme is found under Regulation 41 Income Tax (Subcontractors in the Construction Industry) Regulations 1993 which was adhered to by Mrs Mainwood. The Tribunal therefore found that Mr Durrigan had acted properly in referring apparent failures by the Appellant to the relevant department.

25.    The Appellant did not dispute the contention that CIS should have been operated or that gross payments had been made. Nor was there any argument as to the fact that penalties were lawfully imposed for the failure to submit end of year subcontractor returns.

26.    The Tribunal was invited to consider the issue of relief claimed for double taxation. The Tribunal noted that this had been an issue considered by Mrs Mainwood, who had requested details in support of the clam no less than seven times. The information as to names and addresses of subcontractors for each year was only supplied after the Regulation 13 Income Tax (CIS) Regulations 2005 determinations had been made on 28 July 2008 and under Regulation 13 (3) any further consideration of a direction under Regulation 9 (5) is specifically prevented. In failing to provide information requested by HMRC to assist his own case, the Appellant cannot now claim relief for double taxation and there is no authority by which the Tribunal can allow such a claim.

27.    The appeal is dismissed. The determinations are upheld in the revised amounts as follows:

2002-2003 £258.00 CIS tax due

2003-2004 £3003.00 CIS tax due

2004-2005 £1765.00 CIS tax due

2005-2006 £689.00 CIS tax due

The penalties are upheld as follows:

2002-2003 £258.00

2003-2004 £1200.00

2004-2005 £1200.00

2005-2006 £689.00

28.    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.

TRIBUNAL JUDGE

RELEASE DATE: 23 November 2010