First-tier Tribunal (Tax)

[2010] UKFTT 593 (TC)

TC00843

Appeal number TC/2009/14803

SUB-CONTRACTOR – appellant working for father - father and his company owned some 18 house to let – appellant orchestrated refurbishment work for company - HMRC alleged appellant a contractor under the Construction Industry Scheme – appellant acting as agent for father - appeal allowed

FIRST-TIER TRIBUNAL

TAX

MR MATTHEW BUCKINGHAM Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Income Tax) Respondents

TRIBUNAL: David S Porter (Judge)

Gillian Pratt (Member)

Sitting in public in Leeds on 20 July 2010

Anthony Storey Consultant for the Appellant

Mrs Nadine Newham instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.     The Appellant (Matthew) appeals against the assessments raised by the Respondents (HMRC) on 19 June 2009 in the sums of £3,916 and £4,320 being payments due under section 559 (4) Income Tax and Corporation Taxes Act 1988 on the basis that he was a contractor employing sub-contractors to refurbish premises owned by Buckingham Estates (Northern) Ltd (the Company). Matthew says that he was self-employed and carried out his father’s instructions. He was paid by the Company or his father, in full each week for all the expenditure which had been incurred on the properties and he received £200 per week as payment for himself. He made no other profit out of the transactions for the work done by the Czech contractors. HMRC say that he worked on his own account, that he filled in his tax return on the basis that he employed the Czech contractors and carried out the contracting work and that the assessment had been correctly raised.

2.     Anthony Storey (Mr Storey) was instructed by Matthew and called Matthew and his father John Buckingham, both of whom gave evidence under oath. He also produced a skeleton argument.. Mrs Nadine Newham appeared for HMRC produced a bundle of documents for the tribunal and a skeleton argument.

The Facts

3.     We found the following facts. Either Mr John Buckingham or the Company acquired four properties at auction namely Manchester Road, Wetlands Road, Woodside Road and Heather Road all in Huddersfield. They were all acquired at about the same time, but at different auctions. The Company and John Buckingham had some 18 residential properties altogether.  Matthew, who is 42 years of age, returned to the United Kingdom having worked in the leisure industry abroad for the last 11 years. He had been unable to find a job and his father had suggested that he look after his rental accommodation for him. His father agreed to pay him £200 each week. John Buckingham works full time in a retail business and keeps the properties as investment properties to supplement his income. Before his son’s return he looked after the properties himself. This was not particularly arduous as all of them were rented and they only needed attention if there were problems with the tenants or they required re-letting. When the four properties were acquired they needed refurbishing to bring them up to an appropriate standard. As all four properties needed refurbishing and as they were in Huddersfield, and John Buckingham lived in Harrogate, he deputed his son to deal with the refurbishing works. We were told by John Buckingham that he had used Czech builders in the past and that he had asked his son to deal with them for the purposes of the refurbishment. His son took responsibility for the entire work. Matthew told us that he did very little of the physical work himself and that he had a supervisory role. He took the workers to and from the houses each day, recording the hours that they worked. He also completed their individual pay slips; identifying the name of the worker; the house they were working on; the period of the payment and the amount due.

The pay slip indicated that it was submitted by:-

“Mr John Charles Kino Buckingham

Mr Matthew John Kino Buckingham trading as Buckingham Developments…”

John Buckingham told us that the business was his and that his son had no interests in it or the properties. We do not find it strange that the accounts were addressed to both John Buckingham and Matthew as Matthew had the day to day dealings with all the contractors and tradesman and they would have naturally dealt with him in the first instance. Matthew kept the men supplied with appropriate building materials: wood, plasterboard, fixtures and fittings. At the end of each month he took his father a list of all the accounts and details of the wages due and his father wrote him a cheque, which Matthew paid into his own account from which he defrayed all the other payments. Matthew told us that he had arranged for the money to be paid in this way as it would swell the amount that he had in his bank account and might assist him in obtaining credit, which he had not been able to obtain since his return from aboard. It appears that some of the larger accounts were paid either by John Buckingham or the Company direct. On one account raised by R Middleton Gas Services and addressed to 1082 Manchester Road (one of the houses being refurbished and occupied at the time by Matthew) John Buckingham had written “Do not employ this thief again”. This is clearly an instruction to his son for the future. It also appears that Matthew lived at Heather Road part of the time as some of the invoices are addressed to him there.

4. Matthew had completed his own tax return without any professional help. In fact he had completed the figures incorrectly as he should have apportioned the income and expenditure between the two tax years 1 October 2006 to 5 April 2007 and 6 April 2007 to 30 September 2007. He has signed the return as accurate and correct and had included at the end the following statement;

“I have only one source of income and that is from my father and his company ‘Buckingham Developments’. It is my remit to refurbish his properties and organise this. My business account does therefore resemble an expense account of his company. From October – June my turnover was particularly high because of the high labour charges and the quarter from July- Sept is how it will continue through the next year. I only realised I broke the VAT threshold in this year, filling this return! Can this run April to April as my turnover would suit!”

Mrs Newham pointed out that an incorrect profit had been inserted in box 3.65 and that the figure on £200 each week should have been £10,400 and in fact was £14312. Matthew expressed genuine surprise in that regard and indicated that there must have been some further expenses. We are satisfied that Matthew earned no more than £200 each week and that the turnover in his tax return was no more than the expenses his father had paid for the work to be done during the period. On his return Matthew claimed construction industry costs totalling £43,360 for the period 1 October 2006 to 30 September 2007. Matthew made no profit out of the transactions other than the £200 paid to him by his father. John Buckingham gave evidence under oath and made it clear that the houses were his or his companies; that he was in charge of the refurbishment work and that his son did as he was told. He had purchased the properties as investments and treated the rent as additional income. He did not buy them to sell, but to let. Matthew did not receive half of the rental income and if a property was sold he would not receive anything from the sale proceeds. Given the way in which he gave his evidence we are satisfied that Matthew was instructed by his father.

The Law

5.  Finance Act 2004

Section 57: A construction contract is a contract where one party to the contract is a contractor and the other party is the sub-contractor

Section 58 (and Section 560 Income and Corporation Taxes Act 1988): A sub-contractor is a person who provides his own labour in order to carry out the construction operations of the contractor.

Section 59 (1) (a) A contractor is any person carrying on a business which includes construction operations.

Section 60 Contract payment means any payment made under a construction contract by a contractor to a sub-contractor

Section 61. In making a contract payment the contractor must deduct tax and it must be paid to HMRC in accordance with section 559 ICTA. Tax does not need to be deducted if the sub-contractor has been issued with a certificate by HMRC which allows the sub-contractor to receive gross payments.

Section 74 (2) construction operations are set out in sub-clauses (a) to (f) and include

(a)   extension, demolition, or dismantling of construction, alteration, repair, buildings or structures…

(c) installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;

(d) internal cleaning of buildings or structures, so far as carried out in the course of their instruction, alteration, repair, extension or restoration;

(e) painting or decorating the internal or external surfaces of any building or structure;…

Summing up

6. Mrs Newham submitted that Matthew was a contractor. His tax return revealed that to be the case. HMRC had contacted him after he submitted his return noting that he had claimed deductions for subcontractors and that he may have made payments without deducting tax as required by the legislation. Matthew had indicated both in correspondence and by telephone that he carried out renovation work on property that his father had purchased. He confirmed that he hired the tradesmen to do the work that he could not do. HMRC contend that the work that Matthew did on the properties falls within the scope of the construction operations as provided in section 74  Finance Act 2004 and section 567 ICTA and he should therefore be considered a contractor for tax purpose. Further more, Matthew said in his correspondence that he hired specialist skilled people who came from Czechoslovakia and he paid them weekly in cash. Mrs Newham submits that as the workers are a party to a contract relating to construction operations they are sub-contractors  in accordance with section 58 Finance Act 2004 and section 560 ICTA. HMRC have been unable to discover whether the workers ever paid income tax on their earnings. HMRC are concerned with the relationship between Matthew and the workers. It may well be that John Buckingham held the property as investment property and would not have been liable under the legislation if he had dealt with the refurbishment himself. John Buckingham contracted with his son to refurbish the properties. Matthew paid £21,760 to tradesmen for the period 1 October 2006 to 5 April 2007 and £21,600 for the period 6 April 2007 to 30 September 2007 without deducting any tax. Formal assessments were issued on 19 June 2009. The subcontractors’ payments have been apportioned incorrectly and the revised assessments are:-

Year Total Payments Sum deductible Tax due

2006/07 £22,296 £4,013.28 £4,013.28

2007/08 £21,064 £4,212.80 £4,212.80

Totals £43,360 £8,226.08 £8,226.08

Mrs Newham submitted that the appeal should be dismissed and the assessments confirmed as above.

7. Mr Storey submitted that Matthew was no more than an agent for his father. He had returned from aboard and as he had no job his father paid him £200 per week to look after his and his company’s properties. John Buckingham and his company own the properties as investment premises to let. The four houses had been purchased at auction for that purpose. Due to their state of repair they needed refurbishing. John Buckingham works full time as a retailer and lives in Harrogate. He asked his son to supervise the refurbishment work. His son dealt with the workers, who had initially been employed by John Buckingham. Matthew ferried the workers to and from the properties; provided them with the materials they used; did very little building work himself as he had no building skills, having worked in the leisure industry aboard. The legislation makes it clear that a property business that acquires and disposes of buildings for capital gain or uses the buildings for rental is outside the scope of the Construction Industry Scheme, unless its expenditure on construction operations is sufficient for it to be treated as a ‘deemed contractor’. Section 59 (1) (b) – (i) defines a ‘deemed contractor’ and for the purposes of this appeal the contractor would need to be turning over £1,000,000 in construction operations to qualify. It should be noted that the task of delivering materials is not an operation within the scope of the Construction Industry Scheme.

On the basis that Matthew is not a ‘mainstream contractor nor a ‘deemed contractor’ he should have been employed under PAYE but HMRC have not suggested that. Matthew was a property manager for his father in return for the £200 paid to him each week to him. Mr Storey produced to the tribunal an internal note CISR 15600 provided to the staff of HMRC which is available as a guide when considering Construction Industry matters. It states at the beginning:-

“When a managing agent is acting for a principal or ‘client’ in letting contracts that include construction operations they will not generally be a contractor as defined by the Scheme. This is because the contract for construction operations will more likely be between the principal and the subcontractor. The managing agent’s role would be to see that the work is carried out in accordance with the principal’s contract with the subcontractor and may include making payments to them.”

Mr Storey submitted that the appeal should be allowed and the regulation 13 determination be dismissed.

8. We have considered the law and the facts and allow the appeal. In spite of the fact that Matthew stated in his tax return at section 3.2 that his business was property renovation and/ developer he was nothing of the kind. The evidence from John Buckingham made it abundantly clear that the properties were his investment and that his son carried out his father’s instructions namely to supervise the work on his behalf. From time to time John Buckingham visited the houses being refurbished to ensure that his son was supervising the work to the required standard.. There is no doubt that the properties are investment properties as John Buckingham is employed full time in a retail business. As Investment properties they do not fall within the ambit of the Construction Industry Scheme and John Buckingham would not therefore have been obliged to deduct any tax had he dealt with the properties without his son. Matthew ought to be paid his £200 under PAYE. It appears that Matthew has paid the appropriate amount of tax. It was unclear whether the workers had also paid an appropriate amount of tax. We allow the appeal and dismiss the regulation 13 determination.

9. We were not addressed as to costs and we direct that the Appellant submits his application for costs under rule 10 of The Tribunal Procedure (First-tier) Tribunal (Tax Chamber) Rules 2009, if he intends to do so, to the Tribunal and to the Respondent within 28 days from the release of the decision. The Respondent shall reply within 56 days with the Appellant’s right to reply within 70 days. The tribunal will decide the costs on the basis of written representations.

4.       10. 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:  24 November 2010