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Cite as: [2011] UKFTT 375 (TC)

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Champion Scaffolding Ltd v Revenue & Customs [2011] UKFTT 375 (TC) (08 June 2011)
INCOME TAX/CORPORATION TAX
Penalty

[2011] UKFTT 375 (TC)

TC01230

Appeal number: TC/2010/09303

Construction Industry Scheme—Penalties for late returns (Taxes Management Act 1970 s.98A)—Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

CHAMPION SCAFFOLDING LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: DR CHRISTOPHER STAKER (TRIBUNAL JUDGE) MR HENRY RUSSELL (TRIBUNAL MEMBER)

The Tribunal determined the appeal on 11 May 2011 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 8 September 2010, HMRC’s Statement of Case dated on 21 March 2011, and other papers in the case.

DECISION

Introduction

1. This is an appeal against various penalties imposed on the Appellant under s.98A(2)(a) of the Taxes Management Act 1970 (the “TMA”) for late provision of eleven monthly returns under the Construction Industry Scheme (“CIS”) for the months ending 5 May 2009 to 5 July 2009 inclusive, and 5 December 2009 to 5 July 2010 inclusive. The statutory penalties originally totalled £7,600, but were subsequently reduced by HMRC to £4,900 under s.102 of the TMA.

The relevant legislation

2. Section 70 of the Finance Act 2004 states in relevant part as follows:

(1) The Board of Inland Revenue may make regulations requiring persons who make payments under construction contracts—

(a) to make to the Board, at such times and in respect of such periods as may be prescribed, returns relating to such payments; ...

3. Section 98A of the TMA states in relevant part as follows:

(1) ... regulations under section 70(1)(a) ... of the Finance Act 2004 (sub-contractors) may provide that this section shall apply in relation to any specified provision of the regulations.

(2) Where this section applies in relation to a provision of regulations, any person who fails to make a return in accordance with the provision shall be liable—

(a) 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, ...

...

(3) For the purposes of subsection (2)(a) above, the relevant monthly amount in the case of a failure to make a return—

(a) where the number of persons in respect of whom particulars should be included in the return is fifty or less, is £100, and

(b) where that number is greater than fifty, is £100 for each fifty such persons and an additional £100 where that number is not a multiple of fifty.

4. The Income Tax (Construction Industry Scheme) Regulations 2005, SI 2005 No 2045 (the “Regulations”), regulation 4, made pursuant to s.70 of the Finance Act 2004, provides in relevant part as follows:

(1) A return must be made to the Commissioners for Her Majesty’s Revenue and Customs in a document or format provided or approved by the Commissioners—

(a) not later than 14 days after the end of every tax month, by a contractor making contract payments or payments which would be contract payments but for section 60(4) of the Act (contract payments: exceptions), ...

...

(10) If a contractor who has made a return, or should have made a return, under this regulation makes no payments under construction contracts in the tax month following that return, the contractor must make a nil return not later than 14 days after the end of that tax month. This is subject to paragraph (11).

(11) Paragraph (10) does not apply if the contractor has notified the Commissioners for Her Majesty's Revenue and Customs that the contractor will make no further payments under construction contracts within the following six months.

(12) Subject to paragraph (13), section 98A of TMA (special penalties in the case of certain returns) applies to the requirements in—

(a) paragraph (1), ...

(13) A penalty under section 98A of TMA in relation to a failure to make a return in accordance with paragraphs (1) or (10) arises for each month (or part of a month) during which the failure continues after the 19th day of the sixth month following the appointed day.

5. For the purposes of the Regulations, “tax month” is defined in regulation 2 of the Regulations to mean “the period beginning on the 6th day of a calendar month and ending on the 5th day of the following calendar month”.

6. Section 100(1) of the TMA states in relevant part as follows:

(1) ... an officer of the Board authorised by the Board for the purposes of this section may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate.

7. Section 100B(2) of the TMA states in relevant part as follows:

(2) ... on an appeal against the determination of a penalty under section 100 above section 50(6) to (8) of this Act shall not apply but—

(a) in the case of a penalty which is required to be of a particular amount, the First-tier Tribunal may—

(i) if it appears that no penalty has been incurred, set the determination aside,

(ii) if the amount determined appears to be correct, confirm the determination, or

(iii) if the amount determined appears to be incorrect, increase or reduce it to the correct amount,

8. Section 118(2) of the TMA provides as follows:

(2) 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 or 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 had ceased.

The evidence and submissions of the parties

9. The Appellant’s Notice of Appeal states by way of grounds of appeal as follows. The Appellant employed a bookkeeper/administrator to carry out the tax and VAT obligations on behalf the Appellant, and the director of the Appellant, Mr Read, had no knowledge of accounting and tax matters. The bookkeeper/administrator worked with Mr Read in a previous company and Mr Read believed that she was loyal and efficient, and she led him to believe that she was qualified in all business matters and would be the ideal candidate to handle his business affairs, including tax and VAT obligations. Until June 2010, Mr Read was under the impression that the bookkeeper/administrator was dealing with the CIS monthly returns, but this was not the case. The late returns were discovered when the bookkeeper/administrator left the company. The Appellant received numerous demands for payment of penalties for submission of late returns amounting to £7600. The Appellant issued a cheque for £800 and any new returns have been submitted on time. One factor was that all business related company post was sent to the bookkeeper/administrator's home address, so that all business matters were going direct to her. The Appellant now has a PO box.

10. HMRC submits amongst other matters as follows. Each contractor is responsible for dealing with and adhering to their obligation to ensure they file CIS monthly returns by the due date, and ignorance of the legislation cannot be deemed a reasonable excuse. This obligation cannot be transferred to another person. Negligence or failure on behalf of an employee or agent does not relieve a contractor of their legal obligations within the CIS scheme. Putting systems in place to ensure future compliance, although advisable, cannot be deemed a reasonable excuse for the initial failure to file returns on time. The possible financial effect of a fine on the Appellant cannot amount to a reasonable excuse. The monthly returns in question were submitted late, the fixed penalties were correctly charged in accordance with the legislation and can only be set aside if the Appellant has a reasonable excuse to each penalty which existed for the whole period of each default period. The Appellant’s appeal does not contain anything which shows that something exceptional prevented the Appellant from operating the scheme correctly and submitting the appropriate returns. HMRC have to be seen to be consistent in their approach to all their customers, particularly to those who comply with the regulations.

11. In a reply to the HMRC submission, the Appellant states that the bookkeeper/administrator concealed her mistakes, and suffered depression, which may have contributed to her failings, and that immediately upon her departure many mistakes were uncovered and immediately rectified. The Appellant notes that HMRC has already reduced the penalty to £5,000 (£4,200 taking account of a payment of £800 already made by the Appellant) and requests the Tribunal to reduce the amount of the penalty further to £2,100.

Findings

12. The Tribunal has considered all of the information and arguments before it. The Appellant has accepted that the monthly CIS returns in question were filed late, and has not challenged the amount of the penalty imposed in the event that the Appellant does not have a reasonable excuse. The only issue in this appeal is whether the Appellant does have a reasonable excuse for the late filing of the returns in question.

13. The Appellant relies on the case of Devon & Cornwall Surfacing Limited v HMRC [2010] UKFTT 199. That case concerned an appeal against cancellation of gross payment status rather than an appeal against a penalty for late filing of CIS returns, although the “reasonable excuse” test in both contexts may be materially similar. In that case, the appellant company which had no knowledge of tax or VAT matters had relied on a company secretary to ensure compliance with tax obligations. However, various tax obligations were not complied with. The Tribunal found in that case at paragraph 20 that it had been “reasonable for the Company to rely on its secretary to comply with its tax obligations and it was this reliance which led to the failures to meet its obligations”. That decision concluded at paragraph 23, referring to Rowland v HMRC [2006] STC (SCD) 536 and other cases, that “reliance on a third party, such as the company secretary, can be a reasonable excuse in the direct tax context”.

14. The Tribunal notes however that this case concluded that reliance on a third party “can” be a reasonable excuse, not that it necessarily always will be a reasonable excuse.

15. In Rowland, which was the case particularly relied upon in the Devon & Cornwall Surfacing case, it was found that reliance on specialist accountants could in certain circumstances constitute a reasonable excuse for the purposes of s.59C(9)(a) of the Act. That was a case in which the appellant did not pay the tax on the due date because she had been expressly advised, apparently incorrectly, by reputable specialist accountants who had prepared her tax return that she only had to pay a lower amount. In that case, it was found (at para. 8(p)) that the appellant had “relied on [her accountants] implicitly as supposed specialists in [a] difficult and complicated area of tax law in which she had understood them to be specialists”. It was further found in that case (at para. 8(q)) that as the appellant “did not have the specialist knowledge and expertise herself she employed and relied upon persons whom she reasonably believed to have such specialist knowledge and expertise”.

16. The Tribunal accepts that in cases where highly specialised advice is required, a taxpayer may have no choice but to rely on the advice of a specialist. However, in cases where no specialist advice is required, the Tribunal does not consider that a taxpayer can be absolved of personal responsibility to pay taxes on time through incorrect advice received by a specialist.

17. Although Mr Read may have known nothing of tax or VAT matters, the Tribunal considers that in general, preparation of CIS returns is something that does not require specialist tax advice and is generally capable of being done by a lay taxpayer. It certainly does not require any specialist tax expertise to check whether or not a CIS return for each month has or has not in fact been submitted.

18. In the present case, the papers suggest that the bookkeeper/administrator was an independent contractor to whom responsibility for preparing the Appellant’s CIS returns and other matters had been outsourced, and who was invoicing the Appellant company some £85 per week for “book keeping services”.

19. The failure to file returns on time continued over a period of some months. From the information provided, it appears that the bookkeeper/administrator’s failures were discovered after she ceased acting for the Appellant in about July 2010. It is said that the outstanding returns were then all filed in August 2010.

20. On the material before the Tribunal, it is not apparent that any steps were ever taken by the Appellant to supervise or monitor the services being provided by the bookkeeper/administrator, or to ensure that she was performing her duties satisfactorily, or to verify that each monthly return had in fact been submitted.

21. As each case turns on its own particular circumstances, the Tribunal does not consider it necessary to draw detailed comparisons with the Devon & Cornwall Surfacing case. It is however noted that in that case it was said at paragraphs 16-17 that the late filing of returns were due to “a combination of a problem with a broadband connection and absence of the company secretary due to sickness and holiday”, and that a late payment had been due to “confusion on the part of the company secretary who made the payment at the appropriate time but under the reference number for another company” such that “one company showed an overpayment matched by the underpayment in the [appellant] Company”. The Tribunal does not find any suggestion in that case that the bare fact that responsibility had been entrusted by the appellant to a third party of itself amounted to a reasonable excuse.

22. In the present case, the Tribunal finds that the claimed failings on the part of the bookkeeper/administrator do not of themselves amount to a reasonable excuse for the late filing of the returns. Nor does the fact that the director of the Appellant may have thought that the bookkeeper/administrator was competently looking after the company’s CIS returns. It is the Appellant’s responsibility to ensure that its CIS returns are filed on time. If the Appellant entrusts a third party such as an accountant or bookkeeper/administrator with the task of taking care of the Appellant’s CIS returns, the Appellant still has a responsibility for ensuring that that the third party properly performs this duty. Entrusting such a task to a third party does not of itself completely absolve the Appellant of further responsibility for ensuring that its CIS returns are filed on time.

23. The Appellant has advanced no other circumstances that would amount to a “reasonable excuse” for late filing under s.118(2) of the TMA.

24. The Tribunal notes that HMRC has reduced the statutory penalty applicable in this case. The Tribunal has no power to reduce it further, as requested by the Appellant. The Tribunal finds that the financial consequences of the penalty for the Appellant is not of itself material to the question of whether there is a reasonable excuse.