[2011] UKFTT 69 (TC)

				TC00947

	Appeal number:  TC/2010/04413

Construction Industry Scheme - Appeal against refusal of registration for gross payment - Failure of ‘Compliance test’ -  late filing of self assessment tax returns - Reliance on accountants - Whether reasonable excuse (s 118(2) TMA) - Yes - Appeal allowed 

FIRST-TIER TRIBUNAL

TAX 
	
		THAMES VALLEY RENOVATIONS			 Appellant

		-and-

THE COMMISSIONERS FOR HER MAJESTY’S 
		REVENUE AND CUSTOMS		       Respondents

 		         
	
Tribunal:	          Paulene Gandhi (Judge)	
	         Mr Gordon Marjoram (Member)	

Sitting in public in Birmingham on 5 October 2010

		
Nigel and Daphne Leck, on behalf of the Appellant 

Mr Ivan Allen Officer for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2011

DECISION

1.   Mr Allen acting on behalf of HMRC requested full written findings of fact and reasons for the decision.  

2.     This is an out of time appeal against the refusal to grant gross payment status within the Construction Industry Scheme (CIS) to Thames Valley Renovations Limited because the directors of the company have not complied with their tax obligations.

3.     Oral evidence was given by Mrs Leck, one of the directors and company secretary of Thames Valley Renovations Limited. 

4.     HMRC takes no issue with the fact that this appeal is out of time.  We therefore grant permission to appeal out of time (Rule 20(4) The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009).

5.      There is no dispute between the parties as to the following facts:

a)    Mr and Mrs Leck are the directors of Thames Valley Renovations Limited.  

b)    Thames Valley Renovations Limited applied for gross payment status in July 2009. HMRC reached a decision that they were unable to grant gross payment status to the company in their letter dated 23 July 2009.  This was because between 9 July 2008 and 8 July 2009 (the review period) Thames Valley Renovations Limited must have complied with all of its tax obligations. The determination issued on 23 July 2009 identified that the two directors of the company had both failed in their obligations with regard to their own personal tax affairs. Mrs Leck (the company secretary) appealed to the tribunal on 9 May 2010.

c)	The failures are as follows:

Mrs Leck 

Self assessment return      	Due date                     When received

2006/07                               	31 January 2008	3 March 2010
2007/08 				31 January 2009	7 February 2010
1st  fixed penalty £100		25 March 2008	29 January 2010
late filing 2007 return							
2nd fixed £100 penalty		9 September 2008	29 January 2010
late filing of 2007 return 

Mr Leck 

2006/07 				31 January 2008	3 March 2010
2007/08 				31 January 2009 	7 February 2010
1st fixed £100 penalty
late filing 2007 return 		25 March 2008
2nd fixed £100 penalty 
late filing 2007 return    		9 September 2008

6.    Given that it is not in dispute that the returns were filed late we consider whether there was any reasonable excuse for these failures and whether once the reasonable excuse ceased the failures were remedied without unreasonable delay.

	The law 

7.     Section 118(2) Taxes Management Act 1970 ("TMA"), so far as is material to this appeal, provides as follows:

"... where a person has 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."

8.    There is no definition in the legislation of a “reasonable excuse” which “is a matter to be considered in the light of all the circumstances of the particular case” (see Rowland v HMRC [2006] STC (SCD) 536). The fact of reliance on a third party is not precluded from being a reasonable excuse for the purpose of Section 118(2) TMA. 

9.   As set out in Stephen Mutch v HMRC [2009] UKFTT 288 (TC) the assumed reasonable competent business person must be taken to have exercised reasonable foresight. Then the reasonable business person must be taken to have exercised due diligence and a proper regard for their tax obligations.  

10.     In the case of Rowland the Special Commissioner (Adrian Shipwright) said at [22- 26]: 

“The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes. 
Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd). 
The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse.  
I conclude that in the direct tax context reliance on a third party can be a reasonable excuse. 
The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default.”
11.   Enterprise Safety Coaches (decision no 5391) is a case where the tax payer, through its employee  relied on erroneous advice and it was held that merely acting in good faith on erroneous advice was not precluded by what is now Section 71 VATA from being a reasonable excuse.

Discussion

12.  In the request for a review of the decision dated 01/03/10 Mrs Leck states the following: 

•	The original reason the gross payment registration was not granted was that the director’s tax returns were not up to date. The situation has now been rectified and all returns have now been lodged with HMRC. The directors have requested confirmation of the late filing penalties and once they have been notified of the amounts by HMRC these will be paid.

•	Returns have been delayed due to HMRC having the wrong postal address for Mrs Leck although HMRC have the correct address for her husband.   

13. In a phone conversation on 12 November 2009 between Mrs Leck and HMRC the following was stated: 

•	Mrs Leck was struggling to sort out what was required to progress the appeal. She has found the 2007/08 returns to complete but not the earlier ones. Their accountant had told them there was no need to submit returns when they had no income and that the penalties charged were not due. They have been having a difficult time financially and had accepted the advice they were given. She now appreciates the HMRC did not have any information on what was happening and that their procedures were followed automatically because of this.  

•	HMRC recommended that Mrs Leck contact the self-assessment helpline to update her address and discuss both directors registering for on line filing so that they could complete the missing returns. HMRC advised that once the returns were processed any adjustments would be made to the penalties charged and after that HMRC would be able to consider the appeal.

14.   HMRC's case is that the reasons put forward should not be regarded as a reasonable excuse. The director’s personal returns were submitted after the relevant filing date. The initial and continued failure of the directors to meet their obligations demonstrates that if a reasonable excuse existed the directors failed to rectify the position without unreasonable delay. Thames Valley Renovations Limited failed to comply with its obligations after the end of the qualifying period in the late submission of directors’ returns. 

15.   Having seen and heard Mrs Leck we find her to be credible which means we make the following findings of fact:

i)    The company was suffering from financial problems in 2005 and therefore were advised to apply for IVA and informed HMRC of this. However the IVA was not accepted in July 2005. The company then asked their accountants about their personal tax returns.  They had no reason to disbelieve their accountant when the accountants advised them that as they had no income they did not need to file a tax return. They were also advised to ignore the late filing penalties they received as they had no income.  

ii)     As the business started picking up and work increased the company applied for gross payment status and it was then they were informed by HMRC that they had not been granted gross payment status as they had not submitted their personal tax returns. 

iii)    It is not in dispute that there was no tax outstanding which in turn means that there are no late filing penalties payable.

iv)     The company tried dealing with HMRC as soon as they could. HMRC had the wrong address for Mrs Leck and thus she did not receive her paper tax returns.  She was not able to file all her outstanding tax returns on line.  She and her husband are with different tax offices and she had to chase her tax office to obtain her tax returns. 

16.  From the above facts our conclusion is that there was a reasonable excuse for the late filing of the tax returns.  In our view as no tax was due there would be no reason for Mr. and Mrs. Leck to not send in their tax returns by the due date. However Mr and Mrs Leck relied on the advice of their accountant who informed them that as no tax was due they did not need to complete a personal tax return. 

17.   We find they acted reasonably in relying on this advice.  See Jonathan David Ltd [2009] UKFTT 289 (TC) para 10 where the tribunal held:

“10.	I accept that in an ordinary case the failure by a taxpayer to heed HMRC’s published advice and information, both documentary and online, of the need to make monthly returns, including nil returns, would, other things being equal, negate any defence of reasonable excuse based solely on ignorance of the system.  In this case, however, Mr Scogings ordinarily relied upon Paul, his accountant, to assist him in these matters.  The fact of reliance on a third party is not precluded from being a reasonable excuse for the purpose of s 118(2) TMA.  I find, therefore, that, in circumstances where the Appellant ordinarily relied upon a professional in such matters, it was reasonable for the Appellant itself, through Mr Scogings, to have failed to appreciate the differences between the paper and online systems of making returns, including the absence of any reminder to make the monthly returns.”

18.   In our view Mr and Mrs Leck also ‘ordinarily relied upon a professional’ in relation to their tax affairs and in this case were relying on the advice of their accountant not to file the tax returns.
19.   We then consider whether there was an unreasonable delay after the reasonable excuse had ceased.  In our view once Mr and Mrs Leck discovered that the tax returns were due they took steps in a timely manner to sort out their personal tax affairs.  

20.   Under normal circumstances taxpayers have around seven months to file a paper tax return.  Looking at the chronology in this case the following is evident:

i)      On 23 July 2009 Mr and Mrs Leck found out they had not complied with their tax obligations. 
ii)    By letter of 9 October 2009 HMRC gave the specific details of the director’s compliance failures. 
iii)   In her letter of October 2009 Mrs Leck states that she has made arrangements with the company accountants to complete their tax returns. 
iv)    On 13 November 2009  Mrs Leck wrote to HMRC stating that she is awaiting the tax returns for tax years 2005/06 and 2006/07 but has the returns for 2007/08.  She asks HMRC to amend her address details which were incorrect. She states that she has obtained the correct information codes to complete the self-assessment forms online for 2008/09. 
v)     The 2006/07 returns were filed on 3 March 2010 and 2007/08 returns were filed on 7 February 2010.  

20.    In our view given the delay by HMRC in sending Mrs Leck’s tax returns due to having her incorrect address the company complied with its tax obligations within a reasonable period of time after the reasonable excuse ended.  

Conclusions

21.  As per Rowland reliance on a third party, such as accountants, can be a reasonable excuse in the direct tax context.  Having found it was reasonable for the company to rely on their accountants, and that it was this reliance which led to the failure to meet its obligations we conclude that the company who, on becoming aware of the failures to meet its tax obligations, took timely steps to remedy the situation, has a reasonable excuse and therefore should be treated as having satisfied the compliance test.

22.  The appeal is therefore allowed.

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: 18 JANUARY 2011