DECISION

1. This is an appeal against 15 penalties amounting to £1500 imposed due to the late submission of five monthly Construction Industry Scheme (CIS) returns for the periods ended 5 August 2009 to 5 December 2009 inclusive.

2. The appellant, Mr Crooks, acting in person, requested full written findings of fact and reasons for the decision.

3. This decision sets out our findings of fact and reasons.

The evidence

4. We were provided with documentation by HMRC which related to both HMRC and Mr Crooks’ case. We have considered all the documentary evidence before us with the following being the most pertinent to our decision:

· Penalty appeal to HMRC dated 7 February 2010

· Appeal acknowledgement dated 17 February 2010

· HMRC’s response to the appeal dated 2 March 2010

· Request for a review dated 8 March 2010

· HMRC’s conclusion of the review dated 30 March 2010

· Notice of appeal to the Tribunal dated 27 April 2010

· HMRC’s Statement of Case dated 15 June 2010

5. Oral evidence was given by Mr Crooks.

The law

The Construction Industry Scheme and relevant legislation

6. The background to the Scheme is well known. It was introduced in 1975 to counteract perceived evasion of tax by self-employed workers in the building industry. Under the Scheme, a person making payments to a subcontractor is obliged to withhold income tax from the payment, unless HMRC registers the contractor for gross payment.

7. Taxes Management Act 1970 (“TMA”) section 98A, under the heading ‘Special penalties in the case of certain returns’ so far as is relevant in this case, reads:

(1) …regulations under section 70(1)(a) or 71 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…

(b)….

(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….

8. Section 98A(2)(a) TMA provides for penalties to be charged where a contractor fails to submit a return by the due date.

9. Section 100 TMA permits an authorised officer of HMRC to determine penalties under the Taxes Acts.

10. Section 118(2) 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."

11. Regulation 4 of The Income Tax (Construction Industry Scheme) Regulations 2005 states:

(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), and

(b) not later than 14 days after the end of the tax month following the appointed day, by a contractor who has made a payment in the 12 months preceding the appointed day which would be a contract payment or a payment which would be a contract payment but for section 60(4) of the Act if made after the appointed day.

(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),

(b)…

(c)…

(d) paragraph (10).

(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.

12. We were also referred to the following case:

HM Revenue & Customs v Facilities and Maintenance Engineering Ltd (2006) 77 TC 575 it was stated in paragraph 33 and that “… whether the rules are reasonable or unreasonable, they are undoubtedly the rules which Parliament has laid down, and neither the Commissioners nor the courts on appeal have any power to dispense a company, with whose case they sympathise, from the consequences of them”.

The Facts

13. There is no dispute between the parties as to the relevant facts. We therefore make the following findings of fact.

14. Mr Crooks traded within the new Construction Industry Scheme and has employed subcontractors since 30 July 2009. He registered as a contractor on 29 December 2009.

15. The failures

Month Date return due Date received Period of default (days) Late filing penalty

5 Aug 09 19 Aug 09 18 Jan 10 152 £500

5 Sept 09 19 Sept 09 18 Jan 10 121 £400

5 Oct 09 19 Oct 09 18 Jan 10 91 £300

5 Nov 09 19 Nov 09 18 Jan 10 60 £200

5 Dec 09 19 Dec 09 18 Jan 10 30 £100

16. Accordingly we find that Mr Crooks filed his CIS returns late on each of the occasions set out above.

Mr Crook’s submissions in outline

17. In essence Mr Crooks states the following:

(a) He is new to the Scheme and was unaware that he had to submit his CIS return on a monthly basis as all other taxes are on a yearly or quarterly basis.

(b)He was not acting dishonestly and had no intention of trying to avoid paying his tax.

(c)As soon as he realised that he had made a mistake he registered, filed his returns, and paid the tax due.

(d)He is being penalised for acting honestly as he could have given a later date for employing the subcontractors.

(e)He was misled by the CIS telephone support helpline who told him that he would not be fined for “owning up”.

(f)He is a small business and so cannot afford administrative support and the fine will seriously jeopardize his business and affect him and his family and will put other sub-contractors out of work

(g) The fine is unfair and excessive for a first offence. There is no warning that the fines will instantly accumulate month-on-month before the first fine has been imposed. Fines should not be allowed to snowball before the first one has been served on the person.

HMRC’s submissions in outline

18. In summary HMRC states the following:

(a) Mr Crooks was required by law to register as a CIS contractor and submit his CIS returns by the due date

(b)The requirements of the CIS scheme and its operation is widely publicised

(c)All his monthly returns for the periods in question were late

(d)The penalties were therefore properly imposed unless there was a reasonable excuse for the period in question

(e)Ignorance of the law does not amount to a “reasonable excuse”.

(f)The penalties are proportionate

Discussion

19. It is not in dispute that Mr Crooks filed his CIS returns late. We consider whether there was any reasonable excuse for the failure to file the returns by the due date.

20. 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). Although this is a VAT case the proposition set out is equally relevant to direct tax cases).

21. However Steptoe v R&C Commrs [1992] STC 527 requires the Tribunal to take for comparison a person in a similar situation to that of the actual taxpayer who is relying on the reasonable excuse defence.

22. 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.

23. Mr Crooks says that he did not initially realise he had to file monthly returns as all other returns are filed on a yearly or quarterly basis and he was busy with his job. He was also new to the scheme. As soon as he found out the correct situation he took steps to rectify matters by filing his returns and paying the tax due. He simply made a mistake by not filing his returns on time and he is not trying to avoid paying his tax liabilities.

24. We have no reason to believe that Mr Crooks is not honest and we accept that he made a genuine mistake and was not trying to avoid paying his tax. We also accept that Mr Crooks did the best he could to sort out this matter. However the CIS scheme is black and white and ignorance of basic law does not amount to a reasonable excuse.

25. This means that a lack of knowledge of how the CIS Scheme operates cannot amount to a reasonable excuse. In our view the onus was on Mr Crooks to find out how the scheme operated and then to comply with the scheme. Information about the CIS scheme and its operation is widely available. This is how a reasonable business person exercising ‘due diligence’ and with ‘a proper regard for their tax obligations’ would have behaved.

26. Further any advice given during Mr Crooks’ phone conversations with the CIS helpline, whether correct or not, was not the reason why he did not file his CIS returns by the due date. The reason he did not file his returns on time was because he did not know he had to file them on a monthly basis. As the phone conversations were not the cause of the late filing of his returns they cannot be considered a reasonable excuse for ‘not doing anything required to be done’.

27. Although we have sympathy with Mr Crooks’ distress at receiving so many penalty notices at the same time in our view there is nothing in the legislation which places an obligation on HMRC to issue penalties in any particular pattern.

28. The legislation is not concerned with penalising honest tax payers but simply with treating all taxpayers on an equal footing by setting out rules that by law a tax payer must comply with.

29. Although we accept that Mr Crooks may have difficulties in paying the penalties due to a downturn in his business the insufficiency of funds occurred in 2010 and thus after the period of time the defaults occurred and thus it cannot be the cause of the defaults.

30. If we are wrong about this we find that we have little evidence before us that the penalties are disproportionate in the sense of, as Simon Brown LJ put it in International Transport Roth GmbH v Home Secretary [2003] QB 728, “not merely harsh but plainly unfair”. The question in that case was whether fixed penalties imposed on hauliers whose vehicles were found to contain clandestine entrants to the UK, with limited opportunity for escape from the penalty, no possibility of mitigation and no right of access to an independent tribunal, were disproportionate. Enersys Holdings UK Limited v The Commissioners for Her Majesty’s Revenue and Customs MAN/09/0668 (a VAT case) is authority for the proposition that there is no material difference between Community Law and Human Rights Convention concepts in this respect.

31. We have been provided with no detailed evidence of Mr Crooks' financial circumstances. For example his profit/turnover and the amount of the penalties compared to his profit/turnover. We also take into account that Mr Crooks was five months late in submitting his CIS returns. There is simply no evidence before us that the penalties were grossly disproportionate.

32. We note that HMRC has the power to mitigate the penalties under section 102 TMA. Mr. Crooks is at liberty to request HMRC to do so however the tribunal has no power to mitigate the penalties.

Conclusion

33. Mr Crooks has not shown that there is a reasonable excuse throughout the period

34. 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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

The Construction Industry Scheme and relevant legislation

TRIBUNAL JUDGE

RELEASE DATE: 14 APRIL 2011

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Crooks v Revenue & Customs [2011] UKFTT 246 (TC) (14 April 2011) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01110.html Cite as: [2011] UKFTT 246 (TC)