[2011] UKFTT 301 (TC)

TC01163

Appeal number: TC/2010/03305

INCOME TAX - Construction Industry Scheme - Late filing of CIS returns - Whether reasonable excuse? (s 118(2) TMA) - No - Whether penalty disproportionate? - No - Appeal dismissed 

FIRST-TIER TRIBUNAL

TAX 

	CASTLEDALE BUILDING SERVICES
		Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	PAULENE GANDHI (TRIBUNAL JUDGE)						BEVERLEY TANNER (TRIBUNAL MEMBER)		

The Tribunal determined the appeal on 22 October 2010 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 April 2010,  HMRC’s Statement of Case submitted on 18 May 2010 and the Appellant’s Reply dated 10 September 2010 and 15 September 2010.

© CROWN COPYRIGHT 2011
DECISION

1.    This is an appeal against 243 penalties imposed for the late filing of 31 monthly Construction Industry Scheme (CIS) returns for the period ending 5 May 2007 to 5 September 2009 (inclusive). The penalties amount to £36,100.

2.      The appellant, Mr Curtler,  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 Curtler’s case.  We have considered all the documentary evidence before us with the following being the most pertinent to our decision:
•	Appeal to HMRC dated 22 January 2010
•	HMRC’s response to the appeal dated 2 February 2010
•	Request for a review dated 21 February 2010
•	HMRC’s conclusion of the review dated 12 March 2010
•	Notice of appeal to the Tribunal dated 8 April 2010
•	Letter from Mr Curtler dated 10 September 2010
•	Letter dated 15 September 2010 from Mr Curtler’s tax adviser
•	HMRC’s response to Mr Curtler’s submissions in accordance with directions issued on 26 August 2010.  

The law 
The Construction Industry Scheme and relevant legislation
5.    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. 
6.     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….

7.     Section 98A(2)(a) TMA provides for penalties to be charged where a contractor fails to submit a return by the due date.
8.     Section 100 TMA permits an authorised officer of HMRC to determine penalties under the Taxes Acts.
9.     Section 100B TMA specifies the powers of the tribunal to determine appeals against penalties.
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.
The Facts 
12.   There is no dispute between the parties as to the relevant facts. We therefore make the following findings of fact.

13.   Mr Curtler traded within the new Construction Industry Scheme and registered as a contractor from 6 April 2007.  

14.    Details of the penalties issued for the periods in question are set out by HMRC at folio 2 of HMRC’s bundle.  These have not been disputed by Mr Curtler.

15.   Accordingly we find that Mr Curtler filed his CIS returns late on each of the occasions set out at folio 2.

The company’s submissions in outline
16.    In essence Mr Curtler states the following:
a)   Due to the breakdown of his marriage (which started in 2006 with the divorce being finalised in September 2008) Mr Curtler did not have access to his business records.  

b)    This was because his office was run from the matrimonial home and due to his matrimonial difficulties he was locked out of his house.  

c)  When he finally gained access to his office after some six weeks his business computer and some paperwork had disappeared. Once he was able to gain access to his computer after some 18 months he found that some of the data had been corrupted.  

d)   His father had suffered from bowel cancer and had three major operations relating to this condition. His continuing health problems meant Mr Curtler was reluctant to approach his parents for assistance and tried to deal with matters himself.  

e)   He tried to save money by not instructing an agent to deal with his returns.  This was because his work had dropped off due to the banking crisis and the UK recession and his divorce had left him with no money.  He is running an overdraft with his bank.

f)    He has now completed and submitted all the outstanding CIS returns. 

g)   He is suffering from panic attacks and stress caused by the difficulties in his private life.
 
HMRC’s submissions in outline
17.    In summary HMRC states the following:
a)   Mr Curtler was required by law to submit his CIS returns by the due date.

b) The requirements of the CIS scheme and its operation are 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)   Mr Curtler was still able to conduct his business affairs and trade within the CIS during the periods that he and his agent state that he experienced personal and financial difficulties because his returns confirmed that payments were being made to subcontractors.  Thus neither his ill health nor his personal circumstances were so serious as to prevent him from controlling his business affairs.  

f)   Further given his problems had been on going since 2006 if his problems prevented him from dealing with his returns he should have put alternative arrangements in place to ensure his returns were filed on time e.g. instructed his tax adviser to deal with his CIS affairs on his behalf.  
 
g)   He only informed HMRC about his personal and financial difficulties on 10 September 2009 and even then continued to file his returns late.  A business person acting in a reasonable manner would not wait for over 15 months to contact HMRC about the difficulties he was experiencing. 

h)   HMRC has no record of any request to the CIS helpline from Mr Curtler to request help to complete his returns. 

 Discussion
18.     It is not in dispute that Mr Curtler filed his CIS returns after the due date. We then go on to consider whether Mr Curtler, on balance, has shown that he has a reasonable excuse for these failures. 

19.   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). 

20.    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. 
21.   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.  

22.    Mr Curtler did not file his CIS returns on time primarily because he did not have access to his business records and due to his ill health and financial difficulties.  

23.   We are sympathetic towards the variety of personal and financial difficulties that Mr Curtler experienced from 2006 onwards.  

24.  Losing his business records due to no fault of his own may amount to a reasonable excuse but we simply do not have enough information as to what happened and when.  It is unclear as to what information was lost and how this impacted on his ability to prepare and submit his returns on time; what efforts he made to obtain the lost information and when he managed to obtain it.  He has also not provided an explanation as to why, even after the divorce proceedings were finalised (in September 2008), his returns were still not being submitted by the due date and why he did not inform HMRC of his difficulties until almost a year after his divorce proceedings had ended.    

25.   Ill health can also amount to a reasonable excuse.  A shortage of funds per se cannot amount to a reasonable excuse but the reason for the shortage of funds can. However any health problems/reasons for the shortage of funds must relate to the periods in question and be the cause of Mr Curtler not filing his returns by the due date.

26.    However we have no details or documentary evidence as to the period of time Mr Curtler had health problems and/or financial difficulties both due to losing the contract in Pinner and his divorce. We are therefore unable to ascertain whether these difficulties were the direct cause of Mr Curtler not filing his returns on time.

27.  We also take account of the fact that Mr Curtler was still able to conduct his business affairs and trade within the CIS during the periods that he and his agent state that he experienced personal and financial difficulties because his returns confirmed that payments were being made to subcontractors.  Thus neither his ill health nor his financial circumstances were so serious as to prevent him from controlling his business affairs.  

28.   We are considering whether Mr Curtler behaved as a reasonable business person. We note that Mr Curtler did not contact HMRC to inform them of his difficulties until 10 September 2009 nor did he seek their help at any stage.  He has not provided any explanation for this delay in contacting HMRC.  We would have expected a reasonable business person exercising ‘due diligence’ and with ‘a proper regard for their tax obligations’ to have contacted HMRC as soon as possible to advise them of any difficulties they were experiencing in filing their returns. Further we note that even after 10 September 2009 Mr Curtler continued to file his returns late.

29.    Further given that Mr Curtler’s difficulties had been ongoing since 2006 we would have expected him to have made alternative arrangements to deal with the filing of his CIS returns to ensure that they were filed on time.  He has not provided any explanation as to why such arrangements were not put in place other than he did not instruct his agent as he was trying to save money and did not seek the help of his parents because of his father’s ill health.  This does not amount to a reasonable excuse as there is a legal obligation on Mr Curtler to file his returns by the due date and it was for him to put in place arrangements that enabled him to comply with this obligation.  

30.   Mr Curtler has not claimed that the penalties imposed are disproportionate.  Nevertheless we have considered this.  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 not been provided with detailed evidence of Mr Curtler’s financial circumstances.  For example we do not know his profit and turnover to enable us to ascertain the amount of the penalties compared to his profit and turnover.  We do not have a copy of his bank statements to enable us to ascertain the extent of his financial difficulties.  We also take into account that the failure to file the returns on time took place over a two year period and 31 returns were not filed on time.  There is simply no evidence before us that the penalties imposed were grossly disproportionate. 

Conclusion
32.   For the above reasons we do not find that Mr Curtler has shown that there is a reasonable excuse for his failure to file his CIS returns on time and nor do we find that the penalties imposed are disproportionate.  We therefore dismiss the appeal.

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: 9 MAY 2011