[2011] UKFTT 337 (TC)

TC01197

Appeal number: TC/2010/05362

Appeal against penalties imposed for the late submission of six monthly CIS returns on the grounds that the penalties were out of proportion to the seriousness of the default and that the legislation could not be imposed because it was in contravention of the Human Rights Act 1998 on the grounds of proportionality and discrimination – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	M & J PLUMBING	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: S.M.G.RADFORD (TRIBUNAL JUDGE)									

The Tribunal determined the appeal on 2 March 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 17 July 2010,  HMRC’s Statement of Case submitted on 10 August 2010 and the Appellant’s Reply dated 23 August 2010.

© CROWN COPYRIGHT 2011
DECISION

1.	This is an appeal against the penalties imposed for the late submission of six monthly Construction Industry Scheme (“CIS”) returns which resulted in 31 separate fixed penalties totalling £3,100.
Background and facts
2.	The CIS return due on 19 July 2009 was not received until 29 June 2010. The CIS returns due on 19 August 2009, 19 September 2009 and 19 October 2009 were not received until 15 February 2010. The CIS return due on 19 November 2009 was not received until 10 February 2010 and the CIS return due on 19 December 2009 was not received until 18 January 2010.
3.	On 12 February 2010 Henry Reeves, agent for the Appellant, appealed against the penalties.
4.	On 30 March 2010 HMRC offered to review their decision.
5.	The Appellant requested a review on 6 April 2010 and on 21 April 2010 the HMRC reviewing officer confirmed by letter that he upheld the decision to issue the penalties.
Legislation
6.	Regulation 4 of The Income Tax (Construction Industry Scheme) Regulations 2005 states:
Monthly return
(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.
(2) The return under paragraph (1) must contain the following information—
(a)the contractor’s name,
(b)the contractor’s unique taxpayer reference (UTR) and Accounts' Office reference,
(c)the tax month to which the return relates, and
(d)in respect of each sub-contractor to whom, or to whose nominee, payments under construction contracts were made by the contractor during that month,—
(i)the sub-contractor’s name;
(ii)the sub-contractor’s national insurance number (NINO) or company registration number (CRN), if known; and
(iii)the information specified in paragraph (3).
(3) The information specified is—
(a)if the sub-contractor is registered for gross payment—
(i)the sub-contractor’s unique taxpayer reference (UTR), and
(ii)the total amount of payments which would be contract payments but for section 60(4) of	the Act (contract payments: exceptions) made by the contractor to the sub-contractor during the tax month;
(b)if the sub-contractor is registered for payment under deduction—
(i)the sub-contractor’s unique taxpayer reference (UTR),
(ii)the total amount of contract payments made by the contractor to the sub-contractor during the tax month,
(iii)the total amount included in those payments which the contractor is satisfied represents the direct cost to any person other than the contractor of materials used or to be used in carrying out the construction contract to which the contract payment relates, and
(iv)the total amount deducted from the payments mentioned in paragraph (3)(b)(ii) under section 61 of the Act (deduction on account of tax from contract payments);
(c)if the sub-contractor is not registered for gross payment or payment under deduction—
(i)the sub-contractor’s unique taxpayer reference (UTR), if known,
(ii)the total amount of contract payments made by the contractor to the sub-contractor during the tax month,
(iii)the total amount included in those payments which the contractor is satisfied represents the direct cost to any person other than the contractor of materials used or to be used in carrying out the construction contract to which the contract payment relates,
(iv)the total amount deducted from the payments mentioned in paragraph (3)(c)(ii) under section 61 of the Act, and
(v)the verification reference for higher rate deduction.
(4) The return may be transmitted electronically to the Commissioners for Her Majesty’s Revenue and Customs.
(5) The return must include a declaration by the person making the return—
(a)that none of the contracts to which the return relates is a contract of employment;
(b)indicating whether he has complied with the requirements of regulation 6 (verification etc of registration status of sub-contractor) in the case of each person to whom a payment to which the return relates is made; and
(c)that the return contains all the information, particulars and supporting information   required by this regulation to be included in the return, and such information, particulars and supporting information are complete and accurate to the best of the contractor’s knowledge and belief.
(6) If the return is not transmitted electronically, it must be signed by the contractor or a person duly authorised by the contractor to make the return.
(7) The contractor must make and keep such records as will enable him to comply with this regulation.
(8) The contractor must give the following information in writing to the sub-contractor to whom it relates not later than 14 days after the end of the tax month either in respect of the total payments made in that month or in respect of each payment made in that month—
(a)if the sub-contractor is registered for payment under deduction—
(i)the contractor’s name,
(ii)the contractor’s employer’s reference,

(iii)the tax month to which the payments relate or the date of the payment,
iv)the sub-contractor’s name,
(v)the sub-contractor’s unique taxpayer reference (UTR),
(vi)the total amount of contract payments made by the contractor to the sub-contractor during the tax month,
(vii)the total amount included in those payments which the contractor is satisfied represents the direct cost to any person other than the contractor of materials used or to be used in carrying out the construction contract to which the contract payment relates, and
(viii)the total amount deducted from the payments mentioned in paragraph (vi) under section 61 of the Act;
and
		(b)if the sub-contractor is not registered under Chapter 3 of the Act, the verification reference.
(9) The information required under paragraph (8) may be given by means of electronic communications if—
(a)the contractor has indicated to the sub-contractor that he intends to use electronic communications for the purposes of giving this information;
(b)the sub-contractor has consented to information being given by the contractor by means of electronic communications, and that consent has not been withdrawn;
(c)the information is given in an electronic format—
(i)in which the statement may be stored; and
ii)which permits a paper copy of the information contained in the statement to be printed.

(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(1) (special penalties in the case of certain returns) applies to the requirements in—
(a)paragraph (1),
(b)paragraph (3)(b),
(c)paragraph (3)(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
7.	Section 98A (2)(a) of the Taxes Management Act 1970 (“TMA”) provides for penalties to be charged where a contractor fails to submit a return by the due date.
8.	Section 118(2) TMA states that where a person had a reasonable excuse for not doing anything which was required to be done, he shall be deemed not to have failed to do it if he did it without reasonable delay after the excuse ceased.
9.	Section 100 TMA permits an authorised officer of HMRC to determine penalties under the Taxes Acts.
Appellant’s Submissions
10.	The Appellant submitted that it had changed agents in March 2009 and informed the new agents that the large contracts had completed and that they were not likely to engage any new sub-contractors for some time after 5 April 2009 although it subsequently became clear that payments were made to sub-contractors in the period April to June 2009. 
11.	The Appellant accepted however that this was not in any event a ground for appeal as nil CIS returns were required for this period even if no payments were made. 
12.	However the period April to June 2009 was not the period which incurred the penalties. The Appellant submitted that HMRC ought to have issued the penalty notices promptly to alert the Appellant of its default but five penalty notices were not issued until 27 November 2009 and eleven notices not until 29 January 2010.
13.	The Appellant submitted that the penalties were out of proportion to the seriousness of the default and that the legislation could not be imposed because it was in contravention of the Human Rights Act 1998 on the grounds of proportionality and discrimination.
HMRC’s Submissions
14.	The Appellant had been operating as a contractor within the CIS since 10 June 2008.
15.	The legislation placed the responsibility for delivery of the completed CIS returns squarely on the shoulders of the contractor. Returns for the periods ending 5 July 2009 to 5 December 2009 were submitted late and as a result penalty determinations were issued.
16.	The Appellant had claimed that subcontractors were not engaged after 5 April 2009 however HMRC records showed that for the tax year 5 May 2009 to 5 April 2010 the Appellant paid a total of £47,073 to subcontractors making CIS deductions of £9,414.70 in that same period.
17.	HMRC submitted that the penalties had been charged for the failure to submit the CIS returns. Although the Appellant had claimed that the issue of the penalties was disproportionate and inequitable, the legislation was designed to treat all taxpayers equally. The penalties are imposed to promote the efficient operation of the taxation system.
18.	HMRC submitted that if the case referred to by the Appellant in their letter of 29 April 2010 was that of SKG (London Ltd) the Appellant should be aware that the Tribunal had made no decision on the merits of the case but adjourned it for transfer to the complex track for a full argument on proportionality. However before the case could be heard the penalties were withdrawn due to an administrative error. HMRC then accepted that the penalties could not be reinstated and the appeal was allowed without consideration of the merits of the case.
19.	 HMRC submitted that the appeal did not contain anything which showed that something exceptional had prevented the Appellant from submitting the CIS returns and the Appellant had no reasonable excuse for not doing so.
Findings
20.	The Tribunal considered the question of proportionality and the latest cases on proportionality including Enersys Holdings v HMRC [2010] UKFTT 20 (currently under appeal), R King v R & C Commissioners [2010] UKFTT 79 and Mitchell v R & C Commissioners [2010] UKFTT 485. 
21.	The Tribunal noted that despite the five penalty notices issued on 27 November 2009 the relevant returns were not received until February and June 2010 and the CIS return due on 19 December 2009 was also late.
22.	On 6 December 2010 HMRC offered to reduce the penalties from £3,100 to £1,900 by applying the new penalty system which will come into force from October 2011. The Appellant did not reply.
23.	The Tribunal found that the Appellant had no reasonable excuse for the late submission of the CIS returns and that after mitigation of the penalties by HMRC to the reduced amount of £1,900 the penalties were not disproportionate to the seriousness of the default which could have been corrected by the Appellant earlier on receipt of the first batch of penalty notices.
Decision
24.	The appeal is dismissed.
25.	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: 20 MAY 2011