Barrett

JurisdictionUK Non-devolved
CourtFirst Tier Tribunal (Tax Chamber)
Judgment Date07 July 2015
Date07 July 2015
[2015] UKFTT 0329 (TC)

Judge Roger Berner

Barrett

Keith Gordon and Ximena Montes Manzano, instructed by Mazars LLP, appeared for the Appellant

Hui Ling McCarthy, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents

Income tax – Construction industry scheme (CIS) – Contractor failing to deduct tax on payments to sub-contractor – Income tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045), reg. 9 and 13 – Taxes Management Act 1970 (“TMA 1970”), s. 50(6) – Penalties for failure to make CIS returns – TMA 1970, s. 98A, s. 100, s. 102 – Extent of tribunal's jurisdiction – Whether taxpayer had reasonable excuse in respect of failure to make returns – TMA 1970, s. 118(2) – Reliance on accountant.

The First-tier Tribunal (FTT) allowed a taxpayer's appeal against Construction Industry Scheme (CIS) late filing penalties, finding that the taxpayer's reliance on his accountant provided him with a reasonable excuse. The FTT however dismissed the taxpayer's appeal against a determination of deductions that should have been made from a sub-contractor's payments, on the basis that it had no jurisdiction to consider the issue.

Summary

The appellant (Mr Barrett) was a jobbing builder who used the services of an accountant and between 2006–07 and 2010–11 although he was subject to the CIS he had not released this and therefore failed to make deductions from payments made to sub-contractors and failed to submit to HMRC the required payments and CIS returns (annual for 2006–07 and monthly for 2007–08 onwards). HMRC accordingly issued determinations (“regulation 13 determinations”) under the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) (“the 2005 Regulations”), reg. 13(3) of the amounts which Mr Barrett was determined to be liable to pay to HMRC in respect of a Mr Luke. HMRC also issued fixed penalty determinations for late returns under the Taxes Management Act 1970 (“TMA 1970”), s. 98A(2)(a). The regulation 13 determinations totalled £1,894.55 and the late filing penalties £128,832 (although HMRC had offered to reduce these late filing penalties to £3,928 on the basis of the monthly late filing penalties that would have been charged under the new rules introduced from October 2011 under Finance Act 2009 (“FA 2009”), Sch. 55).

In respect of the regulation 13 determinations Mr Barrett submitted that the amounts determined in relation to the payments made to Mr Luke were excessive. It was argued that the sum determined to be due from Mr Barrett was paid to Mr Luke, and that Mr Luke had made a return of that amount and had paid tax and National Insurance contributions (NICs) in respect of it. It was submitted that the 2005 Regulations can be construed in such a way that this “double recovery” could be avoided, and that the determination should be reduced to nil. HMRC raised a jurisdictional point to the extent that this ground of appeal related to the decision of HMRC under 2005 Regulations, reg. 9(4).

In respect of the penalties Mr Barrett's grounds of appeal were that:

  1. 1) HMRC failed to exercise their discretion (and in particular their powers of mitigation and questions of hardship to be suffered) under TMA 1970, s. 100(1) when determining the penalties;

  2. 2) he had a reasonable excuse for any alleged compliance failures, such that no penalties were due;

  3. 3) the penalties were disproportionate (Mr Barrett accepted that the FTT was bound by the Upper Tribunal (UT) decision in R & C Commrs v Bosher TAX[2013] BTC 2,126 and therefore did not have jurisdiction to find that the penalties were disproportionate. He wished, however, to argue to the contrary if this matter proceeded further. The FTT were urged to make findings on proportionality, but the FTT considered that not to be appropriate); and

  4. 4) the officer making the penalty determination was not duly authorised for the purposes of TMA 1970, s. 100(1).

HMRC raised jurisdictional points in relation to grounds (1) and (4).

The FTT found that its jurisdiction was derived wholly from statute and that different provisions may permit of a broader or narrower scope of public law jurisdiction. Although therefore cases decided in other contexts, whether within or outside the sphere of the tribunal's own jurisdiction, were instructive of a general approach, the focus had to be on the particular statutory provisions required to be construed. In this case there were two relevant provisions. First, with reference to the Court of Appeal decision in Aspin v Estill (HMIT) TAX[1987] BTC 553 and the UT case of Lobler v R & C Commrs TAX[2015] BTC 515 the FTT found that in respect of TMA 1970, s. 50(6) their jurisdiction was limited to determining whether, under the provisions of the legislation, there had been an overcharge to tax. That involved consideration of the statutory requirements for a valid assessment or determination, as well as the question of the proper liability to tax, but it did not enable the tribunal to consider public law questions. Second, with regard to the penalties the relevant legislation was in TMA 1970, s. 100B and in this respect there was clear and binding authority of the UT in Bosher and therefore it could only consider the correctness of the amount of the penalty ascertained in accordance with the provisions of TMA 1970, s. 98A(2) and any arguments as to the mitigation and proportionality could only be made by way of judicial review. Ground of appeal (1) in relation to the penalties was therefore dismissed.

In respect of the regulation 13 determinations Mr Barrett's representative (Mr Gordon) argued about the construction of the legislation and that HMRC's actions had breached Mr Barrett's human rights. The FTT rejected these arguments and were of the view that they did not have the jurisdiction to consider whether Condition B of the 2005 Regulations, reg. 9(4) had been satisfied (i.e. that HMRC should have been satisfied that Mr Luke had submitted a self-assessment tax return as required by law which had taken the payments made to him into account, and that he had paid the income tax and NIC due). However if this was wrong, the FTT found that Condition B was not satisfied as a letter from HMRC showed that Mr Luke had not submitted his relevant tax returns within the statutory time limits and there was no evidence that the relevant tax and NICs had been paid.

In respect of the argument that the officer making the penalty determination was not duly authorised for the purposes of TMA 1970, s. 100(1) the FTT found that it did not have jurisdiction to consider whether a Board Order was ultra vires or otherwise irrational or contrary to TMA 1970, s. 100(1).

With regard to the reasonable excuse argument Mr Barrett's submission was that he had appointed an accountant to deal with all relevant filings and to provide him with the relevant advice and he had no reason to believe that the accountant he appointed would be unable to provide these services, and that he had done what would reasonably have been expected of a taxpayer trying to comply with his statutory obligations. The FTT found that Mr Barrett's actions were that of a reasonable taxpayer. Whilst Mr Barrett did not undertake any research in to the accountant's capabilities before appointing him, he was reasonably entitled to assume, from the accountant's acceptance of the appointment, that he would be competent to deal with both the accounting and tax aspects of his business. The FTT did not accept HMRC's argument that such a reasonable taxpayer would necessarily have taken separate steps to inform himself, independently of his accountant, of his obligations to make returns under the CIS, whether by seeking a second opinion, or by consulting HMRC, or HMRC's published guidance, himself. It was therefore “not unreasonable for a taxpayer in Mr Barrett's position not himself to have been aware of the particular filing obligations under the CIS. This is not a case in which a taxpayer, knowing of an obligation, merely delegates that task to a third party and does not take reasonable steps to ensure that it has been undertaken”. The FTT accordingly concluded that Mr Barrett had a reasonable excuse for the non filing of the CIS returns for which the penalties under TMA 1970, s. 98A had been determined and therefore the appeal against the penalties was allowed.

Comment

This case provides useful analysis on when reliance on an accountant can be accepted as a reasonable excuse. The FTT found that it was not unreasonable for the taxpayer, who had an accountant, not to be aware of his CIS filing obligations, and it made no difference that the filing obligations were neither complex nor arcane. The FTT also distinguished this case from one where a taxpayer knew of an obligation and merely delegated that task to a third party.

DECISION

[1] This appeal concerns tax years 2006–07 to 2010–11. In those years the Appellant, Mr Barrett, carried on business as a jobbing builder under the name NB Building Services. From time to time he engaged sub-contractors and made payments to them.

[2] It is accepted that during the material period Mr Barrett was subject to the Construction Industry Scheme (“CIS”). As such, Mr Barrett should have:

  1. a) registered under the CIS;

  2. b) made deductions at source from payments he made to sub-contractors (at a fixed rate of 18% for 2006–07 or at the rate of 20% or 30% as circumstances dictated from 2007–08 onwards, unless the sub-contractors were registered to receive payments gross and/or to the extent that the payments related to materials rather than to labour);

  3. c) made monthly CIS returns to HMRC of such payments (including nil returns), or, in relation to 2006–07, made an annual return; and

  4. d) made payments to HMRC of the amounts for which, in the relevant period, Mr Barrett was liable to deduct.

[3] Mr Barrett failed to do those things. Accordingly, HMRC issued a number of determinations (“regulation 13...

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