Farrow
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 March 2019 |
| Neutral Citation | [2019] UKFTT 200 (TC) |
| Date | 19 March 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 200 (TC)
Judge Christopher Staker, Mr David Moore
Charlotte Brown, counsel, appeared for the appellant
David Lewis, Presenting Officer, appeared for the respondents
Income tax – Penalty imposed on company for inaccuracy in Construction Industry Scheme return – FA 2007, Sch. 24 – Personal liability notice (PLN) issued to director of the company – FA 2007, Sch. 24, para. 19 – Whether inaccuracy was deliberate.
The First-tier Tribunal (FTT) set aside a personal liability notice (PLN) issued to a director of a company for penalties imposed on the company for inaccuracies in Construction Industry Scheme (CIS) returns.
Mr Farrow (the appellant) was a director of Spectrum Contracting Services Ltd (Spectrum). Spectrum provided workers to clients in the construction industry. Spectrum would usually find the individual workers, the workers would be engaged by a service company (or “umbrella company”) and the service company “took care” of their PAYE and CIS. The end user would pay Spectrum for providing the workers and the service company would take a fee for its services from the individual workers.
Spectrum was registered as a contractor under the CIS, made gross payments to all service companies, and filed nil CIS returns. HMRC issued inaccuracy penalties under FA 2007, Sch. 24 because not all of the companies to which Spectrum made payments had CIS gross payment status, and therefore any payments to companies without gross payment status should have had CIS tax deducted, and for companies that did hold gross payment status, Spectrum should have declared the gross payment in its CIS return. HMRC also issued a PLN to both of Spectrum's directors pursuant to FA 2007, Sch. 24, para. 19, making them each personally liable for 50% of the penalties. The appellant appealed against his PLN.
The FTT noted that in an appeal against a PLN, HMRC had the burden of proving that:
- The company's CIS return(s) contained an inaccuracy.
- The inaccuracy was deliberate on the part of the company.
- The appellant did (or failed to do) something intending or knowing it would bring about the inaccuracy, which required that the appellant knew that the CIS return did or would contain an inaccuracy.
The FTT considered the last of these issues first.
HMRC relied on circumstantial evidence and invited the FTT to draw inferences from various circumstances considered cumulatively, such as that:
- the appellant was the founder of Spectrum and was its operations director with full control over the day to day running of the company;
- the appellant had many years' experience in the construction sector and had knowledge of the CIS;
- there was something suspicious about the very existence of umbrella companies or service companies in the supply chain; and
- various of the service companies had disappeared with unpaid VAT debts.
The FTT accepted that matters such as fraud or deliberate behaviour could be established by circumstantial evidence. However, having considered the various matters relied upon by HMRC cumulatively, the FTT found that the evidence was insufficient to discharge HMRC's burden of establishing on a balance of probability that the appellant lacked a good faith belief that payments to service companies were outside the scope of the CIS.
The FTT set aside the PLN.
The FTT set aside the PLN because HMRC's evidence was not sufficient to prove that the director knew that the CIS returns submitted by the company contained deliberate errors and that his actions or omissions brought about the errors.
[1] The Appellant appeals against a personal liability notice (“PLN”) issued by HMRC on 8 September 2017 under paragraph 19(1) of Schedule 24 to the Finance Act 2007 (“Schedule 24”).
[2] The effect of the PLN is to make the Appellant personally liable for 50% of certain penalties imposed by HMRC under Schedule 24 on Spectrum Contracting Services Ltd (“Spectrum”), a company of which the Appellant was at material times a director. The person who was at material times the other director of that company has been made personally liable to the other 50% of those penalties.
[3] The penalties were imposed on Spectrum in respect of inaccuracies found by HMRC to be contained in its Construction Industry Scheme (“CIS”) returns. The HMRC case is that Spectrum's CIS returns should have included, but failed to include, payments made by Spectrum to various companies which are referred to by HMRC as “umbrella companies”, and referred to by the Appellant as “service companies” or “payroll companies”. The use of these various expressions in the decision below reflects the terminology used by the parties, and does not of itself imply any findings by the Tribunal as to the particular nature of these companies.
[4] Spectrum was incorporated in April 2005. From the time of its incorporation, the Appellant was a director and major shareholder. According to HMRC he was originally the 99% shareholder.
[5] On 24 February 2016, HMRC officers undertook a compliance visit at Spectrum's business premises. HMRC were looking into Spectrum's compliance with respect to both VAT and CIS. During that visit HMRC officers spoke to the Appellant and to Spectrum's finance manager Mr Chris Stevenson. Also present for part of the meeting were Nimesh Pau and Dipesh Modi of the firm R Pau & Co, who were Spectrum's accountants. During the meeting, HMRC put it to the Appellant and to Mr Stevenson that Spectrum had been making payments to various companies without deducting CIS tax. The Appellant and Mr Stevenson freely admitted that this was the case, and stated that it had been their understanding that the CIS did not apply to payments made to service or payroll companies rather than to subcontractors directly.
[6] In a letter dated 19 May 2016, HMRC advised Spectrum that its gross payment status under the CIS was being cancelled as a result of compliance failures identified during the 24 February 2016 visit.
[7] Spectrum appealed to HMRC against the cancellation of its gross payment status. HMRC upheld its decision to withdraw gross payment status in a letter dated 24 June 2016 and in a review decision dated 23 September 2016. The review decision concluded that there were reasonable grounds to suspect that Spectrum had fraudulently made an incorrect return or failed to comply with CIS provisions, given that all of its CIS returns were nil returns and it had not included any payments to any contractors in the CIS returns. That decision acknowledged that HMRC had no direct evidence that Spectrum had behaved fraudulently, and that the HMRC case was based on circumstantial evidence alone.
[8] Spectrum subsequently went into administration. The Appellant's evidence, which HMRC have not sought to dispute, is that this was due to the cash flow consequences of the cancellation of Spectrum's gross payment status. It is however noted that in the notes of the 24 February 2016 meeting, the Appellant is recorded as stating that Spectrum might become unprofitable in the future.
[9] In two letters to Spectrum dated 4 October 2016, HMRC concluded that Spectrum had made payments to subcontractors without deducting and paying to HMRC the amounts that should have been so deducted under the CIS. The letters concluded that Spectrum did not satisfy the conditions to be relieved of that obligation under regulation 9(5) of the Income Tax (Construction Industry Scheme) Regulations 2005 (the “Regulations”).
[10] On 4 November 2016, HMRC issued to Spectrum pursuant to regulation 13 of the Regulations determinations of CIS tax liability in respect of tax years 2013–14 and 2015–16.
[11] On 28 June 2017, HMRC issued to Spectrum's administrators a notice of penalties that HMRC intended to impose on Spectrum under Schedule 24 (for submitting inaccurate CIS returns) and under Schedule 55 to the Finance Act 2009 (“Schedule 55”). This was copied to the Appellant on 30 June 2017.
[12] On 7 September 2017, HMRC sent to Spectrum a notice of penalty assessment, setting out penalties under Schedule 24 and Schedule 55 in respect of periods from 6 April 2012 to 6 April 2016.
[13] On 8 September 2017, the PLN to which these proceedings relate was sent to the Appellant and the other director of Spectrum, making each of them liable to 50% of the penalties imposed on Spectrum.
[14] On 3 November 2017, the Appellant appealed to HMRC against the PLN.
[15] HMRC upheld the PLN in a letter dated 8 November 2017. However, a subsequent HMRC review decision dated 19 January 2018 confirmed that only the Schedule 24 penalties should have been included in the PLN.
[16] On 15 February 2018, the Appellant appealed to this Tribunal.
[17] Paragraph 1 of Schedule 24 provides that a penalty is payable where a person (“P”) gives HMRC a CIS return which contains an inaccuracy that amounts to or leads to an understatement of a liability to tax, where that inaccuracy was either “careless” or “deliberate”.
[18] Paragraph...
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Donnelly
...whether it be “true or false” although the third was but an instance of the second. [11] Mrs Goldring also referred us to Farrow [2019] TC 07048 where the FTT asked itself whether there was evidence “to establish that the inaccuracy was attributable to the acts or omissions of the Appellant......