O'Kane
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 May 2013 |
| Neutral Citation | [2013] UKFTT 307 (TC) |
| Date | 17 May 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 307 (TC)
Anne Redston (Tribunal, Presiding Member)
Income tax - whether self-assessed tax paid late so as to attract surcharges - subcontractor completing accounts and tax returns on an accruals basis - contractor not paying for work done until the following tax year - whether CIS deductions made by the contractor are offset against the subcontractor's SA tax on his profits from that work - held, the deductions are offset - the tribunal's jurisdiction considered - held, not a tribunal of full jurisdiction - whether HMRC behaved unlawfully - no - whether legislation can be read down to allow tribunal to consider reasonable excuse - yes - whether reasonable excuse - yes - surcharges set aside and appeal allowed
The First-tier Tribunal decided that the income tax deducted under the construction industry scheme ("CIS") from payments made by a contractor for the work a taxpayer subcontractor carried out in a relevant year was clearly in respect of the year. It was not in respect of the following year, during which he actually received such payments. There was also no self-assessment ("SA") underpayment on the surcharge trigger dates and the surcharges were incorrectly charged because the CIS deductions were received by HMRC before the SA due date and were more than enough to cover the taxpayer's tax liability. As the taxpayer owed nothing, he had reasonable excuse for not paying further tax.
The Tribunal also decided that the breach of the taxpayer's convention rights had not arisen because of the surcharge itself, but from the Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 59Cs. 59C, which prevented the Tribunal from deciding surcharge cases other than on the basis of reasonable excuse. As that was not something which HMRC had the power to remedy, they had not acted "unlawfully" within the Human Rights Act 1998 ("HRA 1998"), Human Rights Act 1998 section 6s. 6 for failing to exercise their discretion under TMA 1970, Taxes Management Act 1970 section 59C subsec-or-para 11s. 59C(11).
The taxpayer appealed against two SA late payment surcharges in relation to the payment of his 2009-10 SA tax.
In 2009-10, the taxpayer worked as a subcontractor. His accounts for that year were prepared on an accruals basis, and so included sums earned but not yet paid. In 2010-11, those amounts were paid to him by the contractor for whom he worked ("the contractor"), net of CIS deductions, which were remitted to HMRC.
In February 2012, the taxpayer filed an electronic SA return for the 2009-10 tax year. It showed his profits, calculated on an accruals basis, of £26,240. The tax liability thereon was £5,595. His due date to pay the difference between his 2009-10 SA tax and any tax, which had been deducted at source in respect of that year, was 31 January 2011. If any such tax due was not paid by 28 February 2011, a five per cent surcharge would become due. If it remained unpaid by 31 July 2011, a further five per cent was payable.
The taxpayer contended that the CIS deductions received by HMRC in January 2011 should have been matched against the tax due for 2009-10. Those deductions were made from the earnings which had given rise to his 2009-10 profits. As a result, no tax was underpaid on 31 January 2011 and no surcharges should have been levied. Nevertheless, HMRC should have exercised their discretion under TMA 1970, Taxes Management Act 1970 section 59C subsec-or-para 11s. 59C(11) so as to mitigate the surcharge to nil. HMRC already had the tax. Although he did not notify chargeability in 2009-10, it was reasonable for him to have assumed that the contractor had verified his status with HMRC under the CIS rules.
HMRC contended that the deductions only reduced the taxpayer's tax liability in 2010-11, the year the contractor made the deductions and paid them. Where accounts had to be prepared, the taxpayer was required to declare the income that was invoiced at that time. In this case, the tax paid via CIS had to be shown when the payment was actually received.
(2) Whether the CIS deductions made by the contractor were in respect of the taxpayer's 2009-10 profits and were income tax treated as paid in respect of that year.
(3) Whether HMRC acted "unlawfully" within the meaning of HRA 1998, Human Rights Act 1998 section 6s. 6, for failing to exercise their discretion under TMA 1970, Taxes Management Act 1970 section 59C subsec-or-para 11s. 59C(11).
(4) Whether the taxpayer had reasonable excuse for not paying further tax.
Held, allowing the taxpayer's appeal:
On the first issue, TMA 1970, Taxes Management Act 1970 section 59B subsec-or-para 1s. 59B(1) provides that a person must pay the difference between (a) the amounts shown on his SA return, and (b) any payment on account together with "any income tax, which in respect of that year, has been deducted at source". TMA 1970, Taxes Management Act 1970 section 59B subsec-or-para 7s. 59B(7) provides that "in this section any reference to income tax deducted at source is a reference to income tax deducted or treated as paid on any income".
Here, the Tribunal held that the income tax deducted from payments made by the contractor for the work the taxpayer carried out in 2009-10 was clearly "in respect of" 2009-10. That was the year in which the work was done, for which the earnings were included in his tax return, and in which he was taxable on the profits from that work. Furthermore, the tax deducted by the contractor in 2010-11 counted as income tax which had been treated as paid. The tax deducted by the contractor and paid over to HMRC in January 2011 related to the profits which the taxpayer included on his 2009-10 tax return. Those deductions were received by HMRC before the SA due date of 31 January 2011. The statute required that they be treated as income tax paid, and so they were offset against the taxpayer's SA profits. The total tax due on 31 January 2011 was £5,595, so the CIS deductions of £8,750 were more than enough to cover his tax liability. As a result, there was no SA underpayment by the taxpayer on the surcharge trigger dates and the surcharges were incorrectly charged.
On the second issue, TMA 1970, Taxes Management Act 1970 section 59C subsec-or-para 9s. 59C(9) provides that the Tribunal only has jurisdiction to set aside the surcharge if "it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax". If "it does not so appear", the Tribunal must "confirm the imposition of the surcharge".
Under HRA 1998, Human Rights Act 1998 section 8 subsec-or-para 1s. 8(1), if HMRC have acted "unlawfully", the Tribunal is able to "grant such relief or remedy, or make such order, within its powers as it considers just and appropriate". The only relief or remedy available to the Tribunal is to allow the appeal against the surcharge. Under HRA 1998, Human Rights Act 1998 section 6 subsec-or-para 1s. 6(1) the public body will have acted "unlawfully" if they have acted "in a way which is not compatible with any convention right". However, that subsection does not operate, so that HMRC will not have acted "unlawfully" if, "as the result of one or more provisions of primary legislation, [HMRC] could not have acted differently".
Here, the Tribunal held that HMRC were only empowered to impose surcharges under TMA 1970, Taxes Management Act 1970 section 59Cs. 59C if "any of the tax remains unpaid" at the surcharge trigger dates. In this case, none of the taxpayer's tax remained unpaid on those dates. Thus, it was clearly possible for HMRC not to levy the surcharges. However, the breach of the taxpayer's convention rights had not arisen because of the surcharge itself, but from TMA 1970, Taxes Management Act 1970 section 59Cs. 59C, which prevented the Tribunal from deciding surcharge cases other than on the basis of reasonable excuse. That was not something which HMRC had the power to remedy. As a result, HMRC have not acted "unlawfully" within the meaning of HRA 1998, Human Rights Act 1998 section 6s. 6.
On the third issue, the Tribunal held that the taxpayer should not have had to pay the surcharges because he did not, in fact, owe any tax. The tax, which had been deducted and paid over to HMRC in January 2011, was on the self-same payments which formed the basis of his SA profits. Therefore, he had acted in the same way as someone who seriously intended to honour his tax liabilities and obligation. He owed nothing at 31 January 2011 because the sum in excess of his liabilities had already been deducted and paid over to HMRC by the contractor. In all the circumstances of this case, he had a reasonable excuse for not paying further tax.
[1]This is Mr O'Kane's appeal against two self-assessment ("SA") late payment surcharges totalling £559.50, in relation to the payment of his 2009-10 SA tax.
[2]The Tribunal decided that the appeal was allowed and set aside the surcharge.
[3]In 2009-10 Mr O'Kane worked as a subcontractor. His accounts for the year 2009-10 were prepared on an accruals basis, and so included sums earned but not yet paid. In 2010-11 these amounts were paid to him by the contractor for whom he worked ("the Contractor"), net of Construction Industry Scheme ("CIS") deductions which were remitted to HMRC.
[4]Mr O'Kane's agent, Mr Ephraim Bradley, argued that the CIS deductions made after the end of the 2009-10 tax year but received by HMRC before 31 January 2011, should eliminate Mr O'Kane's SA tax due on 31 January 2011. HMRC contended that the deductions only reduced Mr O'Kane's tax liability in 2010-11, the year the Contractor made the deductions and paid them to HMRC.
[5]If Mr Bradley is correct, Mr O'Kane had no outstanding tax to pay on 31 January 2011, and therefore no surcharges should have been triggered. However, the Tribunal then has to consider whether or not it has jurisdiction to allow the appeal on that ground, or...
To continue reading
Request your trial
-
Salmon
...the Tribunal has an explicit statutory jurisdiction to consider whether a person has "a reasonable excuse for the default". In O'KaneTAX[2013] TC 02712, the Tribunal considered whether it could exercise that jurisdiction where there was no underlying tax (i.e. because the assessment on whic......