Revenue and Customs Commissioners v Bosher

JurisdictionUK Non-devolved
Judgment Date19 November 2013
Neutral Citation[2013] UKUT 579 (TCC)
Date19 November 2013
CourtUpper Tribunal (Tax and Chancery Chamber)

[2013] UKUT 0579 (TCC)

Upper Tribunal (Tax and Chancery Chamber).

Mr Justice Warren, Chamber President, Judge Colin Bishopp.

Revenue & Customs Commissioners
and
Bosher

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

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

Construction Industry Scheme - Fixed and month 13 penalties - Late filing of returns - No reasonable excuse - Proportionality of penalties - Whether within wide margin of appreciation - Interpretation of TMA 1970, Taxes Management Act 1970 section 100Bs. 100B - Human Rights Act 1998 - Appeal allowed

On the arguments heard, the Upper Tribunal ("UT") allowed HMRC's appeal against a First-tier Tribunal ("FTT") decision to cancel a number of CIS late filing penalties, finding that the penalties were not "incorrect" and the FTT should not have allowed the taxpayer's appeal. However, disposition of the appeal has been deferred pending the decision in the case of Barrett which considers an argument the taxpayer applied to raise shortly before the hearing and the UT will decide whether or not to grant the taxpayer's application to raise the new point in light of the findings in that case.

Summary

HMRC appealed an FTT decision to cancel a number of CIS late filing penalties on the grounds that the FTT had no jurisdiction to cancel the penalties but even if they did, the penalties were proportionate and the FTT should not have interfered with them.

The FTT had allowed the appeal on the basis that they were permitted to increase or reduce an "incorrect" penalty under Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 100B subsec-or-para 2s. 100B(2)(a)(iii) and the penalties levied were "incorrect" because Human Rights Act 1998 ("HRA 1998"), Human Rights Act 1998 section 3s. 3 (interpretation of legislation) allowed them to read the word "incorrect" as including penalties that were disproportionate and therefore a breach of the taxpayer's rights under Article 1/1 of the First Protocol ("A1P1") to the European Convention on Human Rights ("ECHR") (right to peaceful enjoyment and no deprivation of possessions).

The UT found in favour of HMRC on three counts. Firstly, HRA 1998, s. 3 only came into play where the legislation was incompatible with the Convention which in this case it was not because TMA 1970, Taxes Management Act 1970 section 102s. 102 provides HMRC with the power to mitigate penalties, with failure to do so by HMRC subject to judicial review. This control of HMRC's exercise of their discretion resulted in a guarantee that art. 6 of the Convention would be respected and provided a fully effective vindication of the rights of a taxpayer under A1P1 in the context of the CIS penalties. The powers of the FTT were limited to determining the "correctness" of the penalty in accordance with the provisions of TMA 1970, Taxes Management Act 1970 section 98A subsec-or-para 2s. 98A(2) and in this respect, the penalties were not "incorrect".

Secondly, even if there were an infringement of rights the tribunals and courts could not simply read the legislation in a way that gives effect to those rights because any meaning imported by the application of HRA 1998, s. 3 must be compatible with the underlying thrust of the legislation being construed. In the context of CIS penalties, Parliament imposes penalties and gives HMRC power to mitigate with no provision for appeal against a decision on mitigation because the taxpayer is adequately protected in terms of his Convention rights by the right to judicial review. For the FTT to impose its own view of the appropriate amount of the penalty at a time before mitigation has even been considered by HMRC was entirely contrary to a fundamental feature of the scheme of legislation.

Thirdly, HMRC had indicated that they would mitigate the penalties to an amount that the UT considered was not "disproportionate".

Accordingly, subject to one final point that the taxpayer sought to raise (that the penalties were void because they were computer-generated and had not been determined by an authorised officer of HMRC as envisaged by TMA 1970, Taxes Management Act 1970 section 100 subsec-or-para 1s. 100(1)), HMRC's appeal would be allowed. However, the UT decided to defer the decision on whether to grant the taxpayer's application in respect of the final argument pending the outcome of the case of Barrett in which the same argument had been raised.

Disposition of the appeal was deferred.

Comment

CIS penalties now fall within FA 2009, Finance Act 2009 schedule 55Sch. 55 (with effect in respect of CIS monthly returns due to be filed on or after 19 November 2011). Although the penalties in this case were raised under the former regime within TMA 1970, the UT's finding that the penalty amount as mitigated by HMRC was "proportionate" will have continued relevance because that amount was based on the penalties that would have been charged under Sch. 55.

This case also highlights the right of Parliament to enact non-Convention compliant legislation and that HRA 1998, s. 3 does not enable legislation to be read in a way which involves a departure from a fundamental feature of it simply to give effect to Convention rights.

For commentary on penalties for PAYE and CIS late payments and returns, see the CCH Tax Reporter at 184-975.

DECISION
Introduction

[1]This is an appeal from a decision ("the Decision") of the Tax Chamber (Judge Aleksander and Susan Hewett - "the Tribunal") released on 8 October 2012. Mr Bosher's appeal to the Tribunal was against penalties of £54,100 imposed on him by HMRC for his failure to make monthly returns by the due date under the Construction Industry Scheme ("CIS"). The Tribunal allowed Mr Bosher's appeal and cancelled 193 fixed penalties of £100 each on the grounds that they were disproportionate. The central issue on HMRC's appeal before us is whether the Tribunal had the jurisdiction to cancel these penalties. HMRC say that there was no jurisdiction to do so. But even if there was, they submit that the penalties were proportionate and that the Tribunal should not have interfered with them.

The legal framework and the penalty regime

[2]The CIS is a tax compliance scheme for businesses operating in the construction industry. This is an industry that has traditionally attracted a large, itinerant workforce and often involves "cash in hand" transactions. Historically, this resulted in a significant loss of tax and national insurance contributions because many sub-contractors engaged in the construction industry "disappeared" without settling their tax liabilities, with a consequential loss of revenue to the Exchequer. The solution was described by Ferris J in Shaw (HMIT) v Vicky Construction LtdTAX[2003] BTC 68 at [4]:

In order to remedy this abuse, Parliament enacted legislation, which goes back to the early 1970s, under which a contractor is obliged, except in the case of a sub-contractor who holds a relevant certificate, to deduct and pay over to the Revenue a proportion of all payments made to the sub-contractor in respect of the labour content of any sub-contract. The amount so deducted and paid over is, in due course, allowed as a credit against the sub-contractor's liability to the Revenue.

[3]The legal basis of the CIS, as it has been in force from 6 April 2007, is Finance Act 2004 section 57ss 57-77 of the Finance Act 2004 ("FA 2004") and the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) (the "2005 Regulations"). As Ferris J said, the CIS requires certain payments by contractors to sub-contractors to be made subject to deduction of tax, but the sub-contractors are entitled to claim credit for tax withheld under CIS against their tax liability for the tax year in question.

[4]Contractors are required to make a return no later than 14 days after the end of every tax month (a "monthly return") (Finance Act 2004 section 70s 70 FA 2004 and reg 4 of the 2005 Regulations). For these purposes, a tax month means the period beginning with the 6th day of a calendar month and ending on the 5th day of the following month. So a monthly return must be received by HMRC no later than the 19th day of the month. Nil returns are also required (Finance Act 2004 section 70s 70 FA 2004 and reg 4(10) of the 2005 Regulations).

[5]If a monthly return is received after the filing date, it will be treated as late and the contractor will be liable to a penalty under Taxes Management Act 1970 section 98As 98A of the Taxes Management Act 1970 ("TMA") (introduced by the Finance Act 1989 and amended relevantly by FA 2004), which provides:

  1. (1)… regulations under Finance Act 2004 section 70 subsec-or-para 1section 70(1)(a) or Finance Act 2004 section 7171 of the Finance Act 2004 (sub-contractors) may provide that this section shall apply in relation to any specified provision of the regulations.

  2. (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-

    1. (a) to a penalty or penalties of the relevant monthly amount for each month (or part of a month) during which the failure continues, but excluding any month after the twelfth or for which a penalty under this paragraph has already been imposed, and

    2. (b) if the failure continues beyond twelve months, without prejudice to any penalty under paragraph (a) above, to a penalty not exceeding-

    3. (c) …

    4. (d) (ii)in the case of a provision of regulations under Finance Act 2004 section 70 subsec-or-para 1section 70(1)(a) or Finance Act 2004 section 7171 of the Finance Act 2004, £3,000.

(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...

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