[2009] UKFTT 289 (TC)

							                        TC00233

  Appeal number: Trans/09/462

Construction industry scheme – CIS – penalties for failure to make online returns on time – reasonable excuse – s 118(2) TMA

FIRST-TIER TRIBUNAL

TAX 

	JONATHAN DAVID LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Income tax)	Respondents

				TRIBUNAL: 	ROGER BERNER (Judge)

Sitting in public in Colchester on 16 June 2009

David Scogings, Director, for the Appellant

Chris Shea, HMRC, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This was an appeal by Jonathan David Limited (“the Appellant”) against six penalties for late submission of monthly Construction Industry Scheme (CIS) returns as follows:
Month to	Issued	Amount	
5 July 2008	1 August 2008	£100	
5 July 2008	29 August 2008	£100	
5 August 2008	29 August 2008	£100	
5 July 2008	26 September 2008	£100	
5 August 2008	26 September 2008	£100	
5 September 2008	26 September 2008	£100	

2.	Oral evidence on behalf of the Appellant was given by David Scogings, its director.
3.	At the conclusion of the hearing I announced my decision that the appeal be allowed in part.  The penalty of £100 issued on 1 August 2008 was set aside and the remaining penalties were confirmed.  I gave an oral summary of my reasons, following which the parties agreed, pursuant to rule 35 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, that a decision notice could be issued without including full or summary findings of fact and reasons for the decision.  HMRC have subsequently, under rule 35(4), requested full written findings and reasons, which I now provide.
The facts
4.	I found the following facts:
(1)	The Appellant carries on business as a contractor which includes the making of contracts payments under CIS, for which a liability to make returns not later than 14 months after the end of every tax month arose.
(2)	CIS returns for the months ended 5 July 2008, 5 August 2008 and 5 September 2008 were due by the 19th day of each of those months, but were in fact received by HMRC on 2 October 2008.
(3)	Prior to June 2008 the Appellant filed paper CIS returns.  The forms for making those returns were sent to the Appellant by HMRC.  Mr Scogings completed and returned those forms immediately.  The Appellant was never late with these paper returns, or with any payments referable to those returns.
(4)	Mr Scogings is, as he put it, a “one man band”.  He decided to file his CIS returns online because, being very busy with his contracting work, he thought that this would be easier and quicker for him to operate, and, by saving paper, friendlier to the environment.
(5)	Mr Scogings misunderstood the implications of registering online.  He failed to appreciate that he would no longer receive forms or any other prompt from HMRC in regard to the making of the returns.  He had not realised that he would have to take the initiative in filing online without further prompting, and he said that he could not recollect seeing any warning in HMRC’s information concerning online returns.
(6)	HMRC’s website contains links to a “CIS Online” page.  Prominently displayed there, under a further link entitled “Advantages of verifying and filing online” is the following statement:
Filing online
You need to make a monthly CIS return within 14 days of the end of the tax month you’re reporting on – even if there are no subcontractor payments to report.  If HMRC get your return late you’ll receive an automatic penalty of at least £100.
(7)	Mr Scogings relied on an accountant named Paul to help him with his CIS returns.  At the relevant time Paul was unavailable, as he had travelled to the United States, on account of the deaths of both of his parents.  Paul was not away from the UK for the whole of the period in question (19 July 2008 to 1 October 2008), but was travelling from the UK to the US and back on a number of occasions.  Mr Scoging’s evidence was that the earliest he had been able to get together with Paul in order to file the returns was 2 October 2008, the day the returns were in fact filed online.
The law
5.	There was no dispute that the returns were due and were made late.  The only issue before me was whether there was a reasonable excuse for the defaults, or any of them.
6.	Section 118(2) of the Taxes Management Act 1970 (“TMA”), so far as is material to this appeal, provides as follows:
“…where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.”
Discussion
7.	The Appellant’s grounds of appeal were set out in Mr Scoging’s letter to HMRC dated 10 October 2008 as follows:
I)	I am not late in making any payments, which are due on a quarterly basis.
II)	There has been some confusion on my part between quarterly payments and monthly returns (all monthly returns for the first quarter would have been nil).
III)	This is my first year of registering online which I am seeking to operate in a correct manner.  My record shows that previous to this, all payments and returns were made on time.
8.	In addition, in his evidence before me, Mr Scogings raised the fact that he was confused by the absence of any reminder from HMRC, in contrast to the previous paper returns regime, and his reliance on Paul, the accountant, who was unavailable to the Appellant by reason of his absences in the US.
9.	For HMRC, Mr Shea argued that the Appellant could have no reasonable excuse.  He referred me to advice available from HMRC both on the Internet and in document form to the effect that both monthly and nil returns are required and to the Internet advice on “Using CIS Online” which I have described above.  He submitted that even if I were to find that there had been a reasonable excuse, the failure was not remedied without unreasonable delay.  The penalty issued on 1 August 2008 for the late filing of the return in respect of the month ended 5 July 2008 should have alerted the Appellant to the need to make monthly returns or at least to make enquiries of HMRC.
10.	I accept that in an ordinary case the failure by a taxpayer to heed HMRC’s published advice and information, both documentary and online, of the need to make monthly returns, including nil returns, would, other things being equal, negate any defence of reasonable excuse based solely on ignorance of the system.  In this case, however, Mr Scogings ordinarily relied upon Paul, his accountant, to assist him in these matters.  The fact of reliance on a third party is not precluded from being a reasonable excuse for the purpose of s 118(2) TMA.  I find, therefore, that, in circumstances where the Appellant ordinarily relied upon a professional in such matters, it was reasonable for the Appellant itself, through Mr Scogings, to have failed to appreciate the differences between the paper and online systems of making returns, including the absence of any reminder to make the monthly returns.
11.	Of course, in this case it was not possible for the Appellant to seek Paul’s assistance in the matter of the online returns at the relevant time because Paul was unavailable to the Appellant by reason of his absences from the UK.  If those had been planned absences, for example holidays or business trips, they could not then, in my view, have represented a reasonable excuse.  It would in those circumstances have been reasonable to have expected Mr Scogings, on behalf of the Appellant, to have sought advice at an earlier stage, or from an alternative source.  But here the reason for Paul’s absences over the period was itself exceptional, and could not reasonably have been predicted.  In those circumstances I find that the Appellant had a reasonable excuse for the failure to make the return for the month to 5 July 2008 by the due date of 19 July 2008.
12.	The failure to make that return resulted in the issue of a penalty on 1 August 2008.  At that stage, whatever the position regarding Paul’s continued unavailability might have been, a reasonable businessman would, I believe, have been alerted to the fact that there was a problem and would then have taken steps, either to obtain advice from another quarter or to clarify the position with HMRC.  The Appellant did neither.  Instead there was a delay until Paul was finally available on 2 October 2008, at which time all the outstanding returns were filed.  In my view, therefore, the excuse of Paul’s unavailability, which I have found was a reasonable excuse for the first failure to make the return to 5 July 2008, ceased to be a reasonable excuse on receipt by the Appellant of the 1 August 2008 penalty.  A delay of a further two months thereafter is, in my judgment, an unreasonable delay.  For these reasons, there is no reasonable excuse for the failures to make the returns due on 19 August 2008 and 19 September 2008.
13.	I considered whether the fact that the excuse ceased around 1 August 2008 could affect my decision that it was a reasonable excuse for the original failure to make the return in respect of the month to 5 July 2008.  To reach this conclusion would require reading s 118(2) to the effect that, for something to be deemed not to be a failure, there needs to be both a reasonable excuse and no unreasonable delay after the excuse has ceased.
14.	I do not read s 118(2) in this way.  There are two limbs to s 118(2).  The first limb provides that the effect of a reasonable excuse is to deem non-failure up to the time the excuse ceases.  Taking this limb, the failure of the Appellant to make the return on 19 July 2008 is covered by the reasonable excuse, and the Appellant is accordingly deemed not to have failed to make the return.  Separately, the effect of the second limb is to deem non-failure after the excuse has ceased if the person in question does what is required to be done without unreasonable delay.  The second limb provides a separate relief from that in the first limb; it is not an additional hurdle to be overcome for the application of the relief under the first limb.  The unreasonable delay in making the return to 5 July 2008 after the excuse had ceased around 1 August 2008 does not relate back to the earlier default and prevent the reasonable excuse at that time from deeming the Appellant not to have failed to make the return by 19 July 2008.
15.	On the other hand, it cannot in my view be argued that, by reason of the reasonable excuse having deemed the Appellant not to have failed to make the return to 5 July 2008 by its due date of 19 July 2008, that subsequent defaults must also be treated as not having taken place, on the basis that if the Appellant is deemed not to have failed to make the return then the return must be deemed already to have been made and there can then be no subsequent default.  In my view that is not the effect of the deemed non-failure under the first limb of s 118(2).  The first limb deems non-failure “unless the excuse ceased”.  The effect of this is to prevent continued failure, for example to make a return, from being precluded from being a failure by reason of the earlier failure having been deemed not to have taken place.  The analysis is that a deemed non-failure under the first limb ceases to be regarded as a non-failure with effect from the cessation of the excuse (for the future but not retrospectively), and that failure from that time can only be regarded as non-failure if the necessary action, in this case the making of the returns, is taken without unreasonable delay after the excuse has ceased.
16.	Applying this analysis to this case, I find that:
(1)	There was a reasonable excuse for the failure to make the return for the month ended 5 July 2008 by 19 July 2008.  The Appellant is deemed, up to the time the excuse ceased around 1 August 2008, not to have failed to have made that return.  This covers the default at 19 July 2008.
(2)	From around 1 August 2008, when I have found that the excuse ceased, the Appellant failed to make the returns for the months to 5 July 2008, 5 August 2008 and 5 September 2008 in due time.  There was no reasonable excuse in relation to the returns to 5 August 2008 and 5 September 2008, and in relation to the return to 5 July 2008 the excuse had ceased and there was unreasonable delay after that time in actually making that return.  The failures to make that return in August 2008 and September 2008 are not therefore treated as non-failures under s 118(2).
(3)	The fact that the excuse ceased around 1 August 2008 and that there was unreasonable delay after that time in making the return for the month to 5 July 2008 does not operate to prevent s 118(2) from deeming the failure to make that return by 19 July 2008 a non-failure on the part of the Appellant.
(4)	By reason of the excuse having ceased around 1 August 2008, the deemed non-failure to make the return to 5 July 2008 by the due date of 19 July 2008 ceased to apply when the excuse ceased as regards the period after that time, and does not have the effect of deeming the subsequent defaults in respect of that return not to have occurred.
Decision
17.	For these reasons I decided that the appeal should be allowed in part.  I set aside the penalty of £100 issued on 1 August 2008 and confirmed the penalties issued on 29 August 2008 and 26 September 2008, totalling £500.

Each of the parties has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  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.
ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 28 July 2009