[2010] UKFTT 212 (TC)

TC00513
Appeal reference: TC/2009/11764

BUILDING CONTRACTORS – Construction Industry Scheme – failure to operate scheme in respect of sub-contractor – no CIS returns made – sub-contractor paid gross – whether Appellant entitled to relief under Regulation 9.1 (CIS) Regulations 2005 – answer no – appeal dismissed

FIRST-TIER TRIBUNAL
TAX

 	
					MR K G & MRS H E JOHNSTON	Appellant
(JOHNSTON BUILDERS)

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Ian Vellins (Judge)
		Timothy Ratcliffe (Member)
			
Sitting in public in Leeds on 2 February 2010

The Appellants appeared in person and represented themselves

Alan Hall, senior officer of Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2010
DECISION

The appeal
1.	In this appeal the Appellants are Mr. K G Johnston and Mrs. H E Johnston who have traded as Johnston Builders, and traded in partnership as building contractors for over 36 years, submitting self-assessment income tax returns under the name of K Johnston.  In their partnership self-assessment income tax returns, they had claimed deductions for “payments to sub-contractors in the construction industry”, but had not made yearly returns as were required by the Construction Industry Scheme (“CIS”).
2.	The issue in this appeal concerns the workings of the CIS scheme and the requirements of Contractors to comply with the relevant Regulations.  HMRC asserted that the Appellant partnership was engaged in construction operations as a builder and that during the period 2002 to 2007 workers were engaged to do work for the partnership.  HMRC maintained that the CIS legislation should have been applied as these workers were sub-contractors and the Scheme should have been operated when payments were made to these workers, but was not so operated by the Appellants.  HMRC asserted that the statutory returns of payments made to sub-contractors, and of any deductions required to be made from such payments, were not submitted to HMRC, and that it was responsibility of the Contractor to be aware of and to operate the CIS scheme in accordance with the Regulations.  HMRC therefore were of the view that there had not been full compliance with this legislation, and sought to collect amounts which should have been deducted when making the relevant payment to subcontractors, as was required under the CIS.  The Appellants on the other hand maintained that they had never been aware of such laws, and had met all their tax obligations through submitting their self-assessment tax returns.
3.	The appeals concern Notices of Determination which were raised by HMRC on 31 January 2009 under Regulation 13 (1) of the Income Tax (Construction industry Scheme) Regulations 2005.  The Appellants’ appealed against these notices on 14 February 2009.  A statutory review was requested and completed on 11 June 2009.
4.	Some of the matters and amounts under appeal were resolved prior to the hearing.  The only remaining issues and amounts related to the following sums which HMRC determined should be paid to HMRC by the Appellants, which HMRC claim should have been deducted by the Appellants from payments to a sub-contractor Mr. N in three tax years, namely 2004-2005 £239.04, 2005-2006 £448.92, and 2006-2007 £146.88, totalling £834.84.
5.	At the hearing of the appeal we heard evidence from the Appellants Mr. and Mrs. Johnston, and from an officer of HMRC, Kay Valentine.  The Appellants represented themselves at the hearing, and HMRC was represented by Mr. Alan Hall.  Three bundles of documents were produced to us, and we heard submissions from both the Appellants and on behalf of HMRC.
The background
6.	Any business in the Construction Industry is required to comply with specific legislation when paying their workers.  If the workers are employees, PAYE must be operated.  If they engage workers who are correctly categorised as self-employed workers, then these workers are sub-contractors.  When any sub-contractors are engaged, the CIS scheme requires the contractor to perform certain checks and make returns to HMRC.
7.	The legislation for the periods under appeal requires that a contractor registers with HMRC as a contractor, pays sub-contractors in the right way by making deductions where necessary, pays over-deductions to HMRC, gives sub-contractors deduction vouchers, sends a yearly return to HMRC, and keeps proper records.  If a business in the construction industry fails to operate the scheme correctly, HMRC may make an assessment of the amount of tax that it believes should have been deducted from the amounts paid to sub-contractors under Regulation 13 of the Income Tax (Construction Industry Scheme) Regulations 2005 (“2005 Regs”), had the CIS scheme been operated correctly.  If HMRC believe that the sub-contractor has made a return and paid the relevant duty, some relief against the amount payable on the Regulation 13 determination may be given under Regulation 9 of the 2005 Regs.
8.	The Appellants gave information to HMRC which  has enabled Regulation 9 (4) relief to be given for some payments made to some individuals who performed work for the Appellants, resulting in the only matters remaining unresolved by the date of the hearing of this appeal being the amounts in respect of Mr. N for the relevant years, totalling £834.84.  This was as a result of HMRC having written to the Appellants on 25 September 2007 notifying them that although deductions had been claimed for sub-contractors on the self-assessment income tax returns no returns had been made.  The Appellants provided the details to HMRC, and various adjustments were made by HMRC.
9.	The Appellants had maintained that throughout the relevant periods they had promptly and accurately completed HMRC self-assessment tax returns, and had been unaware of the requirements of the CIS until September 2007, when HMRC started conducting their enquiries of the Appellants.  The Appellants were upset that during so many years of trading HMRC had not queried their sub-contractor entries on their self-assessment return forms in the earlier years.  The Appellants maintained that they had not received leaflets about the Scheme, had not seen newspaper advertising of the Scheme, and were not aware of any radio station announcements of the Scheme, nor had they been informed of the Scheme by their builder’s merchants.  They claimed that they had been seriously mislead by HMRC who had failed to inform them of the CIS scheme earlier.
10.	Regulation 13 of the 2005 Regs permits HMRC to determine against a contractor the amount which to the best of judgment a contractor is liable to pay under the Regulations, where HMRC has reason to believe that there may be an amount payable for a tax year under the Regulations by a contractor that has not been paid to HMRC.  Under regulation 9 relief may be granted under condition A if the contractor satisfies HMRC that he took reasonable care to comply with the Acts and Regulations, and under condition B if HMRC are satisfied that the sub-contractor has paid to HMRC the tax on the amounts that should have been deducted when the contractor made payment to the sub-contractor.  In this appeal the enquiries of HMRC have revealed that the sub-contractor Mr. N did not make payment to HMRC, and in respect of the Appellants HMRC take the view that the Appellants did not take reasonable care to comply with the Regulations, ignorance of the law being no excuse.
Evidence at hearing of appeal
11.	At the hearing of the appeal we heard evidence from Mr. And Mrs. Johnston.  They confirmed that they had operated as builders for over 36 years and had completed self-employed income tax returns promptly.  It was only in September 2007 when they received correspondence from the Compliance Department of HMRC in relation to the Construction Industry Scheme, that they were aware that there was such a scheme.  They immediately contacted their local HMRC case worker, Ms. Valentine to request information on the Scheme.  They were then sent leaflets relating to the Scheme, following which they forwarded the information requested by HMRC.  They were upset because during the many years of trading HMRC had not queried their sub-contractor entries on the self-assessment returns.  The response they received from HMRC was that the amounts in previous years had been small and so no action had been taken, but that the amounts had risen significantly over the previous couple of years.  Mr. and Mrs. Johnston felt that the delays of HMRC notifying them of the scheme amounted to a form of entrapment.  They fully cooperated with HMRC, giving them full details of all the sub-contractors and the trainee that had worked for them over a period of the six years of enquiry.  They informed HMRC that these tradesmen were local small businesses that the Appellants had used for 20 years and all works were carried out on business bill headings inclusive of labour and materials and were paid in full by cheque.  They gave evidence that all the tradesmen had told them that the tradesmen had declared all the accounts in their own tax returns.  HMRC had however told the Appellants that Mr. N had not done so in fact, although the Appellants gave evidence that they had talked to Mr. N who had told the Appellants verbally that he had declared all the amounts in his own tax returns.  The Appellants had not thought to call Mr. N as a witness on their behalf at the hearing.  The Appellants further complained that officers of HMRC had entered into correspondence, upholding decisions, without fully taking into account the Appellant’s correspondence.  The Appellants gave evidence that prior to September 2009 they had never seen or been made aware of any fliers in connection with the CIS, they had never seen any newspaper advertising or heard any broadcasts on any local radio station in relation to this.  They also complained that their local builders’ merchants similarly had not heard about the scheme.  The Appellants had not asked their sub-contractors to produce CIS registration cards, as the Appellants were not aware of the scheme.
12.	The officer of HMRC, Kay Valentine attended to give evidence at the request of the Appellants.  She confirmed that after September 2007 Mr. and Mrs. Johnston had cooperated with HMRC in their enquiries, which had been triggered by the entries made by the Appellants on their self-assessment return forms relating to sub-contractors.  She denied that there had been any intention of entrapment on the part of HMRC in not raising these enquiries earlier.  She confirmed that the documents in the bundles of documents before us related to the advertisement of the CIS scheme through fliers, newspaper advertising, radio broadcasts and internet sites.  HMRC had given relief to the Appellants, following correspondence and enquiries, in respect of sub-contractors who had paid the tax to HMRC, the only exception being Mr. N who had not done so in respect of the three years under appeal in respect of the three amounts under appeal.
Findings of fact and decision
13.	We find that Mr. and Mrs. Johnston had traded in partnership as building contractors for over 36 years.  In particular they were engaged in construction operations as a builder during the material dates in respect of the tax years 2002 – 2007.  They engaged various sub-contractors, but did not operate the CIS scheme.  We found Mr. and Mrs. Johnston to be credible witnesses, and we find that they did not operate the scheme because they were not actually aware of the scheme.  They operated as a small business, and we find that prior to September 2007, they had not received any leaflets relating to the scheme, they had not seen any newspaper advertisements of the scheme, nor heard any radio broadcasts relating to the scheme.  Their builder’s merchants had not specifically drawn their attention to the scheme.  Because of their ignorance of the scheme they did not operate it and when payments were to sub-contractors they did not deduct payments to submit to HMRC when making relevant payments to sub-contractors.  The Appellants, in ignorance of the scheme, had believed that they were meeting their tax obligations by submitting self-assessment income tax returns.  When it came to the notice of HMRC that the scheme was not being operated by the Appellants, enquiries were made by HMRC with which the Appellants fully cooperated.  HMRC were able to ascertain that relief could be given to the Appellants in respect of all sub-contractors except Mr. N, the other contractors having paid over the relevant tax to HMRC.
14.	We are satisfied that Mr. N was a sub-contractor and that the Appellants were the main contractor.  Enquiries by HMRC have ascertained that no relief can be given in respect of amounts of £239.04 in respect of year 2004 / 2005, £448.92 in respect of year 2005 / 2006, and £146.88 in respect of year 2006 / 2007, totalling £834.84 in respect of sums which should have been deducted by the Appellants from their payments to Mr. N and which were not so deducted.  We are satisfied that HMRC’s enquiries have shown that Mr. N did not pay those amounts to HMRC.  The Appellants have failed to operate the scheme by making the statutory returns of payments made to sub-contractors, and have failed to make the deductions required to be made from such payments in respect of Mr. N.  We are satisfied that there has not been full compliance with the legislation by the Appellants, and that HMRC have exercised their statutory power to determine that these amounts should be paid by the Appellants as contractors.  HMRC have the power to do under Regulation 13 CIS Regulations 2005.  We find that the Appellant was not entitled to relief under Regulation 9 (3).  We find that Condition A referred to in Regulation 9 (3) is not satisfied, as we find that the Appellants have not taken reasonable care to comply with Section 61 Finance Act 2004 and the CIS Regulations 2005.  We find that they cannot be regarded as having taken reasonable care to comply, as on their own admission they were not even aware of the Regulations.  It is well established that ignorance of the law is not a defence.  We agree with the views of the Judge in Peter Jackson (Jewellers) Ltd v the Commissioners for Her Majesty’s Revenue and Customs TC00195 at paragraph 15:
“However unaware the Appellant may have been of the new regime the requirement to register is nevertheless an absolute one for which ignorance of the law is not a defence”.
15.	We further find that the Appellants are not entitled to relief under condition B set out in Regulation 9 (4), which only applies where HMRC are satisfied that Mr. N has paid the income tax to HMRC.  We find that HMRC are not so satisfied.
16.	We were informed by Mr. Hall that HMRC are not seeking to collect penalties in this case.  All they are seeking to do is to put the Appellants back in the position that they should have been when they should have made the deductions from the payments that they made to the sub-contractor Mr. N is respect of the three tax years.  All the other issues had been resolved prior to the hearing.  The appeal only related to the failure of the Appellants in respect of Mr. N for those three years.  We have sympathy for the Appellants, who, despite the publicity surrounding the scheme, genuinely seemed to be unaware of it.  However Parliament has enacted the scheme and the construction industry is bound to comply with it.  The Appellants do not qualify for the relief permitted under Regulation 9.  We do not find that the actions of HMRC in not notifying the Appellants directly of the scheme earlier, or not raising matters at an earlier date, relieve the Appellants of their duty under the scheme.
17.	Accordingly we find that the Appellants are contractors for the purpose of the scheme, that Mr. N was a sub-contractor in the construction industry, that HMRC are entitled to recover the sums due from the Appellants, and that they do not qualify for the statutory relief.  Accordingly we dismiss the Appellants’ appeal.

The Appellant has a right to apply for permission to appeal against this decision in accordance with rule 39 of the Rules.  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.

IAN VELLINS
JUDGE
Release Date 11 May 2010