Contour Business Interiors v Revenue & Customs [2011] UKFTT 300 (TC) (09 May 2011)

[2011] UKFTT 300 (TC)

TC01162

Appeal number: TC/2010/08259

Income tax – Construction Industry Scheme – monthly returns – penalties for late submission – whether reasonable excuse – appointment of new agents – notification not received by HMRC – change to paper returns after previous electronic filing not notified to HMRC – paper returns not initially accepted – held reasonable excuse for initial failure but not afterwards – subject thereto, appeal dismissed

FIRST-TIER TRIBUNAL

TAX

CONTOUR BUSINESS INTERIORS Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE) SANDI O’NEILL

The Tribunal determined the appeal on 24 January 2011 without a hearing under the provisions of Rule 26 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (default paper cases) having first read the Notice of Appeal dated 8 September 2010, HMRC’s Statement of Case submitted on 16 November 2010 and the Appellant’s Reply dated 10 December 2010.

DECISION

1. We decided in respect of the appeal against the penalties imposed for the late submission of five monthly Construction Industry Scheme (“CIS”) returns for the months ended 5 February 2010, 5 March 2010, 5 April 2010, 5 May 2010 and 5 June 2010 that the Appellant initially had a reasonable excuse for the late submission of the return for the month ending 5 February 2010 but that the Appellant did not have a reasonable excuse for the late submission of the four subsequent returns. We therefore allowed the appeal in respect only of the first penalty of £100 imposed in respect of the return for the period ending February 2010 but dismissed the appeal in respect of the remaining penalties for submission of late returns.

2. Following the issue of our decision in summarised form, the Appellant through its agents requested full written findings and reasons, on the basis that the Appellant might wish to take the matter further.

The facts

3. From the documents provided to us, we make the following findings.

4. CIS returns were due from the Appellant in respect of the months ended 5 February, 5 March, 5 April, 5 May and 5 June 2010. The Appellant appointed new agents, George H.W. Griffith Ltd, whose notepaper shows the trading name “Griffith & Griffith”. They commenced acting for the Appellant in January 2010. No indication of the actual commencement of their engagement was included in the papers supplied to us, but as the CIS payment and return in respect of the period to 5 January 2010 was not in question in this appeal, we find that their appointment post-dated the work in respect of that return and payment, which was performed by the Appellant’s previous agents.

5. The Appellant’s present agents stated in their response to HMRC’s Statement of case that, according to their records, a form 64-8 was submitted on 11 February 2010. There was no evidence in the documents before us to support this assertion, and we do not accept that a form was submitted at this point. Further, as HMRC had no record of receiving this (see below), we find that this form was not received by HMRC, despite the agents’ internal record of it allegedly having been sent.

6. Following their appointment, the Appellant’s present agents began to submit paper CIS returns on behalf of the Appellant. Payments were made to HMRC in accordance with the information provided in those returns. The process continued in this way until HMRC sent the Appellant a series of penalty notices. The first of these was issued on 5 March 2010. Further notices were issued for each subsequent month, the final one being issued on 2 July 2010. Copies of the actual notices were not supplied with the documents submitted to us; from the list provided by HMRC we find that the Appellant received a number of penalty notices showing the amounts outstanding and the periods in respect of which they had been incurred.

7. It was not until 25 May 2010 that the Appellant’s agents wrote to HMRC, stating that their client had forwarded to them a statement from HMRC regarding outstanding monthly CIS returns for the months ending 5 February, 5 March and 5 April 2010. According to the list submitted to us by HMRC showing the dates of issue of the penalty notices, the notice in respect of the month ending 5 April 2010 had been issued on 30 April 2010. We find that the Appellant did not take immediate steps to make its agents aware of the issue of the penalty notices, as there was clearly a delay between the date on which the Appellant received the notice in respect of the April return and the date of the agents’ letter to HMRC; there was an even greater gap between the issue dates of the penalty notices relating to February and March and notification by the Appellant to its agents that they had been issued to the Appellant.

8. The agents explained in their 25 May letter that they had commenced acting for the Appellant in January 2010 and had been submitting paper returns since then, each one filed within plenty of time to avoid any penalties. They understood that the previous accountant had submitted CIS returns on line, and suggested that this perhaps explained why demands had now been sent. They asked HMRC to confirm that these penalties were not due.

9. On 4 June 2010 HMRC wrote to the Appellant, explaining that they had received correspondence from “your Agent” dated 25 May 2010 appealing against penalties for late filing of Contractor monthly returns. The HMRC officer who wrote that letter stated:

“My records show that your Agent Griffith & Griffith is not listed as having the authority to allow us to exchange and disclose information about you in relation to your Construction Industry Scheme affairs. To enable me to do so, would you please have the enclosed form 64-8 completed and returned within 10 working days from the date of this letter.”

10. In their response to HMRC’s Statement of Case, the agents indicated that according to their records, a form 64-8 was “re-completed” and posted on 4 June 2010. Again, there was no evidence submitted to support this assertion. As the form was enclosed with HMRC’s letter to the Appellant (and not to the agents) dated 4 June 2010, a Friday, which was the same date on which the agents contend that they sent the completed form to HMRC, we are not convinced that the agents did send the form on that date. No copy of the completed form was included in the evidence. (Our finding in respect of the submission of the form is set out below.)

11. On 22 June 2010, HMRC wrote to the Appellant. (If the form 64-8 had been submitted on 4 June, HMRC might have been expected by this stage to have written to the agents rather than to the Appellant; see our finding below.) They thanked the Appellant for its letter dated 25 May 2010 appealing against the penalties for the periods ending 02/10, 03/10 and 04/10. They explained that for the appeal to succeed, the Appellant needed to demonstrate a “reasonable excuse for its failure to submit the return [ie the respective returns] on time. HMRC’s view was that a “reasonable excuse” was where an exceptional event beyond the Appellant’s control had prevented the Appellant from making the return on time. The officer had considered the appeal, but was unable to “accept” it because HMRC had not received the returns for the appealed periods.

12. According to HMRC’s records, the returns for 02/10, 03/10, 04/10 and 05/10 were received on 29 June 2010, and the return for 06/10 was received on 19 July 2010. (Our findings in respect of the receipt of the returns are set out later in this decision.) We find that, as HMRC accepted these returns from the agents at this stage, the form 64-8 must have been received at some time between 4 June and 29 June, assuming in the agents’ favour that the processing of this form within HMRC might have taken some time.

13. In their letter dated 21 July 2010, the agents stated:

“Following your letter dated 22 June 2010, we request a review of [sic] decision against the late filing of contractor’s monthly returns for 02/10, 03/10 and 04/10 for the following reasons:

1. Paper returns had already been submitted for these periods by the due date.

2. Copies of these returns were submitted when requested, but were rejected as they were our file copies and not originals. All returns were duly re-completed and submitted by return.

3. Since receiving your letter, we have successfully submitted the most recent return for month ending 5 July 2010 online and will continue to do so in future.

. . .”

14. HMRC’s conclusion on review, communicated in their letter dated 26 August 2010, was that the decision in the letter dated 22 June 2010 should be upheld. The reason was that the Appeal Review Officer could not find any evidence that the Appellant’s CIS returns were submitted any earlier than 29 June 2010.

15. On behalf of the Appellant, the agents gave Notice of Appeal to the Tribunal on 8 September 2010. The appeal was expressed as follows;

“We are appealing against non submission of CIS contractor monthly returns for the periods ended 5/2/10, 5/3/10, 5/4/10, 5/5/10 and 5/6/10.”

(The grounds for appeal are set out below.)

16. Notice of appeal in respect of the periods ended 5 May 2010 and 5 June 2010 had not previously been given to HMRC. This meant that in this respect the appeal did not comply with s 49D of the Taxes Management Act 1970 (“TMA 1970”). HMRC indicated in their Statement of Case that they had accepted the Tribunals Service Notice of Appeal form as fulfilling this requirement in relation to the appeal against penalties for those two monthly periods. In the present case we accept this waiver of the requirement, but appellants should be aware that giving notice of appeal to HMRC is, as a formal matter, a precondition to giving notice to the Tribunal.

Arguments for the Appellant

17. The Appellant’s agents stated that they had commenced representing the Appellant in January 2010 and had submitted paper returns each month by their respective due dates. None of these were nil returns. They had retained copies for their records. All CIS payments due for the relevant months had also been paid by their due dates, although the agents accepted that this issue was not in question. The system which they used to calculate the CIS liability each month included verifying the amount payable to that shown on the return; one could not be done without the other. They were at a loss to understand why the returns had not been recorded as received by the Respondents (“HMRC”). Since the problem had been brought to the agents’ attention, they had submitted returns on line. They had also been asked to complete the paper returns again, which they had done. Copies of the returns made had been submitted to HMRC when requested, but were rejected, as they were the agents’ file copies and not originals. All the returns had been duly re-completed and submitted by return.

18. They believed that the decision should have been that HMRC should accept that all the CIS returns were submitted by their due dates, that any penalties imposed should now be removed, and that HMRC should further confirm that their annual review would confirm full compliance with CIS requirements.

19. The agents’ internal records of posting showed that each return had been posted in advance of the date due, ie before the expiry of 14 days after the return date. These posting dates were, respectively, 10 February, 12 March, 15 April, 14 May and 17 June 2010. It was not cost effective for them to obtain proof of posting from the Post Office for each item of post sent from their office.

Arguments for HMRC

20. HMRC contended that their records showed that the first four returns were received on 29 June 2010 and the return for the month ending 5 June 2010 was received on 19 July 2010. The Appellant had neither provided HMRC with evidence of postage nor an actual date when the returns were posted. Penalty notices had been issued, the first on 5 March 2010 and then for each subsequent month, the last being on 2 July 2010. The penalty notices had clearly informed the Appellant that the returns for the months ended 5 February, 5 March, 5 April, 5 May and 5 June 2010 were late and needed to be submitted. HMRC contended that it was reasonable to conclude that the number and frequency of penalty notices issued would have alerted the Appellant that something was wrong. HMRC had no records of the Appellant contacting HMRC for advice.

Discussion and conclusions

21. Notice of Appeal was originally given on 8 September 2010, which would have been within the time limit following HMRC’s review letter dated 26 August 2010. However, the Notice was not accompanied by a copy of that letter, and was therefore returned to the agents by the Tribunals Service. Full documentation was submitted by the agents by their letter dated 20 October 2010, which enclosed a revised version of the Notice of Appeal. HMRC did not seek to make any objection to this on grounds of delay in making the appeal, and we accordingly extend the period of time for service of the Appellant’s Notice of Appeal.

22. In respect of the substantive appeal, Regulation 4 of the Income Tax (Construction Industry) Regulations 2005 (SI 2005/2045) provides:

“(1) A return must be made to the Commissioners for Her Majesty's Revenue and Customs in a document or format provided or approved by the Commissioners—

(a) not later than 14 days after the end of every tax month, by a contractor making contract payments. . .”

We would emphasise that this obligation falls upon the contractor, rather than upon its agents. Permission to make payments gross is a privileged treatment, as the normal position is that contractors are required to deduct tax; in order to benefit from that treatment, contractors are required to comply with various obligations, including the proper submission of monthly returns.

23. Chapter 4 of HMRC’s Guide for contractors and subcontractors (CIS340) sets out HMRC’s general requirements from contractors in relation to monthly returns and payments of deductions due to HMRC. Paragraph 4.5 states in relation to paper returns:

“If contractors choose to use paper returns, we will send out the return forms partially completed to arrive by the last day (the 5th) of the tax month they are for.”

24. It follows from this element of the guidance that HMRC need to be made aware that a contractor proposes to make monthly returns in paper form, as HMRC would not be in a position to issue partly completed forms without some prearrangement for the relevant details to be included in those forms.

25. Although there is no statement to this effect in CIS340, our understanding of HMRC’s practice is that once a contractor is making returns electronically, paper returns are not taken into account. The effect is to keep the two systems separate. Where a contractor is making returns electronically, there is no reason for HMRC to take into account or recognise any paper return sent in for a particular month instead of an electronic one. We assume that this is to avoid the risk of confusion; without giving appropriate notice, a contractor is not permitted to switch between the two forms of return, so that a contractor within the “electronic filing” regime is expected to continue within it unless and until that clear notice of the proposed change to “paper filing” is given in time for HMRC to send out the partially completed return for the particular month, as referred to at paragraph 4.5 of CIS340.

26. In relation to the Appellant, we find that confusion arose as a result of what turned out to be a failure of communication. As we have found, there was no specific evidence provided to us to show that notification of the new agents’ appointment had been posted on 11 February 2010, and therefore we do not accept that this was done. We have accepted HMRC’s evidence that their records did not contain any information to show that any notification of the appointment had been received before June 2010.

27. The result of this failure of communication was that as far as HMRC understood the position before the agents submitted the form on 4 June 2010, the Appellant had not completed a form 64-8 authorising its newly appointed agents to deal with HMRC in relation to the exchange and disclosure of information about the Appellant’s CIS affairs. As a result both of the absence of notice of authority and HMRC’s assumption that returns would continue to be filed electronically (because HMRC had no reason to be aware of the appointment of the new agents or the proposal to submit paper returns), the paper returns posted to HMRC by those new agents were not treated as fulfilling the Appellant’s obligation to submit monthly returns by the specified dates.

28. In addition, we find that those paper returns could not have been partly completed by HMRC in accordance with the practice referred to at paragraph 4.5 of CIS340, as HMRC had not previously been notified of the proposal to use paper returns instead of electronic filing. No copies of the returns were included in the documentation supplied to us, but we conclude that the paper returns originally sent to HMRC must have been prepared solely by the agents, with no details inserted by HMRC.

29. Thus in relation to the agents’ attempted submission of monthly returns, we are satisfied that the returns for the first four periods were submitted by the agents at times when HMRC had no notice that the agents had been appointed in place of the previous agents. The return for 06/10 was shown in the agents’ internal records as having been posted on 17 June 2010, the due date being 19 June 2010. However, according to HMRC’s records, it was not received until 19 July 2010. No explanation was offered to us for the late submission of the latter return. In the absence of specific evidence to the contrary, we find that the date of receipt as shown by those records was correct.

30. Although the agents stated in their response to HMRC’s Statement of Case that copies of all previously filed CIS returns were submitted and then rejected by HMRC as not being originals, there is nothing in the evidence before us to establish on what date these copies were submitted, nor any indication of the date or dates on which the “re-completed” forms were submitted to HMRC, the agents having explained that this had been done “by return post”.

31. Even if HMRC had been aware of the proposal to submit paper returns, copies would not have been acceptable. Paragraph 4.7 of CIS340 states:

“The returns must be sent to us unfolded using the envelope we provide. Please ensure that you pay the correct postage for the returns. Please do not send a photocopied return.”

The combination of submission of paper returns without effective prior notification and the subsequent submission of photocopy paper returns meant that the first valid submission of returns did not happen until the properly completed and signed replacement versions were submitted to HMRC. As a result, we accept as correct HMRC’s evidence of the dates of receipt of all the returns as shown in their records (paragraph 12 above).

32. The first penalty notice in respect of the month ended 5 February 2010 had been issued by HMRC on 5 March 2010. Until this was received by the Appellant, there was no reason for the Appellant to suspect that there was any problem with its present agents seeking to submit the monthly returns on its behalf in exactly the same way as had been done through its previous agents. We therefore hold that the Appellant initially had a reasonable excuse for the failure to file on time the monthly return for the period ending 5 February 2010.

33. We find that once the Appellant had received the first penalty notice, it became aware that the process of submitting monthly returns had not operated as it should have expected. At this point the Appellant should have contacted its agents to ask why the problem had arisen. There was no evidence of the Appellant having done so in March 2010; we find that the Appellant did not do this until shortly before the agents’ letter to HMRC dated 25 May 2010.

34. Section 118(2) TMA 1970 (which applies for the purposes of s 98A TMA 1970, which in turn imposes penalties for failure to make monthly CIS returns) provides:

“. . . 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.”

In the context of monthly CIS returns, this gives the contractor the opportunity to put matters right by taking swift action to ensure that a return in the proper form reaches HMRC as soon as possible after the contractor’s reasonable excuse has come to an end.

35. As there was a delay from March 2010 until later May 2010, our finding on the facts is that the Appellant did not take steps without unreasonable delay to resolve the matter after the initial excuse ceased (as a result of the Appellant finding out that the return for the period ending 5 February 2010 had not been accepted as having been filed on time). The excuse ceased as soon as the Appellant had notice from HMRC that the return had not been received in the proper way.

36. With the exception of the period covered by the initial penalty, we therefore find that the Appellant had no reasonable excuse for the late submission of the monthly returns. We have no power or discretion to alter any of the penalties imposed. As a result, we hold that all the penalties in respect of the return for that period, other than the initial penalty, should be confirmed. We further hold that in the absence of a reasonable excuse in respect of the four subsequent monthly returns, the penalties in respect of these should also be confirmed. Thus the total amount of penalties imposed on the Appellant should be reduced from £1,500 to £1,400.

37. Accordingly, we dismiss the appeal in respect of all the penalties other than the initial penalty of £100 in respect of the period ended 5 February 2010.

Right to apply for permission to appeal

38. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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.

First-tier Tribunal (Tax)