[2012] UKFTT 535 (TC)
TC02211
Appeal number:
TC/2012/00857
Income
Tax; PAYE; Penalty for late payment; reasonable excuse; proportionality;
Finance Act 2009, Schedule 56, para 16; Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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McTEAR CONTRACTS
LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE J GORDON REID QC, FCIArb
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Dr HEIDI POON, CA, CTA, PhD
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Sitting in public at George
House, Edinburgh on 10 July 2012
Karen Charnley, ACCA, WDM
Chartered Accountants, Motherwell for the Appellant
William Kelly (HMRC)
instructed by the General Counsel and Solicitor to HM Revenue and Customs, for
the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
This is an Appeal against a penalty for late payment of PAYE (including
associated Class I National Insurance Contributions). A Hearing took place at Edinburgh on 10 July 2012. Karen Charnley, ACCA of WDM, Chartered Accountants, Motherwell,
appeared on behalf of the Appellant. She led the evidence of Mr and Mrs
McTear, the Appellant’s managing director and company secretary. William
Kelly, the HMRC official representing the Respondents (the “Revenue”), led no
oral evidence. He produced a bundle of documents, mainly correspondence and
internal computerised records. There was no dispute about the authenticity of
these records.
The Statutory Regime
2.
Schedule 56 to the Finance Act 2009 contains a penalty regime for late
implement of certain fiscal obligations. The Schedule, which has since been
amended, came into force on 6 April 2010 by virtue of the Finance Act 2009,
Schedule 56 (Appointed Day and Consequential Provisions) Order 2010 SI No 466,
regulation 3(2)(a). The amendments to Schedule 56 were made by Schedule 11 to
the Finance (No 3) Act 2010. Various parts of Schedule 11 were brought into
force by the Finance (No 3) Act 2010, Schedule 11 (Appointed Day) Order 2011 SI
No 132.
3.
The relevant calculation for the purposes of this Appeal is set out in
paragraph 6(6) of Schedule 56 (3% of the total amount of the defaults for
7, 8 or 9 defaults during the tax year). There is, in effect, a sliding scale
of penalty charges, whereby the percentage of penalty increases in proportion
to the number of defaults in a tax year, with the maximum being 4%. Provision
is made for reduction of the penalty on the ground of special circumstances
(paragraph 9) and for its suspension (paragraph 10). Liability can also be
elided if the taxpayer establishes a reasonable excuse for the failure to make
timeous payment (paragraph 16). Certain circumstances are deemed not to be a
reasonable excuse (broadly, insufficiency of funds and reliance on a third
party - paragraph 16(2)).
4.
The effect of the Income Tax (Pay As You Earn) Regulations 2003 SI No
2682 (as read with the Income Tax (Pay As you Earn) (Amendment) Regulations
2012 SI No 822 regulation 27) is that PAYE payments have to be made on or
before the 22nd day of the month of the relevant tax period (being
17 days after the 5th of the month) if payment is made
electronically, and on or before the 19th day of that month (being
14 days after the 5th of the month) if payment is made by any other
method. The penalties also covered associated Class I National Insurance
Contributions in accordance with Regulation 67A of the Social Security
(Contributions) Regulations 2001 SI 2001/1004, as added by the Social Security
(Contributions)(Amendment No 4) Regulations 2010 SI 2010/721 part 2,
regulation 3.
The Penalty
5.
A penalty of £31,735.73 was imposed on the Appellant on 11 August 2011
under Schedule 56 to the Finance Act 2009, calculated at 4% of the aggregate
amounts of the 10 defaults in the year. That sum was subsequently reduced on
review to £29,700.53 conform to HMRC letter dated 25 November 2011. The reason
for its reduction was two-fold. Firstly, it reversed a penalty on the P11D
payment, which was paid on time. Secondly, the penalty for the month to 5
December was cancelled on account of a deferment agreement with HMRC reached on
14 December. The month 8 payment was received on 23 December before the agreed
deferment date of 27 December.
6.
The penalty assessment was further reduced by HMRC’s letter of
notification to the HM Courts & Tribunal Service dated 11 April 2011 to
£16,360.49. following the effect of Agar Ltd v RCC 2011 UKFTT 773 (TC)
at paragraphs 56-60, which found that payment falling due on 19 April 2011 to
be a default for tax year 2011-12 and not 2010-11. As a result of month 12
dropping out of the default aggregate, the Appellant was assessed on 9 defaults
instead of 10 and the relevant penalty percentage was reduced from 4% to 3%.
The combined effect of month 12 being a significantly bigger payment (almost
three times the monthly average for the year) and the penalty percentage
reduction gives effect to the final assessment under appeal being almost half
of the original.
These documents show that PAYE, due by the Appellant to
the Revenue was paid late on ten occasions, generally by only a few days on
each occasion. The first late payment does not count so there were only
nine defaults which are relevant for the purposes of assessing the penalty. No
point was taken about the effect of the revisions to the original penalty
imposed.
Grounds of Appeal
7.
In summary, these state that i) the consequences of late payment and the
amount of penalties were not made clear; ii) the penalties were charged on a
risk-assessed basis; iii) the penalty was disproportionate, based on the
interest that would have been charged, iv) the Appellant relied on its
book-keeper to make timeous payments; and v) the Appellant thought that it was
paying on time and was unaware that penalties were being incurred when payments
were late by only a few days.
Facts
8.
The Appellant carries on business as electrical and plumbing contractors
in the construction industry with an annual turnover of almost £8m. Mr McTear
is effectively the principal of the business but he leaves the administration
and book-keeping to his wife and to some extent Messrs WDM, who inter
alia prepare monthly management accounts. Mrs McTear is the book-keeper,
although she has no formal accounting or book-keeping qualifications. She
takes responsibility for ensuring various payments are made to the Revenue by
their due date.
9.
The Appellant has about 80 employees (plumbers and electricians) with
about ten apprentices. It also regularly engages the services of about 20
sub-contractors. The administrative staff comprises Mrs McTear, an office
manager and an administrative assistant. Five of their employees are salaried
and the rest are paid wages weekly.
10.
The Revenue’s records show that the Appellant has a history of numerous
late payments (usually by a few days) of PAYE which is evident in the tax years
2007-2008, 2008-2009 and 2009-2010.
11.
In recent years, the bulk of the Appellant’s business has been with the
construction company Carillion (in one of its manifestations) on one year
contracts and with Centrica. More recently, they have engaged in local
authority work. This has led to a more consistent and regular cash-flow.
12.
The Appellant has had difficulty in obtaining full and timeous payment
from Carillion. This problem seems to have subsisted for some time and seems
to have come to a head in about January 2011. In a letter dated 26 June 2012
to Carillion, the Appellant asserted the wrongful withholding of monies,
failure to pay for variations, erroneous deduction of main contractor’s
discount, failure to release contractual retention, a claim for interest, and a
claim for loss and expense. The sum due by Carillion was said to be about
£450,000. Carillion have offered only £100,000. We cannot determine whether
any of these claims is well founded, when these claims arose, when the sums
claimed ought to have been paid or how all this affected the Appellant’s
finances and cash-flow. However, they seem to be the familiar type of dispute
and raise the sort of difficulties frequently encountered by a sub-contractor
in the construction industry.
13.
Mrs McTear was contacted on 25 May 2010 by the Revenue. She was
informed that the PAYE payment was overdue. A standard warning letter was sent
to the Appellant on or about 28 May 2010. The Revenue attempted to make
telephone contact with the Appellant in June, July and August 2010, but for one
reason or another, the Appellant did not respond. Contact was made with Mrs
McTear on 14 December 2010; various arrangements were agreed and the PAYE
payment for that month, though received on 23 December, was disregarded as a
default on the grounds of the deferment agreement reached on 14 December. Four
warning letters were sent to the Appellant in the course of the tax year
2010/2011; there was no response to a further attempt to contact the Appellant
by telephone in March 2011.
14.
With the exception of the communication in December 2010, at no other
stage throughout the tax year 2010-2011 did the Appellant contact the Revenue
with a view to making arrangements to defer payment of PAYE from time to time.
The Revenue operates such arrangements in appropriate circumstances.
15.
In about February 2011, the Appellant entered into a time to pay arrangement
in relation to outstanding corporation tax. Two cheques were paid in June and
July 2011, amounting in total to about £209,000. This included certain
PAYE liabilities but did not include the amount due under the penalty regime,
although the Appellant may have been under the mistaken impression that it did.
16.
Employer Bulletins have been regularly issued to employers such as the
Appellant both before and after the coming into force of the Schedule 56
penalty regime explaining it at length in reasonably clear terms including how
penalties are triggered and calculated, the dates for payment, bank clearing
times which should be allowed to ensure these dates are met, and the arrangements
which might be made if an employer is experiencing problems in paying, together
with an explanation as to how to appeal.
17.
In a Budget Release Note (BN90) dated 22/4/09, the Revenue explained
that implementation of the new penalty regime would be based on a risk based
approach from April 2010 (paragraph 8).
18.
In correspondence with the Revenue, WDM asserted that (i) the Appellant
thought that it was paying on time by BACS payments on the 22nd of
the month, (ii) the Appellant had cash flow problems with an overdraft facility
of £115,000 against its turnover of about £8m, (iii) Mr and Mrs McTear injected
substantial funds into their company, and (iv) oversight by the Appellant’s
book-keeper ie Mrs McTear. In fact, the Appellant did not make payments through
BACS. They paid by cheque or through the more expensive CHAPS system.
Submissions
19.
Ms Charnley for the Appellant submitted that the insufficiency of funds
caused by Carillion and Centrica amounted to a reasonable excuse. Carillion
simply did not pay when they said they would. The Appellant was not being paid
on time by its debtors so it could not pay the Revenue on time. Under
reference to Agar paragraphs 52-54, she submitted that the Appellant was
genuinely trying to pay and should not have been on the Revenue’s list of
defaulters.
20.
She submitted that the penalty was disproportionate and amounted to
interest on the overdue payments for the periods they were overdue (usually for
a few days only) at an average rate of 247%. She did not challenge the due dates
or the actual dates on which payments were said to have been made.
21.
Mr Kelly took us through the bundle. He submitted the Revenue had
discharged the onus of showing that the penalty had been triggered; the onus
was now on the Appellant to establish a reasonable excuse. He submitted
that, having regard to the correspondence and the Revenue’s internal records,
there was no basis for the Appellant being unaware that penalties would be
imposed for late payment of PAYE or for this having come as a surprise to the
Appellant. He pointed out, correctly, that contrary to what was said in the
correspondence on behalf of the Appellant, no payments were made by the BACS
system, which takes about three days; they were paid by cheque or through the
CHAPS system, which is a same-day service but which is relatively expensive.
22.
In response to the assertion that the penalty was disproportionate, he
pointed out the amount of the penalties is progressive; habitual offenders were
charged at a higher rate. The penalty takes account of the number of defaults
and the amounts paid late. The regime was designed to have a deterrent effect
and was not to compensate for the loss of use of money during the (late) period
of non-payment.
23.
Reliance on a book-keeper, Mr Kelly submitted, was not a reasonable
excuse. There were no special circumstances within the meaning of Schedule 56
paragraph 9; he referred to Clarks of Hove Ltd v Bakers’ Union 1978 1
WLR 1207 (an employment case on the failure to consult before making employees
redundant) for the meaning of special circumstances (something out of
the ordinary run of events - per Geoffrey Lane LJ at 1216A) followed in White
v RCC 2012 UKFTT 364 (TC) at paragraphs 52-54.
Discussion
24.
The evidence of Mr and Mrs McTear can best be described as somewhat
chaotic, unstructured and in places inconsistent. While they may have been
doing their best to tell the truth we cannot regard all their evidence as
reliable. In general, it lacked detail, was difficult to follow and was
unsupported by any significant documentation.
25.
Overall, it seemed quite clear on the evidence that the nine defaults on
which the penalty has been calculated arose by reason of administrative
inefficiency. Most payments were late by only a few days. This seems to have
arisen because Mrs McTear failed to appreciate how long it would take for
payments to clear through the banking system. If she is being blamed, this is
not a reasonable excuse as the Appellant itself cannot be said to have taken
reasonable care to avoid the failure to pay in time (Schedule 56 paragraph
16(2)(b)). Insofar as the Appellant founds on the fact that it or its officers
did not appreciate the consequences of late payment, that is tantamount to
saying that ignorance of the law is a good excuse. That cannot be accepted.
26.
The evidence demonstrates that there was no general insufficiency of
funds (which is not a reasonable excuse anyway). Rather, there was a failure
to organise the financial affairs of the Appellant either through short-term
overdraft or otherwise to accommodate the uncertainty about the dates when the
Appellant’s debtors paid their accounts, and in particular their key customer
at the time, Carillion. This is a problem common to many businesses. It is
not possible to know with certainty when a debtor will pay. No doubt there are
due dates for payment. But universal commercial experience informs any
reasonably prudent trader that he cannot always rely on particular debtors
paying particular sums on particular dates. This is especially so in the
construction industry where monthly payments throughout the duration of a
contract (particularly one which endures for a year or more as the Appellant’s
contracts with Carillion did) are often based on interim valuations ascertained
through the judgment of a contract administrator. These valuations are
frequently the matter of dispute, particularly where a contractor claims for
the cost of variations and loss and expense for delay and/or disruption. The
quality of workmanship and the entitlement of the employer or main contractor
to retain funds may also be in issue. Even at the end of a contract it can
take a very long time for a final account to be settled.
27.
Part II of the Housing Grants, Construction and Regeneration Act 1996
was intended to provide a speedy, temporary remedy to the sort of cash-flow
problem encountered by contractors in the construction industry in the
circumstances described above. The Appellant has not apparently pursued the
statutory adjudication process, which can be quick and effective. However, the
Tribunal acknowledges that for a contractor such as the Appellant to challenge
a giant in the construction industry such as Carillion at adjudication would,
in reality, be a somewhat daunting task.
28.
No separate argument was advanced on behalf of the Appellant based on
special circumstances. The proportionality argument was not developed beyond
the calculation of interest referred to above. There is nothing in the
legislation, evidence or in the submissions which enables us to conclude that
the penalty regime is disproportionate, whatever the Appellant’s representative
intended that much used word to mean. The penalty regime has been enacted by
Parliament in an area where it has a very wide discretion. Arguments based on
proportionality have been rejected in a number of other cases to which we were
not referred (see for example Dina Foods Ltd v RCC 2011 UKFTT 709 (TC)
paragraphs 41-42 (a PAYE case)); and SLBT Ltd 2012UKFTT 422 (TC)
at paragraphs 25-27 (also a PAYE case). In these circumstances, it is not for
this Tribunal to embark on its own detailed analysis of the case law without
the assistance of the parties. We reserve our judgment on whether, if the
penalty could be described as disproportionate, that indicates or might indicate
the presence of special circumstances justifying a reduction by the
Tribunal. Moreover, any finding that the penalty was not proportionate, could
only lead to a declaration of incompatibility. The position is different where
VAT is concerned. That is a fiscal regime within the competence of the
European Union. By Article 6(3) TEU, Convention rights constitute general
principles of European Union law. Accordingly, if a VAT penalty regime
conflicts with the principle of proportionality whether as a violation of
Convention rights or the general European law principle of proportionality (cf Enersys
Holdings Ltd v RCC 2010 UKFTT 20 (TC), then a court or tribunal would be
bound to disapply UK law which is incompatible with a taxpayer’s rights under
the law of the European Union.
29.
Insofar as the Appellant may be arguing that the Revenue were acting
unfairly, whether generally or because the Appellant has been selected as a
regular defaulter, the facts show that this argument cannot be accepted.
Several letters were written to the Appellant about late payment. There is no
statutory obligation on the Revenue to warn the taxpayer that a penalty has
been triggered in the course of the tax year in question. The penalty
calculation cannot be made until the end of the tax year. Numerous attempts to
contact the Appellant were made by telephone and the penalty regime was well
publicised before and after its inception. The Revenue, having regard to the
Appellant’s payment history, was plainly entitled to consider imposing a
penalty on them.
30.
Whatever may be the nature and scope of a public body’s duty to act
fairly in its decision making processes and in the administration of its
statutory powers (cf Agar at paragraphs 42-50; HMD Response
International v HMRC 2011 UKFTT 472 at paragraph 18) the facts do not
provide a platform for such arguments in this Appeal.
Result
31.
While we have a certain degree of sympathy for the Appellant, there is
no basis on the material and submissions presented to us on which the Appeal
can, to any extent, be allowed. The Appeal is therefore dismissed.
32.
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.
J
GORDON REID QC, FCIArb
TRIBUNAL JUDGE
RELEASE DATE: 22 August 2012
