First-tier tribunal tax cases - reasonable excuse

Castledale Building Services v HMRC Commissioners

Mr Curtler submitted an appeal against 243 penalties of £36,100 imposed for the late filing of 31 monthly CIS returns for the periods ended 5 May 2007 to 5 September 2009. Mr Curtler registered as a contractor under the CIS scheme from 6 April 2007.  He did not dispute the penalties, but claimed that he had a reasonable excuse for the failure to file his returns on time.

His marriage had broken down; this started in 2006, culminating in a divorce in September 2008. He had been running his business from home and due to the matrimonial difficulties he was locked out of his house. When he gained access to his office, his computer had disappeared and it was 18 months before he regained access to it; some of the data had been corrupted.

His father had suffered bowel cancer and had three major operations relating to this condition. Mr Curtler was therefore reluctant to approach his parents for assistance. He had tried to save money by not instructing an agent; his work had decreased as a result of the recession and his divorce had left him with no money.

He has now completed all the outstanding CIS returns. He is suffering from panic attacks and stress caused by difficulties in his private life.

The Tribunal pointed out that losing his business records through no fault of his own could amount to a reasonable excuse, but the Tribunal had no detail as to what happened and when. The taxpayer had also not explained why, after the divorce was finalised in September, the returns were still not submitted and why he had not informed HMRC of his difficulties until almost a year after his divorce had been finalised.

Ill health can be a reasonable excuse. A shortage of funds cannot, but the reason for the shortage of funds can, but it must relate to the period in question and be the cause of the late filing. The Tribunal, unfortunately, did not have the information to judge whether this was the case.

It was also noted that Mr Curtler had been able to continue to conduct his business affairs and trade within CIS during the period that he claimed to experience personal and financial difficulties. Thus, neither were so serious as to prevent him controlling his business affairs.

The appeal was dismissed.

Contour Business Interiors v HMRC

CIS returns were due for the months to 5 February 2010, 5 March 2010, 5 April 2010, 5 May 2010 and 5 June 2010, but were submitted late and penalties were imposed. The taxpayer appointed new agents, George H W Griffith Ltd, trading as Griffith & Griffith.  They commenced acting in January 2010, after the 5 January 2010 return had been submitted. The agents claimed that the February return had been submitted on 11 February, but there is no evidence to support this and HMRC have no record of having received it.

The agents began submitting paper returns to HMRC and payment was made to HMRC in line with the information in the returns. Penalty notices were issued, but it was not until 25 May that the agents wrote to HMRC regarding the outstanding returns. They explained that they had been submitting paper returns since their appointment in January, each one filed in plenty of time to avoid penalties.

HMRC wrote to the taxpayer as follows:

'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.  The 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.'

In their response to HMRC’s Statement of Case, the agents stated that a form 64-8 was ‘re-completed’ and posted on 4 June 2010. As the form was enclosed with HMRC’s letter dated 4 June 2010, sent to the taxpayer and not to the agents, the Tribunal was not convinced that it had been sent on 4 June.

According to HMRC’s records, the returns for February 2010, March 2010, April 2010 and May 2010 were received on 29 June 2010 and the return for June 2010 was received on 19 July 2010.

The Tribunal dismissed the appeal against all the penalties except that for February 2010, as they could find no evidence that the taxpayer’s returns had been submitted prior to 29 June 2010.

Mr Alan Thomas Davies v HMRC Commissioners

Mr Thomas, another trader within the Construction Industry Scheme, submitted a return for the period to 5 June 2010 and paid the tax due on 19 June.  However, although the payment was received by 19 June, the due date, the monthly return was not received until 22 June and a penalty notice was issued. The taxpayer had personally gone to the post office and posted the cheque and the return to separate addresses, on the same day. He appealed against the penalty.

The Tribunal accepted that, although there was no proof of posting, the cheque had arrived in good time and it was highly unlikely that the taxpayer would have made two separate trips to post the return and the cheque.

He accepted that the delay was on the part of the post office and upheld the appeal.

E&P Painting Contractors Limited v HMRC Commissioners

This is a VAT case, an appeal against two surcharge liability extensions. On a first default, a surcharge liability notice is issued, but no penalty is charged. On a second default within the surcharge liability notice period (12 months from the date of the first default) a 2% penalty is levied and the notice period extended. On a third default, a 5% penalty is charged and the period extended and so on.

The appeal was against two extensions: one for the period to November 2009, with a surcharge of £7,935.93 and the second for the period to May 2010, with a surcharge liability of £27,734.78.

The first default occurred in May 2009 and a surcharge liability notice was issued, due to expire in May 2010. The second default was in the period to August 2009; the tax due was paid in instalments and cleared by December 2009. The surcharge liability extension was to August 2010 and a surcharge of 2% imposed.

The third default was for the period to November 2009. In the absence of a return, tax was estimated at £96,049 and a 5% surcharge imposed. The liability notice period was extended until 30 November 2010; the return was finally received in July 2010. Again the tax was paid in instalments, the final payment in May 2010. However, the return showed tax due in the sum of £158,718.89 – much more than the estimated amount and a further surcharge arose.

The fourth default occurred in the quarter to February 2010; in the absence of a return, tax was estimated at £90,242 and a 10% surcharge imposed. The return was received in April 2010, showing a liability of £139,426.05 and a supplementary surcharge was levied.

The fifth default was the period to May 2010 when tax due was £217,398.57. A payment of £32,000 had been made on 21 June 2010 and was intended to be set against tax due for the period to September 2009, but was misallocated to the May 2010 period, leaving tax due of £184,898.57. A surcharge of 15% was imposed.

The taxpayer appealed against the third and fifth default surcharges. The basis of the appeal was that the November 2009 return was actually submitted on time and the payment of £32,000 made in June 2010 was erroneously allocated against the May 2010 (although the effect of this was that the overall surcharge was reduced, being offset against a 15% surcharge).

The Appellant also said he was unaware of non receipt of the return for six months, although there was no evidence of him raising a query with HMRC.

The basis of the appeal against the fifth default was that the return had been submitted on time (which was not the case) and the company was suffering severe cash flow problems, due to late payment by a major debtor. This was not accepted by HMRC.

The taxpayer had been consistently late in submitting its returns and, although aware of the 'time to pay2 facility', has made no approach to HMRC.

The appeal was dismissed.

The cases of Contour Business Interiors and Mr Alan Davies demonstrate the importance of keeping records and, indeed, evidence of posting documents. In Contour, 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. This has been challenged in other cases, but the Judge did not comment on this occasion.