In Barking Brickwork Contractors Limited v HMRC[1], the First-tier Tribunal ("FTT") decided that a taxpayer had a reasonable excuse for late filing and set aside the penalties which had been charged by HMRC pursuant to Schedule 55, Finance Act 2009.

Background

Mr Burling is the sole director of a small brickworks, Barking Brickworks Limited (the "Appellant"), which undertakes a variety of construction projects for domestic and commercial clients.

Until 2010, the Appellant engaged its own sub-contractors and, pursuant to Regulation 4, Income Tax (Construction Industry Scheme) Regulations 2005, filed Construction Industry Scheme ("CIS") returns each month detailing payments made to sub-contractors and the amounts of tax withheld.

The Appellant's bookkeeper made regular returns until October 2010. At that time, the Appellant contracted with an agency which took care of its sub-contractor needs. That agency had "gross payment" status for the purposes of the CIS, which meant that the Appellant could pay it without deduction of any tax.

The Appellant continued to file CIS returns, but these were always for nil amounts. The Appellant's bookkeeper took the view that the payments made to the agency were an ordinary business expense rather than a payment to sub-contractors as such. This view appears to have crystallised around the time of a call made by the bookkeeper to HMRC early in 2011. The bookkeeper called HMRC's helpline and attempted to submit a nil return by telephone.  HMRC asked her to confirm that no sub-contractors had been paid and indicated that penalties may be due if the information given was false. The bookkeeper, believing that she was paying an agency rather than a sub-contractor, confirmed the position.

A month or two later the bookkeeper left the Appellant at short notice and Mr Burling's daughter stepped into the breach. She had no previous experience of bookkeeping. Mr Burling candidly accepted during the hearing before the FTT that he was similarly unfamiliar with the workings of the back office. Believing that his former bookkeeper had been running things correctly, however, he instructed his daughter to follow the process operated by her predecessor.

This she did, and having continued with the nil return filling she attempted to file over the telephone. The person she spoke to at HMRC suggested, as she was regularly filing nil returns, that it would be possible for the Appellant to move to 6 monthly returns and the Appellant did this for the period December 2011 to October 2013.

During a routine compliance check carried out by HMRC on 22 October 2013, HMRC identified that the Appellant should file monthly and include the gross sum paid to the agency. Later that same day, the Appellant provided all the returns necessary to correct the position.

As all the relevant tax had been accounted for by the agency, this error led to no tax loss to the Exchequer, however, HMRC issued penalties to the Appellant for late filing in the sum of £12,700. The Appellant appealed the penalties to the FTT, arguing that it had a "reasonable excuse", within the meaning of paragraph 23, Schedule 55, Finance Act 2009, for its compliance failure.

FTT's decision

The Appellant argued that the misunderstanding had arisen as a consequence of the initial call which its bookkeeper had with HMRC early in 2011. This misunderstanding was compounded by the change in staff and the further suggestion by HMRC that the Appellant was able to move to 6 monthly returns.

HMRC argued that ignorance of the law is no excuse and that the Appellant could have consulted its guidance which would have indicated the correct course. HMRC was of the view that the Appellant had not heeded the guidance given during the first call regarding the possibility of penalties and that there was no obligation on HMRC to provide more information to the Appellant than it had - it was for the Appellant to ensure that the procedure was applied correctly, not HMRC.

In HMRC'S view a "reasonable excuse" could only be found if a person has been prevented from submitting a return by events "outside of their control" after they have taken reasonable care to comply with the requirements placed upon them. HMRC did not accept that the Appellant had taken reasonable care and accordingly it did not have a reasonable excuse.

The FTT rejected HMRC's argument that the Appellant had not acted on the advice it had provided. In the view of the FTT, it was clear that the information provided to the Appellant during both the first and later call was incomplete. Although the FTT accepted that HMRC was under no obligation to provide information, in circumstances where it did, that advice must be complete and accurate[2] and in this instance HMRC had not complied with that obligation.

The FTT was similarly unimpressed with the suggestion that the answer could be found in HMRC's guidance material. The FTT commented:

"… it cannot reasonably be assumed that a taxpayer will have read all [of the guidance]. Indeed, the very volume of the information makes it unlikely that even the most conscientious of taxpayers will have done so".

In any event, the Appellant believed what it was doing was correct, consequently it would not have occurred to it that it should consult HMRC's guidance.

In the view of the FTT, HMRC construed the words "reasonable excuse" too narrowly. The correct test was outlined in The Clean Car Company Ltd v CCE[3]:

"… reasonable excuse should be judged by the standards of reasonableness which one would expect to be exhibited by a taxpayer who had a responsible attitude to his duties as a taxpayer but who in other respects shared such attributes of the particular appellant as the tribunal considered relevant to the situation being considered".

Taking into account the facts and attributes of the Appellant, the FTT concluded that the Appellant had a reasonable excuse and allowed its appeal.

Comment

There is an increasing tendency on the part of HMRC to attempt to limit and compartmentalise the exercise of its own discretion. It is, of course, important that HMRC attempts to deal with taxpayers consistently, however, in cases such as this the legislation cries out for the HMRC officer concerned to view matters in the round and reach a sensible and realistic view. Surely it must have been evident that this small business had done its best to comply with the regulations and, when the error was identified, it was corrected immediately.

The exercise of a discretion, by its very nature, cannot be arbitrary and HMRC would do well to be more reasonable when considering what constitutes a "reasonable excuse".

Please click here for the judgment.