. DECISION
1. Introduction
2. Mr. Koleychuk
seeks to appeal against a large number of £100 penalties and final penalties of
£300 and £600 assessed under the construction industry scheme for his failure
timeously to deliver nil returns under that scheme to HMRC for periods between
March 2009 and January 2010. He also seeks to appeal against a penalty in
respect of the February 2009 period in which he delivered a return late.
3. These
penalty determinations were issued in batches in May, July, August, October,
and November 2009, and in May and July 2010. The penalty notices informed the
recipient of his rights to appeal and stated that any appeal must be made
within 30 days the date of the notice.
4. Mr. Koleychuk
did not make any appeal within those 30 day periods.
5. The first
issue before us is whether the tribunal should extend the time in which Mr. Koleychuk
should be permitted in respect of any of these penalties to appeal. If the
tribunal decides to extend time, the second issue is whether any of the
penalties should be set aside.
6. We deal
with the detail of legislation later. However we should explain at this stage
that the legislation requires a relevant person to make returns of payments he
has made to subcontractors in periods ending on the 5th of each
month (in this decision we call the return for the period ending 5 March, the
“February return” and so on). The legislation requires nil returns to be made
in certain circumstances. The returns are required to be made by the 19th of
the month in which the return period ends. If the returns are not made in time
a penalty is charged. The penalty is £100 if the return is delayed for one
month and a further £100 for each subsequent month the return is delayed. A
larger penalty is payable once a return is more than 12 months late. The
penalties are notified by the sending of penalty notices to the taxpayer.
The Evidence
7. We decided
to hear the evidence in relation to all these matters and to reserve our
decision in relation to all these issues.
8. Mr. Koleychuk's
English was poor. Mrs Burjak acted on his behalf as his interpreter and also
gave evidence of her own of her involvement with his affairs. She brought no
documentation with her and so was unable to produce any written evidence or to
refer to her files to assist with the tribunal’s questions. Her evidence about
the documents she had received and sent to Mr. Koleychuk was sketchy. The
evidence from her directly and through her translation from Mr. Koleychuk as to
the dates of events was uncertain and occasionally inconsistent. She was a
forceful advocate who would have been a better one if she had come properly
equipped and prepared.
The Facts
9. We find
the following facts.
10. Mr. Koleychuk works as a
building labourer. His main work was, at the relevant times, plasterboard
fixing. He worked for contractors on building sites. He would be engaged by a
contractor whose site manager would allocate parts of the building to him in
which he would be required to fix plasterboard. A different area would be
allocated to him each day and his work inspected and monitored. If it was
deficient he would be told take it out down and start again. Other areas would
be allocated to other workers. The work would continue until the available work
at the site was finished. Then he would look for other work on a new site.
11. Work on a site would last
from a few weeks to a few months. While working on the site Mr. Koleychuk had
no other source of income.
12. Mr. Koleychuk was treated by
the contractors as a subcontractor rather than an employee for tax purposes.
Tax was deducted from payments made to him under the CIS scheme.
13. In February 2009 Mr. Koleychuk
had back problems and as a result could not do all the work required of him. He
realised that he would lose his contract and that he should do something. He
engaged (and paid) a worker to work alongside him to do the tasks he could not
do. This stopped before the end of February 2009. Thereafter he returned to his
normal mode of work.
14. In May 2009 Mr. Koleychuk
approached Mrs Burjak's firm for help with his 2008/2009 tax return. Prior to
that date he had had some help with his tax affairs from another accountant and
had spoken informally to Mrs Burjak. In May 2009 Mrs Burjak realised that Mr. Koleychuk
had engaged a subcontractor and advised him to register under the CIS scheme.
15. He was registered under that
scheme on 20 May 2009 and received an information pack from HMRC together with
return forms. He submitted CIS returns for the periods from February to May
2009 in June 2009. They were received by HMRC on 16 June 2009.
16. Mr. Koleychuk moved house in
July 2009. He lived at his new address for the next two years. It was not clear
whether or during what period returns and penalty notices had been sent to his
old address. Some were sent thither, and from time to time Mr. Koleychuk went
there and found or was given some or all of them. It was not clear when or
whether Mr. Koleychuk notified his change of address to HMRC.
17. Mr. Koleychuk's form of
appeal had annexed to it a copy of a letter dated 5 March 2009 addressed to
HMRC. That letter gave a PAYE reference and an HMRC accounts office reference.
Those references were not the CIS scheme references later provided by HMRC to
Mr. Koleychuk on his registration under the scheme. The letter said "I
would like to inform you that in the nearest future I am not going to have
subcontractors. I will inform HMRC if I will need to make CIS declarations.
Please do not send me monthly returns."
18. The provenance of this
letter was unclear. Mr. Koleychuk suggested its writing had been prompted by
his first accountant or possibly as a result of informal conversations with Mrs
Burjak before he formally engaged her to help with his tax affairs. Miss Weare
could not say that HMRC had received the letter and, given the references on it,
it seems to us that its receipt would have been unlikely to have been tied to
Mr. Koleychuk's records. It was dated after Mr. Koleychuk had made the payments
in February to his helper but before the date of his registration under the CIS
scheme.
19. We believe that it is likely
that the letter was written after 5 March 2009 and that its date referred to
the last period in which Mr. Koleychuk engaged a subcontractor (since the return
periods for PAYE and the CIS scheme end on the fifth of each month). The PAYE
and accounts office references may well have been those of the contractor for which
Mr. Koleychuk was working at the time the letter was written. It may have been
posted to HMRC at some time after May 2009, but the evidence before us was not
sufficient to conclude that it was likely that it had been.
20. Mrs Burjak told us that she
had told Mr. Koleychuk to put a tick in the box on the May 2009 CIS return
indicating that he would not have any subcontractors in the next six months.
She believed he had done so. However the copy of the return produced to us and
received by HMRC had no entry in this box. We conclude that Mr. Koleychuk did
not make one. We believe that he did not understand the English in the form
well enough to make the necessary entry or forgot or misunderstood Mrs Burjak’s
instructions.
21. After June 2009 Mr. Koleychuk
made no further CIS returns until 16 August 2010. In the meantime he was sent
blank CIS returns by HMRC and HMRC sent him penalty notices for the failure to
deliver returns on time.
22. The following penalty
notices were sent:
(1)
on 29 May 2009 10 notices in respect of the delayed returns for
February, March and April 2009.
(2)
one notice on 3 July 2009 for the late return for May 2009;
(3)
two notices sent on 31 July 2009 in respect of May and June 2009;
(4)
three notices on 28 August 2009 in respect of the late returns for May, June
and July 2009;
(5)
Four notices on 2 October 2009 in respect the late returns for May, June,
July and August 2009;
(6)
Five notices on 30 October 2009 in respect of the late returns for May, June,
July, August and September 2009;
(7)
Six notices on 27 November 2009 in respect of the late returns for May
toOctober 2009;
(8)
39 notices on 12 May 2010 in relation to delayed returns for May 2009 to
December 2009;
(9)
8 notices on 28 May 2010 for May 2009 to December 2009;
(10)
8 notices on 2 July 2010 for the same period;
(11)
and 7 notices on 30 July 2010 for the same period.
23. The total penalties assessed
and under appeal amount to £10,000.
24. As a result of his change of
address Mr. Koleychuk may not have received all the penalty notices immediately
after their issue but he told us that he had found some of them on their visits
to his previous house. Mrs Burjak said that she thought that Mr. Koleychuk
first contacted her about the notices in 2010 but she was unable to tell us the
date on which that contact had been made because she had no documentation with
her. She told us that she had told Mr. Koleychuk that he should fill in the returns
and make an appeal against the penalties, but that if he did fill in the
returns (as nil returns) HMRC would reduce the penalties to nil (as she said
had happened with other clients).
25. HMRC’s Debt Management unit
wrote to the appellant in August, and November 2009 and August and November
2010 about the debt accruing by reason of the penalty notices.
26. For the period ended 5 February
2010 and 5 April 2010 HMRC accepted that Mr. Koleychuk had made nil returns by
telephone. The penalties originally assessed for these months were cancelled.
27. There was correspondence
between Mr. Koleychuk (or his advisers) and HMRC in 2010. HMRC made an offer to
reduce the penalties to £6,400 in total. Mr. Koleychuk notified his appeal to
the tribunal on 21 January 2010.
28. In April 2010 Mr. Koleychuk
was hit by a car. His shoulder was injured and he was unable to pursue his
normal work. Later in 2010 his wife had serious problems with a pregnancy.
The parties' arguments
29. Mrs Burjak says that the
penalties notified after May 2009 are wholly unfair. Mr. Koleychuk had no
subcontractors and no tax went unpaid. Mr. Koleychuk has difficulties with
English. His income is small and he cannot afford expensive accountancy or
legal advice. These penalties amount to half his annual income; they are not
just harsh.
30. She says that Mr Koleychuk’s
difficulties with English mean that it is difficult for him to deal with HMRC
on the telephone and no facilities are provided for face-to-face discussion.
For someone who has difficulties with the language face-to-face discussion is
the only effective way of communicating. Mr. Koleychuk's circumstances should
be taken into account.
31. Miss Weare noted that the
appeals were out of time. She noted that no explanation had been put forward
for the delay. If the tribunal were minded to admit the late appeals then she
made the following points.
32. First she said that the
tribunal had no jurisdiction to address the proportionality of the penalties.
Any proportionality challenge could be by way of judicial review in the High
Court only.
33. There was no evidence on
which the tribunal could conclude that Mr. Koleychuk had a reasonable excuse
for his failure to deliver the returns on time.
34. The submission of returns in
June 2009 showed that Mr. Koleychuk was aware of the requirements of the CIS
regime. He had had the information pack and he was sent the returns.
35. The receipt of
the batches of penalty notices during 2009 must have made Mr. Koleychuk aware
that he was in default.
The Law
36. The construction industry
scheme in the form relevant ot this appeal was introduced by Finance Act 2004.
The primary legislation was supplemented by regulations, namely SI 2005/2045.
The scheme provides for certain payments made by a “contractor” to
subcontractors to be made under deduction of income tax. Subcontractors who are
registered for gross payment may receive payment without deduction.
37. A “subcontractor” is defined
by section 58 thus:
“For the purposes of this Chapter a party to a contract
relating to construction operations is a sub-contractor, if under the contract-
(a) he is under a duty to the
contractor to carry out the operations, or to furnish labour …or the labour of
others in the carrying out of operations or to arrange for the labour of others
to be furnished in the carrying out of operations; or
(b) he is answerable to the
contractor for the carrying out of the operations by others…”
36. Regulation
1 of the Regulations defines “contractor” to have the same meaning as in
section 57 FA 2004. Section 57 FA 2004 defines "construction contract”
and, in subsection (2)(b), “contractor”:
“(2) In this chapter "construction contract"
means a contract relating to construction operations (see section 74) which is
not a contract of employment but where --
(a) one party to the contract is a subcontractor (see
section 58); and
(b) another party to the contract ("the
contractor") either --
(i) is a subcontractor under another
such contract relating to all or any of the construction operations, or
(ii) is a person to whom section 59
applies."
37. Section 59
describes 12 classes of person. They include the Crown, the NHS and local
authorities. But the first category is:
“(a) any person carrying on a business which includes
construction operations".
39. Section 70 deals with periodic returns by “persons who
make payments under construction contracts” .It permits the Board of HMRC to
make regulations about such returns. Under subsection (1) permission is given
to make regulations to require persons "who make payments under
construction contracts” to make returns in relation to such payments.
Subsection (2) provides that provision made in those regulations may include
provision requiring:
"(d) a return to be made where no payments have been
made in the period to which the return relates."
40. We note that
this permits regulations to be made only in relation to “persons who make
payments under construction contracts”. There are two points to
make. First that if a person is merely a contractor, but not a person who “make[s]
payments” then the Regulations cannot make, and cannot be treated as making,
any provision requiring him to make returns.
41. Second, the
words “who make payments” implies an element of continuity. In our view, on a proper
construction of this phrase, a person who has made payments and will never make
them again is not a person who “makes” payments; on the other hand a person who
has made payments will continue to be a person who makes payments until there
cease to be arrangements by virtue of which he may make them.
42. A
proper construction of “makes” must of course be made in contemplation of the
section as a whole. Subsection (2)(d) is part of the whole. It specifically
authorises the making of a requirement to submit returns where no payments have
been made in the period. The approach to “makes” outlined above does not
deprive this provision of effect: a person who makes a payment in January, and
who is subject to arrangements under which he will make payments in March,
will, in February, be a person who “makes” payments.
43. Nor does it
seem to us that the legislative purpose of that subsection requires some
broader meaning of “makes” so as to encompass a person who at some past time
has made payments but has not given notification of his cessation: once a
person has ceased to be someone who makes payments there is no need for HMRC to
have any interest in him, but if he simply does not make one in the relevant
month, there is an interest in monitoring his actions and, through the return
obligation, reminding him of his continuing obligations under the scheme.
44. Finally we
note that we have paid no heed to the terms of the Regulations in construing
the Act: secondary legislation can be no guide to the construction of primary
legislation. The words of Regulation 4(11) quoted below provide a sensible way
by which a person who is, or is about to become a person who no longer makes
payments, may make his position clear – for his own benefit and that of HMRC.
But whilst providing a good workable administrative solution it does not help in
construing the words of the Act under which it is made.
45. Regulation
4 (1) provides that a “return must be made to HMRC not later than 14 days after
the end of every tax month by a contractor making contract payments”. “Contract
payments” are (by section 60 FA 2004 and regulation 1) payments made under
construction contracts and made by the contractor to a person who is a
subcontractor. A tax month is defined as the period beginning on the 6th day of
the calendar month and ending on the 5th day of the next. The return
must be made by the 19th of the month following that to which the substantial
part of the return relates.
46. Thus an
obligation arises to make a return arises only if (a) the person is a contractor,
and (b) he is a person who “makes” payments under construction contracts.
47. Regulation
4 paragraphs (10) to (13) are particularly relevant to this appeal. They
provide:
"(10) If a contractor who has made a return, or
should have made a return, under this regulation makes no payments under
construction contracts in the tax month following that return, the contractor
must make a nil return not later than 14 days after the end of that tax month.
This is subject to paragraph (11).
(11) Paragraph (10) does not apply if the contractor has
notified the Commissioners for her Majesty's Revenue and Customs that the
contractor will make no further payments under construction contracts within
the following six months.
(12) Subject to paragraph (13), section 98A TMA (special penalties
in the case of certain terms) applies to the requirements in -
paragraph (1), ... [and] ... paragraph (10).
(13) A penalty under section 98A of TMA in relation to a
failure to make a return in accordance with paragraphs (1) or (10) arises each
month (or part of a month) during which the failure continues after the 19th
day of the sixth month following the appointed day.”
48. We note
that regulation (11) requires no particular form for such notification: it may
be by letter, fax, email, phone or face to face.
49. Section 98A
TMA provides relevantly as follows:
"(2) Where this section applies in relation to a
provision of regulations, any person who fails to make a return in accordance
with the provision shall be liable --
(a) to a penalty or penalties of
the relevant monthly amount each month (or part of a month) during which the
failure continues ...
(b) if the failure continues beyond 12
months, without prejudice to any penalty under paragraph (a) above, to a penalty
not exceeding…(ii) in the case of a provision of regulations made under section
70(1)(a) or 71 [FA]2004, £3000.
“(3)
For the purposes of subsection (2)(a) above, the relevant monthly amount in the
case of the a failure to make a return -- (a) where the number of persons in
respect of whom particulars should be included in the return is 50 or less,
£100 ...”
50. Section
118(2) TMA provides:
"(2) ... 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 ceased."
Discussion
51. We consider first whether
appeals should be permitted out of time.
52. Mrs Burjak indicated that,
if permission was given to appeal out of time , the appellant did not wish the
case to be referred for a formal review by HMRC, and that the appeal should be
considered by the tribunal.
53. In deciding whether to
permit Mr Koleychuk to appeal out of time the tribunal must seek to act justly
and fairly. That involves taking into account all relevant factors and
performing a balancing exercise. Rule 3.9(1) of the Civil Procedure Rules
contains a list of factors to be taken into account by a court in similar
circumstances. We should also normally have regard whether the applicant has a
good prima facie case; in this case we had the advantage of hearing all the
parties’ evidence and submissions so we are therefore able to be clearer in our
assessment of the strength of the case. The following considerations appeared
to us to be relevant:
(1)
that the administration of justice was generally best served by the
adherence to time limits prescribed by statute;
(2)
that the failure to appeal promptly did not appear to us to have been
intentional but arose as a result of Mr Koleychuk’s limited means, limited
English, and lack of understanding of the system;
(3)
that the penalties at issue are in aggregate very large in relation to
Mr Koleychuk’s means and would bear heavily on him;
(4)
that in relation to the later penalties it seemed to us that there was a
good case that they were not exigible;
(5)
that HMRC would not in the circumstances be put to extra expense if we
extended the time limit for appeal, nor would uncertainty be created over its
tax collection, although it could lose the benefit of the assessed penalties.
54. In our judgement these
factors indicated that an extension of time should not be allowed in relation
to the penalties notified on 29 May 2009. At that time Mr Koleychuk was dealing
with, and could reasonably have sought advice from his accountant . In relation
to those penalties he has in our view no reasonable excuse for his delay and no
tenable argument that they are not due.
55. By contrast in relation to
the penalties notified on and after 3 July 2009, Mr Koleychuk’s move and the
consequent late receipt of at least some of the penalty notices, his limited
means to pay for advice, from April 2010 his injury, and the strength of the
case that the penalties were not due caused us to conclude that an extension of
time to appeal should be granted.
The Merits
56. In February 2009 Mr. Koleychuk
was a party to a contract relating to construction operations (plaster boarding)
and under that contract was under a duty to carry out the operations or to furnish
labour to carry out those operations. As a result he was, for the purposes of
section 59, a subcontractor.
57. We then asked whether the
contract between Mr. Koleychuk and the worker he engaged was a
"construction contract" within section 57. It would be such a
contract only if:
(1)
it was not a contract of employment;
(2)
one party (the worker) was a subcontractor; and
(3)
the other party (Mr Koleychuk) was a subcontractor under another such
contract or a person carrying on a business which included construction operations.
58. There was no evidence before
us as to whether the contract between the worker and Mr. Koleychuk was or was
not a contract of employment. If it was a contract of employment it could not
be a construction contract. But, given that the February 2009 CIS return was
made on the advice of his accountant, it seems likely that there was some
evidence that the worker was not an employee. On the evidence before us we find
that it was not proved that he was not an employee.
59. On the bases that the
contract between Mr. Koleychuk and his worker was not one of employment, and
that Mr. Koleychuk himself was not an employee (which was not questioned by Mrs
Burjak) that contract would be a construction contract because the worker would
be a subcontractor within section 58 and Mr. Koleychuk would also be a
subcontractor by reference to his contract with his main contractor.
60. As we have noted, section 70
permits regulations to be made requiring returns to be made by "persons
who make payments under construction contracts". On the basis recorded
above that neither Mr. Koleychuk nor the worker were employees, the payments
made by Mr. Koleychuk to his worker would have been payments under a
construction contract, and as a result Mr. Koleychuk would in February 2009
have been such a person and the regulations could apply to him.
61. In March 2009 we believe
that Mr. K could still properly be called a person who “makes payments under
construction contracts”. He had made such payments in the previous period and
the reason that he had made them (his bad back) had only just ceased.
62. In April 2009 the shadow of
his previous need for help, and the possibility that it might recur, persuades
us that Mr Koleychuk could still properly be described as a person who made
such payments and was therefore a person to whom the regulations could apply.
63. But by May 2009, two months
had passed since Mr Koleychuk engaged another person to do construction work in
his stead. By then the problems with his back were history and he was, we
believe, working on his own again. By then the arrangements which gave rise to
his having made payments had clearly ceased and he could not properly be
described as a person who makes payments under construction contracts. His
activity was providing his own labour in controlled circumstances for another, and
did not encompass arranging for others to work him.
64. From May onwards we do not
believe that Mr Koleychuk could properly be described as such a person.
65. As a result in our judgement
from May onwards Mr Koleychuk could not be, and was not, required by the
regulations to make any returns. As a result his failure to make them was not a
failure to which regulation 4(13) could apply, and no penalty arose under
section 98A in respect of any such failure.
66. However Mr Koleychuk was a
person to whom the regulations did apply in February and March and April 2009.
In those months he failed to provide a return by the stipulated time and
regulation 4(13) applied. As a result the penalties of £400 in respect of the
February return, £300 in respect of the March return, and £200 in respect of
the April return were properly exigible unless he had a reasonable excuse for
his failure.
67. We do not believe that Mr
Koleychuk had a reasonable excuse for his failure. He may not have been aware
of his obligations to make returns but ignorance of the law cannot be a
reasonable excuse. No other reason for his failure was advanced in relation to
the period before June 2009 other than perhaps his difficulty with English. But
no link was made between that difficulty and his failure to make these early
returns.
68. We therefore find that the
penalties in respect of the February, March and April returns were properly
chargeable. Section 118 TMA does not provide an escape.
69. Miss Weare suggested that
this tribunal did not have jurisdiction to deal with the question of
proportionality. We disagree. Section 7 of the Human Rights Act 1998 provides
that "a person who claims that a public authority has acted ... in a way
which is made unlawful by section 6 (1) may ... rely on the Convention right in
any legal proceedings." Proceedings before this tribunal constitute legal
proceedings and this tribunal therefore has the power and the duty to consider
the effect of any such claim of unlawful action.
70. Section 6(1) provides that it
is unlawful for a public authority to act in a way which is incompatible with a
Convention right. If the assessment of the penalties under appeal was made
unlawful by section 6(1) the tribunal would have to take account of that fact.
71. However section 6(2)
provides that section 6(1) does not apply to acts of an authority which are
compelled by primary legislation or which were to give effect to such
legislation. In Bysermaw [2007] UK SPC 644 the Special Commissioers
found that as a result of this provision section 7 HRA could not be relied on
in relation to CIS penalties.
72.
73. However, we have found that
only some £1000 of penalties are exigible in respect of his failure to deliver
returns on time. It is clear to us that a penalty of £1000 bears harshly upon Mr
Koleychuk but it does not seem to us to be wholly unfair in the circumstances.
As a result it cannot be disproportionate and we have no need to consider the
application of section 7(1) of the Human Rights Act.
Conclusion
74. We allow the appeal in
respect of the penalties issued after 29 May 2009.
75. Had we extended time for
appealing the earlier penalties we would have dismissed the appeal in relation
to the penalties levied in respect of the periods ending on 5 February, March,
and April 2009 and allowed the appeal in respect of the penalty for the period
5 May 2009. The appeals in relation to these periods are struck out.
76. The result is that in
aggregate penalties of £1,000 are properly payable.
Rights of Appeal
77. 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.
CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 09 February 2012
