Wednesday, March 31, 2010



To date taxpayers who have claimed recourse to the Human Rights Act in tax appeals have had little success. So have taxpayers who have sought to avoid penalties for errors in relation to the Construction Industry Scheme (CIS). HMRC seem to expect the construction industry to be far more conscientious and more knowledgeable about tax than other businesses of a comparable size.

The problem with the Human Rights Act 1998 is that the right most likely to be infringed by the tax system is the protection of property and the law caveats that by allowing the State to deprive a person of his property “in the public interest”. The public interest in the efficient collection of taxes wins hands down virtually every time.

The decision of the First-tier Tribunal in SKG (London) Ltd is accordingly a breath of fresh air. SKG is run by Mr Higgins and his son. It started in March 2008, taking over Mr Higgins’ family business. It supplies conservatories. Mr Higgins handled his own VAT but his accountants handled the payroll. In February 2009 Mr Higgins felt that he had got the VAT into a muddle and called on his accountants for help. The accountants reviewed the records and discovered that in July 2008 the company had used a sub-contractor and the sub-contractor had invoiced the company for his services net of tax. The accountants told Mr Higgins that he should have registered under CIS and that he owed the tax to HMRC. The accountant registered the company for CIS and sent a return for the month to 5 August 2008 together with a cheque for the tax to HMRC on 11 March 2009. The form declared that the company did not anticipate paying any sub-contractors in the next six months – which by March had, of course, already passed. The payment was a “one-off”.

So what did HMRC do? Say “thank you” and ask if the company envisaged using sub-contractors in the future? I don’t know. What I do know is that in February 2009, i.e. just after it had been asked to register the company for CIS and without waiting for submission of any CIS returns, HMRC sent the company two penalty notices for £700 and £2,100 respectively. The £700 was a penalty of £100 a month for each of the months from 5 August 2008 to 5 March 2009. It should be noted that the return for the month to 5 March 2009 was not even overdue; indeed the month hadn’t yet finished on 28 February 2009 when the notice was issued. The £2,100 was a further penalty of £600 for the September return, £500 for the October one and so on because the CIS penalty is £100 per month for every month the return is late.

The tax legislation provides that where a person had a reasonable excuse for not doing something required to be done by the due date, he is deemed to have done it by that date if it did it within a reasonable time after the excuse ceased. Mr Higgins’ accountant said that the company had been honest throughout, the delay had been due to its proprietors failing to understand the tax system, and that the problem had been rectified as soon as the accountants identified it. HMRC told the Tribunal that, “HMRC take the view that a “reasonable excuse” is confined to one where an exceptional event beyond a person’s control has prevented the person making a return on time”. I must say that’s news to me. I have specialised in tax for 45 years and have never heard that before. It is certainly not what the legislation says.

Mr Higgins also said that a penalty of £2,800 for paying £1,119.40 seven months late is disproportionate and unfair. Proportionality, like Human Rights, is a European concept. The Tribunal thought that Mr Higgins might have a point and adjourned the case to hear arguments on proportionality. HMRC subsequently decided to withdraw the penalty notices.

Accordingly it is still not clear to what extent proportionality applies to fixed penalties. It is however clear that if a taxpayer thinks that penalties are disproportionate he should raise human rights as a defence. It may be that, as in this case, HMRC will, on reflection, feel disinclined to contest the point.



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