Out of proportion!

By | 28 June 2022

HM Revenue and Customs (HMRC) promises in its ‘Charter’ to “treat you fairly”. However, in practice HMRC can sometimes seem heavy-handed when applying its powers.

Many appeals by taxpayers to the tax tribunal concern the imposition of penalties by HMRC. The rates and amounts of penalties can be eye-watering. For example, the standard maximum penalty for tax return errors, etc. (i.e., involving offshore matters or transfers in certain jurisdictions) is 200% of the potential tax.

Damage to the business

However, HMRC sanctions for non-compliance are not limited to financial penalties. An important example relates to the construction industry scheme (CIS). Subcontractors can obtain ‘gross payment status’ from HMRC (i.e., so they can be paid by contractors without deduction of tax at source) if certain conditions are satisfied. However, HMRC can cancel gross payment status at its discretion if (among other circumstances) there have been compliance failures (FA 2004, s 66(1)).

The cancellation of gross payment status can have a devastating cashflow effect on businesses in the CIS. Unfortunately, HMRC is not required to take such effects into account when deciding whether to exercise its discretion to do so (JP Witter (Water Well Engineers) Ltd v HMRC [2018] UKSC 31).

However, in RMF Construction Services Ltd v Revenue and Customs [2021] UKFTT 9 (TC), the First-tier Tribunal (FTT) held it should be able to consider whether HMRC’s ‘punishment’ of withdrawing gross status would be proportionate in the circumstances. In that case, HMRC conducted a scheduled compliance review of the appellant company in September 2011 to ensure the company was meeting its obligations under the CIS. HMRC identified compliance failures and subsequently withdrew the company’s CIS gross payment status. The company appealed to HMRC, and subsequently to the FTT.

So long ago…

The company’s grounds of appeal included that there had been a significant amount of time since the compliance failures. It had been eight years since its appeal to HMRC was rejected, nine years from the date HMRC carried out their review and more than 10 years from the end of the accounting period under initial review.

There had been various compliance failures (e.g., a late corporation tax return). The FTT concluded that the withdrawal of CIS gross status over eight years after the ‘offence’ of the company’s failure to file its corporation tax return on time (plus other minor infringements) would be totally disproportionate. The objective of the CIS (i.e., the enforcement of compliance) had been achieved by the mere threat of the withdrawal of gross status; to carry through on that threat by withdrawing gross status now (i.e., when the company had been fully compliant since that time) would serve no useful purpose whatsoever and was therefore disproportionate. The company’s appeal was allowed.

Practical point

Penalties and other sanctions for tax compliance failures (e.g., fixed and daily penalties for the late filing of an individual’s self-assessment return) are generally subject to specific appeal procedures for those affected. Consider an appeal in appropriate circumstances where HMRC’s sanctions are unfair or disproportionate. HMRC also has a wide discretionary power to mitigate any penalty (TMA 1970, s 102). Remember the old saying: “if you don’t ask, you don’t get!”

The above article was first published by Business Tax Insider (August 2021) (www.taxinsider.co.uk).