Advanced Scaffolding (Bristol) Ltd v. HMRC: Tribunal Recognizes Special Circumstances for Penalty Reduction under Schedule 55 CIS Penalties

Introduction

Advanced Scaffolding (Bristol) Ltd v. Revenue & Customs is a significant case adjudicated by the First-tier Tribunal (Tax) on December 18, 2018. The appellant, Advanced Scaffolding (Bristol) Limited, a small family-owned business providing scaffolding services, appealed against penalties imposed by HM Revenue & Customs (HMRC) for late filing of Construction Industry Scheme (CIS) returns. The key issues revolved around whether the appellant had a reasonable excuse for the late filings and whether the penalties charged were disproportionate, especially considering multiple defaults arising from a single inadvertent mistake.

The parties involved include:

Appellant: Advanced Scaffolding (Bristol) Limited
Respondents: The Commissioners for Her Majesty's Revenue & Customs

The case primarily examined penalties under Section 98A of the Taxes Management Act 1970 (TMA) and Schedule 55 to the Finance Act 2009, focusing on the proportionality of penalties and the existence of special circumstances justifying a reduction.

Summary of the Judgment

The Tribunal upheld HMRC's penalties under Section 98A TMA totaling £3,000, as the appellant failed to demonstrate a reasonable excuse for the late filing of CIS returns. However, the Tribunal identified special circumstances that justified reducing the additional penalties under Schedule 55 to nil. This resulted in a total penalty payable of £3,000, considering the entirety of the circumstances surrounding the multiple defaults, which stemmed from a single genuine mistake by the appellant’s director.

Analysis

Precedents Cited

The Judgment extensively referenced several precedents to shape the Tribunal’s decision:

Welland v HMRC [2017]: This case was pivotal in considering whether multiple penalties arising from a single mistake could constitute special circumstances warranting penalty reduction.
Jagger v HMRC [2018]: Addressed the applicability of Schedule 55 penalties in relation to liabilities determined by references to tax liabilities.
Bosher [2013] UKUT 579 (TCC): Established that the Tribunal cannot reduce penalties on the basis of proportionality or unfairness under the previous penalty regime.
Collis v HMRC [2011] UKFTT 588 and Warren v HMRC [2012] UKFTT 57: Provided interpretations of what constitutes 'special circumstances' for penalty reductions.
Bluu Solutions Limited [2015] UKFTT 95: Clarified the Tribunal's discretion in considering special circumstances during penalty assessments.
Crabtree v Hinchcliffe (Inspector of Taxes) [1972]: Offered insights into the interpretation of 'special circumstances' as exceptional or unusual events.

Legal Reasoning

The Tribunal’s legal reasoning centered on interpreting the provisions of Schedule 55 to the Finance Act 2009. It meticulously dissected the definitions and limitations of 'special circumstances' under paragraph 16, juxtaposing them with existing precedents. The key points in the reasoning included:

Applicability of Paragraph 17(3): The Tribunal analyzed whether the penalties under Schedule 55 refer to liabilities determined by reference to tax, ultimately extending the interpretation to include liabilities related to CIS deductions.
Definition of Special Circumstances: Drawing from cases like Welland and Warren, the Tribunal concluded that special circumstances could encompass multiple penalties arising from a single mistake, especially when combined with other mitigating factors.
Consideration of Overall Circumstances: Rather than evaluating each factor in isolation, the Tribunal assessed the cumulative effect of factors such as multiple defaults from a single mistake, a genuine error, a good compliance record, and minimal tax deductions due.
Policy Intent: Emphasized that Parliament intended penalties to discourage non-compliance while allowing discretion for exceptional cases to prevent disproportionate penalization.

Impact

This Judgment has several implications for future cases involving CIS penalties:

Clarification on Special Circumstances: It reinforces that multiple penalties resulting from a single inadvertent mistake can be considered special circumstances, especially when the taxpayer demonstrates a genuine error and has a good compliance history.
Tribunal Discretion: Affirms the Tribunal’s authority to assess and reduce penalties based on the entirety of the circumstances, thereby offering taxpayers avenues for penalty mitigation beyond the strict interpretation of the law.
Guidance on Reasonable Excuses: Sets a precedent that mere ignorance of the CIS obligations, even if genuine, does not constitute a reasonable excuse unless it aligns with the stringent criteria established by the Tribunal.
Balance between Compliance and Fairness: Highlights the balance the legal system seeks between enforcing tax compliance and ensuring penalties are fair and proportionate to the taxpayer's circumstances.

Complex Concepts Simplified

To enhance understanding, the Judgment involves several complex legal concepts that can be simplified as follows:

Construction Industry Scheme (CIS): A HMRC initiative requiring contractors in the construction industry to deduct tax from payments made to subcontractors and report these deductions.
Schedule 55 to the Finance Act 2009: A legislative framework outlining penalties for late submissions of CIS returns, including provisions for special circumstances that may warrant penalty reductions.
Reasonable Excuse: A legal defense where the taxpayer must demonstrate that their failure to comply with a tax obligation was due to circumstances beyond their control, making compliance impossible or unreasonable.
Special Circumstances: Exceptional situations that deviate from the norm, allowing for discretion in reducing penalties. These are not merely errors or oversights but specific conditions that significantly mitigate the taxpayer's culpability.
Tribunal's Judicial Review Power: The authority of the Tribunal to evaluate whether HMRC has properly exercised its discretion, particularly in assessing special circumstances for penalty reduction.

Conclusion

The Tribunal's decision in Advanced Scaffolding (Bristol) Ltd v. HMRC underscores the nuanced approach required in adjudicating tax penalties. While it upheld the penalties under Section 98A TMA due to the absence of a reasonable excuse, it acknowledged the presence of special circumstances under Schedule 55 that justified reducing additional penalties. This case exemplifies the legal system's commitment to fairness by recognizing that multiple penalties arising from a single mistake, especially within a compliant and small business framework, warrant consideration for reduction. The Judgment provides clarity on interpreting 'special circumstances' and reinforces the importance of comprehensive evidence in penalty mitigation.

For practitioners and taxpayers alike, this case serves as a reference point for understanding the boundaries of penalty assessments and the potential for relief in cases of genuine, albeit inadvertent, non-compliance within the CIS framework. It highlights the importance of maintaining accurate compliance records and seeking professional advice when navigating complex tax obligations.