What the Contractors Support Limited FTT case means for PSCs
An interesting and relevant judgment for contractors, and not just because of the appellant’s name ‘Contractors Support Limited,’ has been handed down by the First-Tier Tribunal (FTT) with, unsurprisingly perhaps, interesting take-aways for contractors who are limited companies, writes HMRC dispute expert Jesminara Rahman, founder of Tax Resolute UK.
In fact, the tribunal case of Contractors Support Limited v The Commissioners for HMRC  UKFTT 744 (TC), heard on July 25th 2023, supports contractors who are personal service companies (PSCs) in helping along their understanding in four key areas:
1. What are your responsibilities as a director?
2. What records are meant to be maintained by law even if your company is dormant?
3. What constitutes an appeal?
4. Is it a ‘reasonable excuse’ that the appeal is late because you were in the process of engaging an agent?
What are your responsibilities as a director?
In the case, HMRC was seeking clarification as to how the current director engaged from April 15th 2021 was able to sign off company tax returns for accounting periods ending on November 21st 2017; November 30th 2017, November 30th 2018 (submitted on May 14th 2017), in addition to a return for the accounting period ending November 30th 2020 (submitted on June 18th 2021).
The director submitted four tax returns soon after he was engaged on April 15th 2021. The previous director stated that the company was dormant and therefore there was no information and documents to provide to the new director. The current director claimed he had no information and no access to the company records.
HMRC issued an information notice (under Schedule 36 Finance Act 2008), which requested information and documents required to be maintained by a company to deliver a correct and complete tax return.
That brings us onto:
What records are meant to be maintained by law even if the company is dormant?
A limited company is required to keep all records (also known as the statutory records) which are necessary to establish, without doubt, that a tax return is accurate. This includes all documents and information necessary to establish the sales, purchases, assets and liabilities of the company in the relevant accounting period and at the end of the accounting period.
The requirement that the return must be correct and complete implies a requirement that the documents and information to be kept must evidence that the return is correct and complete.
If the company’s business operates a bank account, it will need to keep a record of transactions on the account -- and of the balance on the account at any particular time to ensure that receipts and expenditure have been properly recorded.
What the taxman wanted from Contractors Support Limited
HMRC issued a Schedule 36 Information Notice on May 12th 2022 to Contractors Support Limited -- which ironically is an advisory to umbrella companies and others in the contractor sector on dealing with HMRC and tax compliance checks. The following information and documents were requested by the tax authority:
1. Confirmation as to whether Contractors Support Limited held any bank and/or building society accounts, at any time during the accounting periods ending November 21st 2017; November 30th 2017, November 30th 2018, and November 30th 2020.
2. If any bank and/or building society accounts were held, copies of all statements for each account held, relating to the accounting periods ending November 21st 2017; November 30th 2017, November 30th 2018 and November 30th 2020.
3. Details of all clients for whom Contractors Support Limited provided services for during the accounting periods ending November 21st 2017; November 30th 2017, November 30th 2018 and November 30th 2020, and whether or not payment was received for the services provided. The list, HMRC said, should include the name of the client, a description of the work undertaken, the date(s) when the services were provided and where no payment was received or no charge for the services made, “please provide the reason why.”
Contractors, beware -- an appeal cannot be made for the requirement against statutory records as these are essential records that are necessary to compile the tax return and there have been various tribunal cases that have tested what is a statutory record, and it is accepted that company bank statements would come under statutory records.
In the case, the tribunal judge ruled the request for the details of the clients via the requested lists does constitute statutory records. A company must be able to verify its trading debtors and creditors including an analysis of who has been charged with what and whether they have been paid. Therefore the list of clients is part of the statutory records. The appellant did not seriously challenge that bank statements were part of the statutory records.
And even if the company is dormant, the company would be required to keep statutory records underlying the submission of dormant company accounts. Helpfully perhaps, the tribunal judge clarified that this would even include the list of clients’ details.
What Contractors Support Limited told HMRC
The director’s response to HMRC on 10th June 2022:
“Good afternoon Mr Henton [HMRC officer],
“Thank you for your letter dated 12 May 2022. As stated in my previous communication, my involvement in the company only commenced on 15 April 2021. For all intents and purposes, I took over a dormant shelf company as it was convenient and easy to do and then changed its name.
“The former director has previously informed me that the company never charged for any service so it never received any payment nor incurred or paid for an business expenses. I have no reason to not believe that, so I really do not know what more I can do for you. For the avoidance of any doubt, I have no access whatsoever to anything that predated 15 April 2021.
“Therefore, I am unable to provide any company bank and/or building account statements, or details of any clients or services during the periods outlined in your letter, as I was not involved with the company during the applicable periods.
“I believe that I have made reasonable enquiries and fully cooperated with you. If you disagree, please explain how and on what basis you believe I need to do more, specifically within the scope of Paragraph 1 of Schedule 36 to the Finance Act 2008 and insofar as my circumstances apply.
“As always, I will gladly cooperate if I reasonably can.
On May 12th 2023, HMRC issued the Schedule 36 Information Notice and a timely appeal would need to be submitted by the director by June 11th 2023.
So then, thirdly:
What constitutes an appeal?
The tribunal judge clarified that the term ‘appeal’ is not defined in any tax statute, and the email by the director dated June 10th 2022 could be defined as a “request for a decision to be changed”.
HMRC’s Appeals manual indicates six criteria that must be satisfied for an appeal to be valid. Those six are that it must be, in writing; sent to HMRC, within the time limit, by the appropriate person, against appealable decision, and contain the grounds of appeal.
The tribunal judge accepted the email of June 10th 2022 fulfilled these criteria and the reasonable recipient of that email (HMRC!) should have construed it as an appeal against the information notice.
My take for contractors to remember is this -- there is no requirement that an appeal should include the word “appeal”. HMRC accepted this view during the tribunal hearing.
A narrow 'victory'….
The tribunal judge stated:
“On balance, but only just, I agree with Mr Smith [the appellant’s representative], that in the context of the previous communications between HMRC and the appellant, the email of 10 June 2022 does comprise a valid appeal against the information notice. It is written in response to the information notice. It sets out why the appellant is not able to comply with it (essentially it sets out the appellant’s grounds of appeal which is the important element of an appeal).
“The appellant has re-emphasised that it has tried to obtain the information sought by the information notice, but has been unable to do so. He was not involved with the appellant during the applicable periods. He asks what more he can do in the circumstances.
“That notice seeks information which the appellant has already told HMRC it cannot obtain. The email 10 June 2022 re-emphasises that. To my mind that is a fair and square challenge to the information notice.
“I therefore find as a fact that the email of 10 June 2022 was a valid in time appeal against the information notice”.
Therefore contractors and to reiterate, the appeal does not need to even have the word ‘appeal’ in it, or even contain specific grounds of appeal, but it must be a challenge to the information notice.
Please keep in mind though, this was only “just” accepted as an appeal. Thus, a timely appeal had been submitted against the information notice on 10th June 2022.
However, this was a “pyrrhic” victory for Contractors Support Limited because, unfortunately for the director, the appeal was not upheld. The information and documents requested by HMRC were deemed statutory records of which there can be no appeal submitted against.
Appealing against an HMRC penalty of £300
The email of June 10th 2022 was a valid in time appeal made against the information notice. But at the time, it was not accepted as a valid appeal by HMRC.
The tribunal case has now clarified that the information sought by the information notice comprised of statutory records of the appellant against which the appellant has no right of appeal. So, the appeal was made in time but was invalid because there can be no appeal made against the requirement for statutory records.
On August 19th 2022, HMRC issued a penalty of £300 for failure to comply with the Schedule 36 Information Notice. An appeal should have been submitted by the company by September 18th 2022.
The appellant engaged an agent to represent them during the appeal process. A letter of authority was signed, (but not submitted to HMRC) on September 26th 2022. The appeal was submitted by October 27th 2022 -- but the late appeal was not accepted by HMRC, which led to the tribunal appeal being lodged on December 23rd 2022.
The letter of authority was not submitted by the agent until November 3rd 2022. HMRC objected that the appeal submitted directly to HMRC on October 27th 2022 was invalid, because the agent did not have the authority to submit the appeal on behalf of the company.
But the tribunal judge rejected this notion, as there was a letter of authority signed by the appellant on September 26th 2022 albeit it had not been submitted to HMRC. Therefore, a valid appeal had been submitted by the agent on behalf of the appellant on October 27th 2022. The appeal had been submitted late -- out of time by 39 days. The tribunal judge acknowledged that the delay was not serious and was short.
Is it a ‘reasonable excuse’ that the appeal is late because you were in the process of engaging an agent?
However, the tribunal judge did not accept that it was a ‘reasonable excuse’ that a specialist was needed to submit a valid appeal in time. So, it should not have taken another month to submit a timely appeal; in fact the tribunal judge declared, “to submit a timely appeal does require any specialist skill merely an understanding of plain English.”
Put another way (and the tribunal judge did say it like this), if the appellant was capable of emailing HMRC on June 10th 2022, then the tribunal judge could not see why the appellant was not capable of appealing against the penalty notice without such specialist advice.
In conclusion, we have an appeal where the delay was not serious, but rejected because the tribunal judged held that the appellant should have been capable of submitting a timely appeal -- and we have a case, where even the appellant did not even know they had made a valid appeal on June 10th 2022!
My final take-away for limited company contractors? A timely, simple, appeal can be made, but it is another issue of whether it will be a robust appeal that will be accepted by a tribunal judge, as clearly both appeals here have not in essence been upheld.