HMRC’s track record for successful prosecutions hit another obstacle recently. In December 2016 HMRC set in motion a prosecution of payroll fraud, claiming the defendants First Choice Recruitment Limited (First Choice) “were knowing participants in the …payroll fraud”. In the statement, HMRC also referred to some emails where they claimed that First Choice was fully aware of what was going on. What HMRC failed to do was provide any evidence to prove their claim, indeed the emails proved to the contrary.
The case was around a subcontractor that claimed to have the status of ‘Gross payments’ when he did not. For those who operate a CIS scheme, you will know that verification should take place where the subcontractor is either working for the contractor for the first time or haven’t been engaged for at least two tax years. So it begs the question if there is a gap that is less than two years how will a contractor know if the subcontractor they are re-engaging has lost the status of ‘Gross payments’? Should the verification program be amended so that if there is any sort of gap then the verification process be undertaken again?
On the 6th August 2018 a “skeleton argument” was set out by First Choice in advance of an appeal hearing that had been set for later that month. The burden of proof was then clearly HMRC's a burden they could not sustain. Before the hearing date on 16th August HMRC withdrew citing that their decision was “to save time and costs”. Realistically they could not provide proof of the payroll fraud by First Choice and so withdrew because their chance of a successful prosecution was poor. The problem for HMRC was, the emails they had provided proof that First Choice was not aware of the subcontractor’s true status.
First Choice believed that HMRC had acted unreasonably and on 25th September 2018 made an application for costs under rule ’10 (1) (b) of the tribunal procedures rule’. To apply for costs to a First Tier Tribunal is a rarity, and as a rule, can only be awarded in specific circumstances of which ‘unreasonable behaviour or conduct’. Something that First Choice firmly believed had occurred. The First Tier Tribunal agreed with First Choice that HMRC had indeed had acted in a manner that could only be considered as ‘unreasonable not only in its defence but also in its conduct with the appeal’. When commenting the First Tier Tribunal stated: “It is unacceptable for a public authority to make allegations of fraud where they have no credible evidence upon which to make even a prima facia case.”
Condemnation of HMRC went beyond that as the First Tier Tribunal made no hesitation is commenting further on what HMRC by suggesting that there should be ‘appropriate levels of supervision and training so that their litigators deal with matters appropriately and in accordance with the law.’
As a result, the First Tier Tribunal found in favour of First Choice and ruled that HMRC reimburse costs from the original appeal along with the costs incurred for the application of costs.
From this, it does imply that where the Construction Industry Scheme is in place, scrupulous records are kept and maybe where there is a clear break in engagement with a subcontractor that it would not harm to undertake verification again.