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Accountant to blame in CIS penalty appeal

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8th Sep 2014
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A “jobbing” builder has won an appeal against penalties of £7,000 for failing to comply with Construction Industry Scheme (CIS) tax rules.

A first tier tribunal [Gary Laithwaite versus HM Revenue and Customs] recently ruled that the builder’s reliance on his accountant was a reasonable excuse for the errors in his tax return.

Laithwaite told the tribunal that his turnover was £70,000 and his net profits were between £17,000 and £25,000.

He had been operating under the CIS rules, which require companies to deduct tax from sub-contractor wages. The tax rules were introduced to stop labourers being paid in cash and avoiding tax.

When Laithwaite’s business expanded he started using a sub-contractor, Steve Baybutt on a “labour only” basis.

Laithwaite told his accountants Calculus Accountants & Co (Calculus) about the sub-contractor.

The person responsible for PAYE returns at the accountant told Laithwaite that he needed to register for the CIS scheme.

Laithwaite used friends in the building industry who supplied materials as well as labour. All the contractors he dealt with appeared to have tax certificates and they advised him that he had no need to deduct any tax from his sub-contractor payments, as they would pay the tax, the tribunal heard.

Because the sub-contractors were providing materials, as well as labour, Laithwaite thought the new CIS rules did not apply and he did not need to make any returns.

The accountants did not advise Laithwaite that if there were materials involved he still needed to make the returns under the construction scheme.

The tribunal said it found evidence from Gabriel Kavanagh, of Calculus, “singularly unhelpful” and that it “did not believe that part of his evidence which dealt with Mr Laithwaite’s failure to comply with the scheme.”

The tribunal was more impressed with Laithwaite’s “truthful and straight forward” evidence.

Laithwaite said he had received the generic details from HMRC but as these had been voluminous he had not read them in detail but had decided to consult his accountants.

“We have no doubt from the way that he told us, that he genuinely believed that he had complied with the terms of the scheme and that he had been properly advised by [the PAYE specialist at his accountant],” said tribunal judge, David Porter. “He had no reason to suppose that her advice was incorrect.”

The tribunal allowed Laithwaite’s appeal against the penalties.

The ruling shows that HMRC’s tougher penalty system, which started in 2011, can be successfully challenged.

HMRC has been accused of taking up “penalty farming” to help plug the tax gap.

Replies (29)

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Euan's picture
By Euan MacLennan
08th Sep 2014 12:11

I don't understand this

nickhuber wrote:

The person responsible for PAYE returns at the accountant told Laithwaite that he needed to register for the CIS scheme.

Laithwaite used friends in the building industry who supplied materials as well as labour.  All the contractors he dealt with ... advised him that he had no need to deduct any tax from his sub-contractor payments, as they would pay the tax, the tribunal heard.

“We have no doubt from the way that he told us, that he genuinely believed that he had complied with the terms of the scheme and that he had been properly advised by [the PAYE specialist at his accountant],” said tribunal judge, David Porter. “He had no reason to suppose that her advice was incorrect.”

His accountant advises him to register for CIS.  His mates advise him not to deduct tax.

And the accountant gets the blame?

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By Septimus
08th Sep 2014 14:02

Seems strange but...

The question that does not seem to be covered in the report is did the contractor ask the accountants about his friends that were invoicing him together with materials?  I would like to believe that if he had then he would have got the correct answer!

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Stepurhan
By stepurhan
08th Sep 2014 14:11

Some light

The decision appears to hinge on the fact that the accountant went on to prepare the accounts. At this point he should have become aware that his client was operating CIS incorrectly, and advised accordingly. He apparently did not. So Mr Laithwaite is not relying on advice per se. He is relying on the accountant NOT pointing something out meaning he was correct. This is mostly from the judgement itself (link at top of the article) by the way.

I can see the argument, but this still sounds like a pretty thin basis for the accountant being found liable. Some checks are always wise, but are we expected to virtually audit accounts so we can advise on any and all issues? Seems rather a lot to expect for the sort of fees you would charge such a client.

I expect to see an appeal on this decision.

 

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By Roland195
08th Sep 2014 14:54

A sensible outcome nonetheless

Although I believe the right result has been achieved - £7k penalties on a £70k T/O must be excessive by anyone's measure and arises from the bureaucratic non-filing on returns rather than genuine risk to the treasury (and interestingly enough is being proposed as not necessary under the changes to CIS), I cannot fathom the logic of tribunals.

Was it the tribunal chairman's last day?   

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By justsotax
08th Sep 2014 16:21

what next...

accountant blamed for non disclosure of cash receipts....because man down the pub told electrician client that he didn't need to disclose cash receipts.  

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By johnjenkins
08th Sep 2014 16:33

As I see it

If all the tax was paid and there was factually (not potentially, as HMRC like to say) no loss to HMRC then there should be no penalties (perhaps a £100 fine for not following rules).

What doesn't seem correct is that the onus is on the Accountant, not the tax payer, to get things right.

As Roland says £7k penalties (not filing returns for a period) on a turnover of £70k is ludicrous.

We had a similar case 2 years ago and I asked for a review of £24K penalties (penalties for filing nil returns due to misunderstanding offset rules) and managed to get it suspended as long as everything was adhered to in the future. This makes me think that perhaps there has been a previous case some time ago with exactly the same outcome.

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David Winch
By David Winch
08th Sep 2014 17:01

The decision

Some quotes from the tribunal's decision

16. In a letter of 14 November 2011 from Calculus Mr Kavanagh stated

 

“I write in reply to your letter, dated 31 October 2011, requesting comments on ‘why Mr Laithwaite did not seek to verify the sub-contractors’. Before I make such comments, you need be aware that, whilst Calculus may be authorised by Mr Laithwaite to act in the capacity of tax agents, Mr Laithwaite retained responsibility for operating and complying with the CIS Scheme, over which we had no oversight or input.

1. Thus, Mr Laithwaite did not access professional support or advice in the area of CIS. Apparently he took advice from fellow tradesmen, which may go some way towards explaining where he went wrong…..”

and at paragraph 5 he said

"5. When we prepared Mr Laithwiate’s 2008/9 annual accounts and found there were gross payments by sub-contractors, we reminded Mr Laithwiate of how the CIS Scheme was intended to operate…."

 

This comment is hardly consistent with the suggestion that Calculus had no involvement with Mr Laithwiate’s operation of the CIS scheme.

and later -

31. We have considered the law and the evidence and we have decided that Mr Laithwaite had a reasonable excuse, under section 118 of the Act, for his failures to make the appropriate returns. We found his evidence to be truthful and we are satisfied that he genuinely believed that he was operating the scheme correctly as a result of the initial advice given by Cath from Calculus. Mr Kavagnan was unconvincing and his correspondence clearly demonstrated that his firm knew about the CIS scheme and, therefore, must have known of Cath’s advice. As a result, Mr Laithwaite was entitled to rely on the ongoing advice from the accountants, who appear not to have considered that the way in which Mr Laithwaite was dealing with the scheme was incorrect. Having decided that Mr Laithwaite had a reasonable excuse, the penalties are set aside

Draw your own conclusions.

David

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Replying to tom123:
Euan's picture
By Euan MacLennan
09th Sep 2014 09:47

Thank you, David, I will draw my own conclusions

Who is to blame?  The Tribunal for an incoherent decision.

davidwinch wrote:

Some quotes from the tribunal's decision

16. In a letter of 14 November 2011 from Calculus Mr Kavanagh stated

 

“... you need be aware that, whilst Calculus may be authorised by Mr Laithwaite to act in the capacity of tax agents, Mr Laithwaite retained responsibility for operating and complying with the CIS Scheme, over which we had no oversight or input.

1. Thus, Mr Laithwaite did not access professional support or advice in the area of CIS. Apparently he took advice from fellow tradesmen, which may go some way towards explaining where he went wrong…..”

and at paragraph 5 he said

"5. When we prepared Mr Laithwiate’s [sic] 2008/9 annual accounts and found there were gross payments by [sic] sub-contractors, we reminded Mr Laithwiate [sic] of how the CIS Scheme was intended to operate…."

 

This comment is hardly consistent with the suggestion that Calculus had no involvement with Mr Laithwiate’s operation of the CIS scheme.

I assume that the sentence in bold is the Tribunal's conclusion.  If so, it is perverse.  The accountant's letter states precisely that the accountant had no involvement in the operation of the CIS scheme.  How the Tribunal could have reached such a contrary conclusion is beyond me.

davidwinch wrote:

and later -

31. Mr Kavagnan [sic] was unconvincing and his correspondence clearly demonstrated that his firm knew about the CIS scheme and, therefore, must have known of Cath’s advice. As a result, Mr Laithwaite was entitled to rely on the ongoing advice from the accountants, who appear not to have considered that the way in which Mr Laithwaite was dealing with the scheme was incorrect.

Draw your own conclusions.

David

The Tribunal apparently took a dislike to Mr Kavanagh for some reason - even misspelling his name - but prejudice of that sort is not a valid basis for a decision.  The observation that the accountant knew about the CIS scheme is fatuous - of course, they knew about the scheme as "Cath" had recommended that Mr Laithwaite register for CIS in the first place, presumably as a contractor.  The comment that "the accountants, who appear not to have considered that the way in which Mr Laithwaite was dealing with the scheme was incorrect" is completely inconsistent with "When we prepared Mr Laithwiate’s [sic] 2008/9 annual accounts and found there were gross payments by [sic] sub-contractors, we reminded Mr Laithwiate [sic] of how the CIS Scheme was intended to operate….".

Whilst we may think that the penalties of £7,000 were excessive, this is a shoddy decision by the Tribunal.  They may have reached the right conclusion, but by completely the wrong means of libelling the accountant for the client's foolishness in believing that his mates knew more than his accountant.

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By johnjenkins
08th Sep 2014 17:22

Clearly

the tribunal decided that Mr. Laithwaite believed he was running the CIS correctly. Is that in itself a "reasonable excuse"? Probably not. However if Cath advised and Calculus actually reminded Mr Laithwaite of how the scheme was run, then surely they can't turn round and say they had no input. The tribunal obviously picked up on this. Maybe the tribunal thought £7k penalty was too high and that finding a flaw in the Accountants letter was the answer.

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By ShirleyM
09th Sep 2014 07:57

Re Davids comments

We are in a similar situation.

We do not operate CIS for clients as this is done by a payroll bureau, or by the clients themselves. The CIS services are not part of our engagement. We do inform clients of the CIS requirements and will provide guidance, and we do check that the CIS scheme has been operated correctly when we prepare final accounts.

It appears as though the accountants were not providing CIS services, but they did advise the client that CIS was required, and also informed them that CIS wasn't being operated correctly, so why is the accountant at fault?

It's a bit scary that we are in the exact same situation and could still be blamed for client errors, and/or failure to follow our advice and recommendations.

"Laithwaite said he had received the generic details from HMRC but as these had been voluminous he had not read them in detail but had decided to consult his accountants"

Did the accountant not provide full and proper advice? If the client couldn't/wouldn't read the documented guidance, then how can the accountant cover the 'voluminous' requirements verbally and be certain the client understands?

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By Jekyll and Hyde
09th Sep 2014 09:23

this is a classic reason why the cis. ...
..... needs a massive overhaul to make it easier.

Who is at blame? I consider HMRC, accountant, client and man down pub.

Hmrc - the amount of cr*p (sorry guidence) they have on their website that Is misleading/deceiving and quite frankly even as an accountant I question my understanding when I read some of it. Topped with such useless advice from their so called helpline, no wonder no one reads this information they provide. Followed by a decade or so of "tax doesn't have to be taxing" deceptive marketing just before the penalty system came in to maximise the penalties. Lets hope they order the right number of black leather jackets as part of their new uniforms. How many years have we been saying cis isn't working! With £42 tax why on earth are they going for £7200 in penalties. Why don't they enter into the real world and give a reasonable penalty of say £500 - £1000.

Accountant - any accountant that doesn't write a formal letter to their client in this just ant informing them of their legal requirements and placing this on a permenant section of their file is, In my opinion, is equally at fault. I have had 3 major cases of similar issues happening over the last decade. In 2005 I informed a client of the cis regs as he was working closely with an electrician but not working withing cis. He decided that working within the rules was too hard and he wasn't making enough money and hence went back to employment. I lost a client. About 4 years ago I lost a client who went to another accountant because I was "too legite" and worked for hmrc and not them. I lost a client. Recently I took on a client has cis concerns. I once again advised in writing and with the new agency regulations we have decided it safer to employ. I have had some difficult conversations with this client. So those "sausage factory" accountants that simply do the bear minimum and offer no real advice is equally to blame as the rest. Where was the draft accounts letter or client highlighting issues to deal with? Where were the file notes. However my guess is that the accountant still acts for the client and decided not to reveal all his correspondence at tribunal.

Client - if a non expert is getting information from hmrc and having some verbal advice from accountant, why ignore it. Robin Hood isn't around anymore they need to get real! Get an accountant you trust and pay the right fees and you get the right service.

Man down pub - should be shot! Oh I can say that. Client should be investigated and as part of this the names of thethese such people should be disclosed. Not too difficult hmrc spends 2 hours on a Friday early evening in the pub client drinks in and then hmrc to investigate all these in pub. Then market this!

Accountancy profession - I have said this a few times now. We all need to up our games and enhance our profession. This means that perhaps joint marketing by the professional bodies highlighting the complexities in tax, and the sheriffs high penalties. There are far too many accountants that want to do the bare minimum for the maximum gain and wonder why accountants are getting the blame. The blame lies with everyone involved with this case and in my opinion the findings was wrong. We have a chap that appears to have listened to the rouges down the pub and has gotten away with no penalties so sends a clear message to the rest of them that they can carry non doing this! Whilst a terminally ill person who has no funds to pay some tax loses a penalty decision. Why couldnt his wide be blamed and his penalties dropped?!?What a great message this is sending out to the taxpaying community and those that are going to say I am being hypocritical, as I have said before those that can should and those that can't don't. I hope hmrc appeal this case.

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By christine bulbeck
09th Sep 2014 10:39

CIS

simple........................verify everyone that works for you in the Construction Industry and let HMRC determine if you need to be deducted tax (Net sub contractor) or not (Gross sub contractor)

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By lesley.barnes
09th Sep 2014 11:05

Damned if you do, damned if you don't

I feel sorry for the accountant in this case, he has been made a scape goat. The client was receiving a service for self assessment and had rung up about employing a sub contractor. He was correctly told to register for CIS. He couldn't be bothered reading the paperwork, wanted to save money, didn't use his accountant to prepare the returns, took advise from his mates and it went pear shaped. 

From the opening statements for the case it says that following advise to register for a labour only sub contractor

"He then employed substantial sub-contractors all of whom had certificates confirming that Mr Laithwaite need not deduct tax. He had failed to provide monthly returns even though no tax was due, which gave rise to the penalties." 

So the issue is rather than subbies supplying materials not being included for CIS these people appear to be allowed to be paid gross. The client hasn't verified the tradesmen and made returns showing he's paid them gross. So he's registered for CIS but then failed to make returns so he didn't know how to operate the system. The accountant has picked up on this when he did his tax return and advised him about CIS again but the client still did nothing. From the judgement in this case the only way an accountant could cover themselves when a client rings up with a question is to give them a copy of the information from HMRC, explain it to them, make sure they understand it, get them to sign a document saying they understand and charge them for the advice. If this client couldn't be bothered reading what HMRC sent him, he wouldn't be bothered reading anything an accountant gave him. To cover everything about anything to do with HMRC in one phone call is impossible. I can imagine when this client rang up for advice the PAYE clerk will have tailored the advise to what she was asked rather than everything she ever knew about CIS.

I want this case appealed not because I agree with the fines but I would like some justice for the accountant and his damaged reputation. I hope the client can't sue him for his legal costs. I'm sure the accountant must be scratching his head and wondering how the heck this happened.

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By johnporter
09th Sep 2014 11:59

CIS

Surely under Discrimination Laws HMRC should be prosecuted anyway as they Target Subbies in the Building Trade (and associated) & not for example Van Drivers who are used as subbies in the Transport Industry. (or for that matter accountants who subbie work out to bookkeepers)

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By Ninian
09th Sep 2014 12:01

£7k....

..........in fines don't arise overnight so presumably 'our hero' didn't bother to read his penalty notices either as they accumulated on his door-mat; nor refer them to the accountant or the brains-trust dahn the pub. 

I agree that £7k is disproportionate to his circumstances but perhaps he deserved this level of fine for his sheer stupidity/perversity rather than non-compliance.

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By Jekyll and Hyde
09th Sep 2014 12:11

am afterthought on compliance
It seems clear to me that the justification of compliance has taken a big hit with this case. The argument for non compliance and worry later has won. Had the decision on £7200 stood, then a clear message that there is a benefit of compliance and it would have made it far easier for to justify to some clients the need to take compliance serious. At the moment, I am starting to wonder if there is any benefit of compliance if such a penalty decision can be successfully appealed again.

Imagine, are you paying too much for you cis and other compliance costs? If so come to us and we can reduce your accountancy costs and reduce your cash flow burden. Simply don't comply! And if you are looked at, then we will seek to apply laithwaite v hmrc as a justification. I am clearly not being serious, however it has somewhat weakened my argument about penalties as a justification for getting things right.

I bet the man down the pub is havibg a field day bragging about being better than the accountant for giving the right (perceived) advice to his mate. No wonder clients don't listen to accountants.

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By johnjenkins
09th Sep 2014 12:37

Good point on compliance

I wonder how far you could actually take it.

Scenario - Ltd Co no Assets. Doesn't comply with CIS. After one year all corp tax paid. vat paid and all subbies paid their own tax. So no loss to HMRC. When compliance hits, umpteen thousands in penalties. Does HMRC wind comapny up or wite off penalties?. Oh yes no money in account for HMRC to grab. Assume company wound up scenario starts all over again.

Surely compliance should be that penalties are awarded when rules aren't applied and there is a loss (not potential loss) to HMRC. t's like the £1200 penalty for self assesment return showing no tax due not being filed on time. When penalties are awarded according to the offence then we might get somewhere.

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By johnporter
09th Sep 2014 13:08

Good points

You are asking for Common sense to prevail, somewhat lacking in anything associated with 

Tax /Government. etc

If they can find a nonsensical way to do/ explian things so that nobody including them

understands what they are talking about they do it.

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By johnjenkins
09th Sep 2014 13:16

There are

many things in this world that seem [***] about face. I'm going to blame it on the poles changing from North to South and vice versa. 

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By Pavlova1
09th Sep 2014 14:28

For the avoidance of doubt......

Our own practice, which is based in Glasgow, is called Calculus Accountants (Scotland) Ltd and has no connection or knowledge of this "Calculus Accountants & Co", which I note from the Trinubal Hearing ruling is based in Manchester. Just saying for the avoidance of any doubt on the part of anyone who may have read this article! Does appear however that the Accountant has been landed with the blame rather than the culture of "a mate told me in the pub........!"  

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David Ross
By davidross
09th Sep 2014 15:28

In what danger is the accountant (aside from reputation) ?

I doubt if his client would sue him and if he did, now that he has no penalties to pay he has suffered no loss

Since I doubt that HMRC would agree with the Tribunal, they are unlikely to 'have a go'.

So whilst the Tribunal seems to have been perverse, they have given a sort of Justice for the excessive penalties.

Will HMRC appeal?

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By johnjenkins
09th Sep 2014 16:42

I don't think

HMRC have any other option but to appeal.

Can you imagine how the floodgates would open quoting this case.

Let's put it another way, would you appeal if roles were reversed? Of course you would.

I'm sure if the penalty was £100 we wouldn't even have had a tribunal to argue about.

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By Ninian
10th Sep 2014 13:22

I don't think...

Would HMRC achieve much with an appeal?

The Bosher (lovely name for a small-time builder) case has decided that disproportionate penalties should be rescinded and despite my dislike for the way 'our hero' handled his CIS affairs the fine isn't justified in terms of loss to HMRC, scale of business etc etc. 

I agree with other comments that this is likely to make a nonsense of CIS penalties but then they are something of a nonsense to begin with because in the age of human rights etc any system that mindlessly keeps adding penalties for effectively the same misdemeanour is on a par with the rack. The underlying problem is that CIS applies to an industry wherein paperwork and compliance are for many participants something culturally and mentally alien. So do you use stick/carrot or both to persuade people to comply? The Bosher decision would tend to indicate that the financial stick is only be used sparingly. Is there another form of stick? Or else how does one persuade....?

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Replying to NickParsons:
David Winch
By David Winch
10th Sep 2014 18:22

Bosher

Ninian wrote:

The Bosher (lovely name for a small-time builder) case has decided that disproportionate penalties should be rescinded  . . .

Ninian, can you help me here?

As I understand it the First Tier Tribunal cancelled all 193 fixed penalties of £100 each (or reduced them to nil if you prefer) and reduced the tax geared penalties to be equal to the CIS tax shown on the (late) returns.  In total therefore penalties of £54,100 were reduced to £6,287.  See Bosher v Revenue & Customs [2012] UKFTT 631 (TC) (08 October 2012).

I understand HMRC appealed this decision and the Upper Tribunal reinstated the penalties of £54,100 but recognised that HMRC in practice proposed to accept a mitigated penalty of £14,600 in total.  The Upper Tribunal considered the penalties (even of £54,100) imposed were not disproportionate.  See HMRC v Anthony Bosher [2013] UKUT 579 (TCC) (19 November 2013).

Has the Upper Tribunal decision been further appealed?

David

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By gazza5
11th Sep 2014 12:24

Case

I have just read the case myself. From my viewpoint it appears they are not happy with the specialist team at HMRC either (not just the accountant). Looks to me like HMRC didn't operate the correct procedure either.

Incase others haven't seen this here is the link http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=7896

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By johnjenkins
11th Sep 2014 13:14

Fascinating reading

and it just goes to show how in the very simplest of appeals, an expert on the meaning of each appendix in each section is needed to stand any chance.

I do like the way Mr. Kelly left it to the tribunal before he showed HMRC the errors that had been made by a "specialist unit".

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By Ninian
11th Sep 2014 16:20

Bosher

Thank you for that as I was unaware of the overturn and no, I don't know if it has been further appealed but, interestingly, I had a large amount of CIS penalties cancelled in an appeal after the date of the Upper Tribunal and the main grounds I had cited were 'disproportionality'. 

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7om
By Tom 7000
15th Sep 2014 15:29

Remind me again...

 

How much did the accountant pay for getting the blame?

 

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By AndrewV12
17th Sep 2014 10:32

Well done Gary Laithwaite

Well done Gary, you were un- believably lucky, you took your own advice and assumptions did everything wrong, and got away with it.   When it suits them such people always quote 'My mate says', but never advise of his mates knowledge, experience, qualifications.

£7,000 fines is way to high anyway so i am glad he got away with it.  

 

Who knows did the Accountant and Gary create a smokescreen (blame each other) and got away with it.

 

 

'The tribunal was more impressed with Laithwaite’s “truthful and straight forward” evidence'. - I am unsure how to take this, truthfulness ????? he got it all wrong.

 

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