[2009] UKFTT 284 (TC)

			
TC00228

						Appeal number:  Trans/09/172

Construction Industry Scheme (CIS) – partnership – cancellation of gross payment status – reasonable excuse – insufficiency of funds

FIRST-TIER TRIBUNAL

TAX 

	RUSSELL BEARD (as partner in F & B Builders)	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (CIS)	Respondents

				TRIBUNAL: 	Roger Berner (Tribunal Judge – Chairman)
						Faith Mark (Tribunal Judge)

Sitting in public in London on 26 May 2009

Stuart Lewis, Pinnick Lewis, for the Appellant

Bruce Robinson for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This was an appeal by Russell Beard (“Mr Beard”) in his capacity as a partner in F & B Builders against the cancellation of his registration in that capacity for gross payment under the Construction Industry Scheme.
2.	F & B Builders is a partnership, the partners of which are (and at all times have been) Mr W C Fountain and Mr Beard.  Notice of the determination of cancellation of gross payment status was given to Mr Beard by HMRC on 6 October 2008, and it is from that determination that Mr Beard has appealed.
3.	In support of its determination, at the hearing HMRC produced evidence of alleged failures on the part of both Mr Fountain and the Appellant in complying with their respective obligations under the Tax Acts or the Taxes Management Act 1970 (“TMA”).  However, the letter of 6 October 2008 notifying the determination to the Appellant made reference only to the alleged default of Mr Beard.  On making such a determination, s 66(5) Finance Act 2004 requires HMRC to give notice to the affected person stating the reasons for cancellation of the registration for gross payment.  It is from that determination that the affected person appeals.  In the absence of any alleged default by Mr Fountain being given as a reason in the notice of determination, we decided not to admit evidence of that default in these proceedings.  The appeal therefore proceeded only on the basis of the alleged default by Mr Beard.
4.	At the conclusion of the hearing we announced that our decision was that the appeal was dismissed.  Mr Beard indicated that he wished the decision notice to be accompanied by full written findings of fact and reasons for the decision, which we now provide. 
The Facts
5.	Mr Lewis, who appeared for Mr Beard, set out Mr Beard’s case, and we also heard oral evidence from Mr Beard.  Mr Robinson, for HMRC, set out the circumstances on which HMRC relied in support of its determination.  We also considered documentary evidence provided by both parties.
6.	From the evidence we find the following facts:
(1)	F & B Builders have been trading in the construction industry since 1992.  The firm has two partners, Mr Beard, who was the individual registered for gross payment under the Construction Industry Scheme (“CIS”) as a partner in the firm, and Mr William Fountain.
(2)	Over the years the business fortunes of the firm have been mixed.  In some years the firm generated a reasonable income, whilst in others there were losses.
(3)	At some stage the partners had formed a limited company, Fountain & Beard Limited, which was initially successful, but in 2006 ran into financial difficulties when a customer had defaulted in payment.  Liquidators were appointed and the partners were left with personal debts they had incurred in order to finance the company.
(4)	Following the company ceasing to carry on business Mr Fountain and Mr Beard re-established their partnership business under the name F & B Builders.  This was successful in the year to 31 March 2007, but in the year to 31 March 2008 a loss was made.  During this time the bank facilities available to the business were stretched and although use was made of the firm’s overdraft, it was necessary for resources to be directed primarily towards payments to subcontractors and for materials and working capital.
(5)	Mr Beard made payment late in respect of the following self assessment liabilities for the tax year ended 5 April 2007:
Amount due on 31 January 2007			£7,290.87
Amounts paid:
13 May 2008		£2,993.49
25 July 2008		£38.89
2 September 2008	£4,258.49		£7,290.87
Surcharge due 18 April 2008			£364.54
Paid 2 September 2008				£364.54
Interest due 15 October 2007			£6.51
Paid 13 May 2008				£6.51
(6)	Mr Beard lives with his partner and he has five children.  In order to provide for his family over the years he has extended his credit on credit cards and built up significant debts, both personal and to support the business.  In June 2008 these debts amounted to more than £43,000.
(7)	In order to obtain fund to meet his liabilities, Mr Beard has moved house on two occasions.  In October 2003 he sold a property in Radlett, Hertfordshire, and after buying a more substantial property in Kemsley, Sittingbourne, with the aid of a mortgage, was able to realise a surplus of £15,000.  The build up of personal debt and the decline in the business fortunes of the partnership after March 2007 prompted Mr Beard and his partner to take steps to sell the Kemsley property.  This house was put on the market in the autumn of 2007.  It did not sell quickly, and suffered two abortive sale attempts involving issue of draft contracts to purchasers who then did not proceed.  A sale was finally completed on 18 June 2008.  The original asking price for the property had been £249,000, but this had successively been reduced and the final sale price received was £235,000.  Mr Beard purchased a smaller property for £160,000 with the assistance of a mortgage.  Conditions set by the lender included the settlement by Mr Beard of a considerable amount of his existing debts such that on completion of the sale and purchase the cash surplus available to Mr Beard was limited to £7,991.
(8)	Mr Beard had allocated more than £5,000 of that property surplus to payment of his outstanding tax liabilities.  At that time, however, he suffered the misfortune that his car, which he used to transport his children to and from school, was stolen and had to be replaced.  The replacement car was purchased in August 2008.  The insurance claim proceeds for the stolen car were not received until some time later. 
(9)	Relief was claimed by Mr Beard in respect of his share of the partnership loss for the year ended 31 March 2008, amounting to £4,378.08, and for that loss to be carried back against Mr Beard’s income for the tax year ended 5 April 2007.  This resulted in a repayment to Mr Beard on 31 October 2008 of £1,295.97.
The Law
7.	Under s 66(1)(a) Finance Act 2004 HMRC may make a determination cancelling a person’s registration for gross payment if it appears to them that if an application to register the person for gross payment were to be made at that time HMRC would refuse to register that person. 
8.	For a partnership, such as F & B Builders, a number of conditions have to be satisfied before a partner in the firm may be registered.  There are three basic tests, set out in Part 2, Sch 11, Finance Act 2004: the business test, the turnover test and the compliance test.  Of these only the compliance test is in issue in this appeal.
9.	The compliance test, in para 8, Sch 11, includes a requirement that each of the partners must have complied, so far as any charge to income tax is concerned as falls to be computed by reference to the profits or gains of the firm’s business, with obligations imposed on that partner in a qualifying period by or under the Tax Acts or the TMA.  In the case of a cancellation of a registration, the “qualifying period” (which is defined by para 14, Sch 11) means the period of 12 months ending with the date of the determination.  This is the hypothetical application date by virtue of s 66(1)(a) of the 2004 Act.
10.	By para 8(5), Sch 11 a person is not to be taken to have complied with a para 8 obligation if there has been a contravention of a requirement as to the time at which the obligation was to be complied with.  So, as a general matter, if the tax is paid late, that late payment will not absolve the earlier payment default.
11.	There are two classes of exception to these default provisions.  The first is contained in para 8(2) by virtue of which the firm is to be treated, in relation to a partner, as satisfying the compliance test if the failure is of a kind prescribed by regulations.  The regulations in question are the Income Tax (Construction Industry Scheme) Regulations 2005, specifically Table 3 (as amended) in regulation 32.  Amongst other items Table 3 includes as a prescribed (and thus effectively ignored) obligation the obligation to pay income tax in circumstances where the payment is made not later than 28 days after the due date, and the applicant has not otherwise failed to comply with this obligation within the previous 12 months, and late or non-payment of an amount under £100.
12.	The second exception is in para 8(3), Sch 11.  This provides that the firm is to be treated, in relation to a partner, as satisfying the compliance condition as regards an obligation if HMRC are of the opinion that (a) the person had a reasonable excuse for the failure to comply; and (b) if the excuse ceased, he complied with the obligation without unreasonable delay after the excuse had ceased.  A similar provision, in relation to obligations under the TMA, is applied by s 118(2) of that Act: a person is deemed not to have failed to do something if he had a reasonable excuse for not doing it and if he did it without unreasonable delay after the excuse had ceased.
Discussion
13.	In this case the determination of the cancellation of Mr Beard’s registration for gross payment was on 10 September 2008, and the qualifying period was therefore the period of 12 months ending with that date.  We find that Mr Beard was in default of his obligations in the qualifying period, so far as concern income tax computed by reference to the profits of the partnership, in his failure to pay the surcharge of £364.54 due on 18 April 2008 and in his failure to pay interest of £6.51 due on 15 October 2007.  However, as regards this latter obligation, it may be disregarded by virtue of reg 32 of the 2005 Regulations.
14.	The issue before us therefore was whether Mr Beard had a reasonable excuse for the late payments of income tax and the surcharge.  Two excuses were put forward on behalf of Mr Beard:
(1)	That, having regard to the possible loss claim in respect of the partnership for the period to 31 March 2008, and the likely carry-back of Mr Beard’s share of that loss, it was not clear what, if any, liability to tax would remain for the period to 31 March 2007, and for which the tax would be due on 31 January 2008. 
(2)	That, because of Mr Beard’s financial position, the deterioration in the partnership business in the period to 31 March 2008 and the failure of Mr Beard to sell his property until June 2008, Mr Beard was unable, due to insufficiency of funds, to meet the obligations on time.
Loss claim
15.	The possibility of the loss claim in respect of the year ended 31 March 2008 being carried back so as to adjust the liability of Mr Beard to income tax for the tax year to 5 April 2007 cannot provide a reasonable excuse for late payment of that tax.  The obligation of Mr Beard as at 31 January 2008 was to pay the sum due in respect of his self assessment.  That sum was £7,290.87, and the liability to make that payment on 31 January 2008 was unaffected by the possible loss claim.  Loss relief claims are provided for in para 2, Sch 1B, TMA.  Under that paragraph such claims are claims for the year in which the loss is incurred, and not for the earlier year for which relief is sought.  Accordingly, in this case, any carry back loss claim could not have affected the self assessment liability for the tax year ended 5 April 2007, which was payable on 31 January 2008.  Of course, even with hindsight, had the carried back loss had the effect of reducing the 31 January 2008 liability, it would not have reduced it to less than £100, so a default would still have occurred.
Insufficiency of funds
16.	It is evident that Mr Beard was under considerable financial pressure, with mounting personal debt and a business suffering a downturn in the year to 31 March 2008.  In neither para 8(3), Sch 11, Finance Act 2004 nor in s 118(2) TMA is “reasonable excuse” defined.  We take the view, however, that without more an insufficiency of funds is not of itself a reasonable excuse.  This is not a case where the exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become due on a particular date would not have avoided the insufficiency of funds which led to the default, such as a major client of the partnership failing to pay or delaying payment (see, in a VAT context, Customs and Excise Commissioners v Steptoe [1992] STC 757).  Mr Beard was aware of his financial position for some considerable time prior to 31 January 2008, and he was aware of his tax liability falling due at that time.  He had over a period incurred considerable debt, including on credit cards, and in the past had needed to release equity in property by moving home in order to meet liabilities.  He was aware enough of his financial position in autumn 2007 to put his then current house on the market.  We had no evidence of any particular cause of insufficiency of funds as at 31 January 2008 that could have been regarded as providing a reasonable excuse.  We do not regard the failure of the limited company in 2006 due to a customer default to be sufficiently proximate to the 2008 defaults to represent a reasonable excuse for those defaults. The downturn in the partnership business in the year to 31 March 2008 was an incident of business activity generally, which as a general rule cannot form the basis of a reasonable excuse for failure to account for tax on the due date (see Customs & Excise Commissioners v Salevon Ltd [1989] STC 907), and we find that it was not a reasonable excuse in this case.
17.	We do not consider that it is reasonable for a taxpayer to expect to be able to fund payment of tax out of the sale of an illiquid asset such as his home.  It is always possible that such a sale will take time, and that the funds will not be available when the tax has to be paid.  In putting his house on the market Mr Beard was aware in good time of the need to raise cash to pay his liabilities.  It would have been reasonable in the circumstances, particularly when two prospective sales had proved abortive, for the possibility of the sale being delayed beyond the tax payment date to have been anticipated, and for alternative means of funding the tax liability to have been sought.  The delay in the sale of the property cannot therefore constitute a reasonable excuse.
18.	Finally, as regards reasonable excuse, events that take place after the due date for payment cannot represent a reasonable excuse for the original default (though, if there has been a reasonable excuse for the original default which has ceased, such events might themselves form a separate excuse for any further delay).  In this case the unfortunate loss of Mr Beard’s car through theft cannot provide any excuse for the default in payment of tax or surcharge. 
Business Payment Support Service and Time to Pay
19.	Mr Lewis raised the fact that in the Pre-Budget Report 2008 the Government had introduced the Business Payment Support Service designed to assist businesses that are unable to pay their tax.  That service came into effect on 24 November 2008.  As part of that service HMRC have stated, in relation to subcontractors registered for gross payment status, that gross payment status will be unaffected if the taxpayer has, before the tax payment is due, come to HMRC to agree a Time to Pay (TTP) arrangement.  Whilst it is possible that if this service had been available at the relevant time it could have assisted Mr Beard, if he had availed himself of it, the service was not introduced until well after Mr Beard’s defaults, and accordingly cannot be material for the purpose of this appeal.  Furthermore, any assistance under the new scheme (which is supplemental to existing Time to Pay arrangements) would have been dependent on Mr Beard having entered into a TTP arrangement under it.    There was no evidence before us that any attempt had been made on behalf of Mr Beard to enter into a TTP arrangement prior to the default on 31 January 2008.
Decision
20.	For these reasons we dismiss this appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 10 June 2009