[2009] UKFTT 350 (TC)

									TC00288
Appeal number TC/2009/11325

Construction Industry Scheme – Refusal to grant gross payment status – Whether compliance test has been met – Whether reasonable excuse for the failure to comply and whether there is reason to expect future compliance 

FIRST-TIER TRIBUNAL
TAX CHAMBER

	DUCTAIRE FABRICATIONS LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: 	MRS FIONAGH GREEN (Judge)
						MR JOHN CHERRY

Sitting in public in London on 24 September 2009

Mr Nazim Ali of N Ali & Co, Chartered Certified Accountants and Registered Auditors and Mr Sohaib Akram, Audit Manager, for the Appellant

Miss Nicola Parslow, HMRC Presenting Officer, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal, dated 8 September 2008, against the refusal to grant Gross payment status within the Construction Industry Scheme. 
The relevant legislation 
2.	Finance Act 2004
(a)	The taxation of payments by contractors to subcontractors in the construction industry is governed by legislation, at Section 57-68 Finance Act 2004, Schedules 11 and 12 Finance Act 2004 and by regulations, The Income Tax (Construction Industry Scheme) Regulations 2005, SI 2005 No.2045 and is effective on or after 6 April 2007.
(b)	Under Section 61 Finance Act 2004 any payment by a contractor to a subcontractor must be made under deduction of tax at the appropriate rate.  The deduction is made from the payment excluding any amount directly relating to the cost of materials.
(c)	Under Section 63(1) Finance Act 2004, the Board must, on application, if it is satisfied that the correct information has been provided, register the subcontractor.
(d)	Where an application under Section 63(2) Finance Act 2004 is made for registration of gross payment, and the Board are satisfied that the correct information has been provided and the requirements as set out in Section 64 Finance Act 2004 are satisfied, then the applicant will be registered for gross payment.
(e)	Under Section 63(3) Finance Act 2004 in any other case, the Board must register the subcontractor for payment under deduction.
(f)	Section 66(1) Finance Act 2004 provides that the Board may at any time make a determination cancelling a person’s (subcontractor) registration for gross payment if it appears to them that if an application were to be made at the time of the determination the Board would refuse to register them for gross payment or has failed to comply with any provision under this chapter or regulations made under it.
(g)	Section 64 Finance Act 2004 provides the requirements for registration for gross payment.  At subsection (4)(a) it provides that the applicant must satisfy the conditions in Part 3 of Schedule 11 to this Act.
(h)	Part 3 of Schedule 11, Finance Act 2004 sets out the three statutory tests which the subcontractor must satisfy being:
•	Paragraph 10 – the business test
•	Paragraph 11 – the turnover test
•	Paragraph 12 – the compliance test

(i)	Paragraph 12(1), Schedule 11, Finance Act 2004 requires the company must have complied with:

•	All obligations imposed on it in the qualifying period by or under the Tax Acts or the Taxes Management Act 1970, and
•	All requests made in the qualifying period to supply all accounts of, or other information about, its business.

(j)	Paragraph 12(2), Schedule 11 Finance Act 2004 provides that a company that has failed to comply with their obligations can be treated as satisfying the conditions as regards those obligations where the failure is of a kind prescribed by regulations.

(k)	The regulations are at Part 6, Statutory Instrument 2005 No.2045, which sets out the conditions to be satisfied for Gross payment.  At table 3 within Regulation 32, the obligations are set out in Column 1.  Column 2 of the table sets out the prescribed circumstances where a company can be treated as satisfying the conditions of the obligations within the compliance test.  There is a further regulation at Statutory Instrument 2008 No.1282 which takes effect from 3 June 2008 which sets out a further circumstance when a company can be treated as satisfying the conditions of the obligations within the compliance test.

(l)	Paragraph 12(3), Schedule 11 Finance Act 2004 provides that a company that has failed to comply with such an obligation or request referred to in Subsection (1) is to be treated as satisfying the condition if the company had a reasonable excuse for the failure to comply and it complied with the obligation without unreasonable delay once the excuse had ceased.

(m)	Section 118(2) Taxes Management Act 1970 provides that a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as allowed or where a person had reasonable excuse he did it without unreasonable delay after the excuse had ceased.

(n)	Paragraph 12(7), Schedule 11 Finance Act 2004 provides that there must be reason to expect that the company will, in respect of periods after the qualifying period, comply with all such obligations and requests within Paragraphs 10, 11 and 12 Schedule 11 Finance Act 2004.

(o)	The qualifying period is defined in paragraph 14, Schedule 11 Finance Act 2004 as the period of 12 months ending with the date of the application in question.

(p)	Section 66(2) Finance Act 2004 provides that where a determination is made the persons registration for gross payment is cancelled from the end of the prescribed period after making the determination.

(q)	Section 66(5) Finance Act 2004 provides that a notice cancelling a person’s registration is issued without delay to the person stating the reasons for the cancellation.

(r)	Regulation 26 SI 2005 No.2045 provides that the prescribed period is 90 days from the date of the notice in Section 66(5) Finance Act 2004.

(s)	Under Section 67(1)(b) Finance Act 2004 a person may appeal against the cancellation of the registration for gross payment.

(t)	Section 67(2) and (3) Finance Act 2004 provides that the appeal must be in writing to the Board within 30 days of the cancellation and stating the reasons for believing the registration for gross payment should not have been cancelled.

(u)	Section 67(5) Finance Act 2004 provides where a person appeals against the cancellation of his registration for gross payment the cancellation does not take effect until the later of the abandonment of the appeal, the determination of the appeal by the Commissioners or the appropriate court.

(v)	Section 66(8) Finance Act 2004 provides that a person whose registration is cancelled may not, within a period of one year after the cancellation takes effect, apply for registration for gross payment.

(w)	Where a person’s registration for gross payment is cancelled he is registered for payment under deduction.

(x)	The tax deducted is not lost to the subcontractor.  Section 62 Finance Act 2004 provides for the treatment of sums deducted.

(y)	A company can set off deductions against the following sums payable:

•	Pay as You Earn tax due from company’s employees
•	National Insurance Contributions due
•	CIS deductions made from the company’s subcontractors
•	Student Loan repayments due from the company’s employees

At the end of the tax year, any excess CIS deductions can be refunded or set against Corporation Tax due once the company’s P35 annual return has been received.

(z)	Sums deducted from a subcontractor that is not a company are treated as being income tax paid in respect of the subcontractors relevant profits.  Any excess sums deducted will be repaid.

The Issue

3.	Whether the company’s gross status should be refused.

4.	The evidence and submissions of the Parties

1	The Appellant contends that:

(a)	The failures in respect of the Contractors’ Returns should be disregarded as there was a 6 month grace period from April 2007 to October 2007.

(b)	Although the corporation Tax payment was late this was due to changes with the accounting period and ownership of the company.

(c)	Most of the PAYE payments and Returns due were made within 7 days of the due date.

(d)	That there was an overpayment on the PAYE record for the year ended 5 April 2007 due to a misallocation of payments.

(e)	The withdrawal of gross status will have an adverse effect on the business.

(f)	The compliance failures were not significant.

(g)	The decision to refuse gross status is an abuse of the Respondents’ powerful privilege position and cannot be justified in terms of the Appellant’s commercial commitments on day to day matters in the administration of their business affairs and that the withdrawal of gross status would destroy the efficient competent and successful business.

(h)	That Ductaire Fabrications Ltd was acquired by Coles Holdings Ltd on 19 July 2006 and that the accounting year had been up to 30 September and when acquired by Coles Holdings Ltd the company was incorporated into the year end of the holding company 31 December. There was a conflict of dates.  The auditing was as part of a group. There was an extended period of 15 months not 12 months and with two separate corporation tax returns. Two schedules in support related to the schedule of over/under payments for Ductaire Fabrications Ltd and a summary of profits chargeable to corporation tax for the year ended 31 December 2006 with profit and loss account for the year ended 31 December 2008. The schedule revealed a significant reduction due to the effects of the recession and the Appellants consider that it will be very difficult to continue with the business without gross payment status.

(i)	That the Respondents did not give help and advice but concentrated on penalties.  

(j)	That the amended corporation tax return in March 2008 related to nine companies and a careful consideration needed to be given to the loss relating to the companies within the group.  The Appellants also contended that the monthly scheme payment due on 19 July 2007 was settled by utilising the credit balance brought forward from a previous overpayment, and was thus not paid late. They further contended that the payment actually made on 25 July 2007 then set up a new credit balance, which could settle the payment due for the next month, and so on throughout the review year.

2.	The Respondents contended that:

(a)	The Crown accepts, in this case, that the requirements of the turnover and business tests have been met. 

(b)	The Crown contends that the company has failed the compliance test.

(c)	The legislation requires that the company must have complied with all obligations imposed on it in the qualifying period by or under the Tax Acts or the Taxes Management Act 1970, and all requests made in the qualifying period to supply all accounts of, or other information about, its business.

(d)	The Qualifying period in this case is the 12 months to 18 June 2008.  The CIS 308 notifying the appellant of the failures was issued on 11 August 2008.

(e)	The failures are:

(1)	Corporation Tax Return (CT 600) for the accounting period ended 30 September 2006 was due on 30 September 2007 and not received until 31 December 2007.  This was 92 days late.

(2)	A penalty for the late filing of the Corporation Tax Return for the accounting period ended 30 September 2006 was imposed on 22 October 2007 in the sum of £100.  This was paid in full on 14 April 2008.

(3)	Corporation Tax for the accounting period ended 30 September 2006 in the amount of £26,589.45 due on 1 July 2007 was paid as follows:

(a)	£100		7 February 2008	221 days late
£26,489.45	14 April 2008		287 days late

(b)	Corporation Tax for the accounting period ended 31 December 2006 in the amount of £1,583.27 due on 1 October 2007 was paid as follows:

	£1,583.27	14 April 2008		196 days late

(4)	Monthly Contractors Returns

Month ending	Due Date	Received 	Days late
05/07/2007	19/07/2007	25/07/2007	        6
05/08/2007	19/08/2007	29/08/2007	      10
05/09/2007	19/09/2007	26/09/2007	        7
05/02/2008	19/02/2008	20/02/2008	        1

Monthly Scheme Payments

		Payments		      Days          Total
Description	Due By              Paid on       late           Amount
2007/08	
Month 3	19/07/2007       28/07/2007      9	        22,052.63
2007/08
Month 4	19/08/2007	30/08/2007    11        21,079.01
2007/08
Month 5	19/09/2007	25/09/2007      6        25,149.84
2007/08
Month 6	19/10/2007	01/11/2007     13       20,101.49
2007/08
Month 7	19/11/2007	23/11/2007       4       24,537.59	
2007/08

Month 8	19/12/2007	30/01/2008      42      21,671.87
2007/08
Month 9	19/01/2008	08/02/2008      20      20,192.13
2007/08
Month 10	19/02/2008	29/02/2008      10       21,936.57

(f)	Certain compliance failures can be disregarded as set out within the legislation and that where the company has failures it can be treated as satisfying the obligation where it had a reasonable excuse for failing to comply with its obligations and those obligations were complied with without unreasonable delay once the excuse has ceased.  Although reasonable excuse is not defined within the legislation HMRC issues guidance on what is accepted as a reasonable excuse and the Respondents contend that in respect of the failures for late payment of corporation tax the due date of payment is nine months and one day after the end of the accounting period and prior to the submission of a tax return for that period and that no explanation had been given as to how the change of accounting date or the change in ownership affected the company’s ability to pay on time had been submitted.  The Respondents further contended that in respect of the failure to file the contractors’ returns on time that the failure to file the return for the period ended 5 July 2007 could be disregarded by reference to HMRC guidance and that a period of grace was allowed in relation to the penalties for the late filing of the contractors’ returns insofar that the late submission of a return up to 19 October 2007 would not incur a filing penalty. The late filing of returns would not be overlooked when considering the compliance test. A “mailshot” was issued to all contractors within CIS in April 2007 explaining this position.  In respect of the PAYE payments the first three payments could be disregarded by reference to prescribed circumstances within the legislation but the remaining PAYE payment failure cannot be disregarded and there had been no excuse provided for these failures.  In correspondence it has been said that there was an overpayment on an earlier year due to the misallocation of payments and the company was in credit with HMRC as a result.  The overpayment refunded on 11 June 2008 amounted to £15,254.53 which is significantly less than a monthly payment made late.  The Respondents contended that the company does not have a reasonable excuse.  The Respondents further contended that the legislation makes no allowance for the consequences of a loss of gross payment status to be taken into consideration.  

5.	The Respondents referred the Tribunal to the case of John Grosvenor v Commissioners for Her Majesty’s Revenue and Customs and that at paragraph 37 Judge Staker stated:

“I further find that the consequences of cancellation of gross payment status is not relevant to the issue whether or not there is a reasonable excuse.”

The Respondents further referred the Tribunal to the case of HMS Inspector of Taxes v Transform Shop Office and Bar Fitters Ltd (2005) EWHC 1558 (CH) where Mr Justice Hart says at paragraph 14:

“The purpose which Parliament plainly had in mind in the legislation was to procure a strict compliance with tax obligations by making such compliance the price of obtaining a certificate”.

The Respondents contended that unless tax obligations were strictly complied with a company having gross payments status would have an unfair competitive advantage over those who were complying. The Respondents further contended that the Tribunal needed to consider the further test within the legislation for the period after the qualifying period. This test states that there must be reason to expect that the applicant will, in respect of periods after the qualifying period, comply with all such obligations and requests imposed on it. The Respondents contend that Ductaire Fabrications Ltd fails the “reason to expect test” by virtue of the failure to pay the corporation tax for the account period ended 31 December 2007 in the amount of £5,387.39 due on 1 October 2008 and which was paid in full on 7 January 2009, 98 days late.  

6.	The Respondents accepted at the Tribunal hearing that the late submission of the corporation tax return itself could be disregarded but that the penalty of £100 could not be so disregarded.  

Findings

7.	There is no dispute between the parties as to the actual dates of payments and that payments were made late as set out in the Respondents’ contentions above. 
 
8.	The corporation tax return for the accounting period ended 30 September 2006 was due on 30 September 2007 and was not received until 31 December 2007 which was 92 days late.  However it was accepted by the Respondents that as the corporation tax return itself was submitted the failure to lodge on or before 30 September 2007 could be disregarded as one of the exceptions within regulation 32 of the Income Tax (Construction Industry Scheme) Regulations SI 2005 No.2045.

9.	Ductaire Fabrications Ltd were registered for gross payment pursuant to section 64 Finance Act 2004.

10.	The Board may at any time make a determination cancelling the registration for gross payment if it appears to them that if an application were to be made at the time of the determination the Board would refuse to register them for gross payment or has failed to comply with any provision or regulation made under it.  

11.	The business test and the turnover test are satisfied.

12.	There is a failure in respect of the penalty for the late filing of the corporation tax return for the account period ended 30 September 2006 in the sum of £100.  The penalty is not within the exceptions from the compliance obligations as it is not less than £100.  The Income Tax (Construction Industry Scheme) (Amendment No.2) Regulations 2008.  

13.	The corporation tax for the accounting period ended 30 September 2006 in the amount of £26,589.45 due on 1 July 2007 was paid as to £100 7 February 2008 221 days late and £26,489.45 on 14 April 2008 287 days late.  The Appellant argued that a change of ownership into a group with loss relief available meant that corporation tax calculations were delayed, however the corporation tax return for Ductaire Fabrications Ltd was submitted on 31 December 2007 showing the correct amount of corporation tax due from the company, but the majority of the corporation tax was not paid until 14 April 2008. The Appellant explained that delays in calculating corporation tax were caused by decisions to be made about group loss relief.  Those decisions were made by 31 December 2007 when the corporation tax return was submitted but the corporation tax was still not paid as to the £26,489.45 until 14 April 2008.

14.	The failures in respect of the late monthly Contractors’ Returns were also carefully considered and it was decided that they could all be disregarded.  The monthly contractors’ return for the month ending 5 July 2007 was disregarded within the regulations and the monthly contractors’ returns for the month ending 5 August 2007, 5 September 2007 and 5 February 2008 could be disregarded as there were not more than two failures within the relevant twelve month period.  

15.	The Tribunal then also carefully considered the late payments in respect of the monthly scheme payments and it was decided that the scheme payments paid on 28 July 2007, 30 August 2007 and 25 September 2007 could be disregarded within the regulations.  However there were failures in respect of the monthly scheme payments paid on 1 November 2007, 23 November 2007, 30 January 2008, 8 February 2008 and 29 February 2008. The failure to file the return for the period ending 5 July 2007 is disregarded within the regulations by reference to the HMRC guidance and a period of grace was allowed in relation to the penalties for the late filing of the contractors’ returns insofar that the late submission of a return up to 19 October 2007 would not incur a filing penalty.  The Tribunal did accept however that there were only two contractors’ returns which were filed later than 14 days after the correct submission date.  

16.	In respect of the PAYE payments the first three payments can be disregarded by reference to the prescribed circumstances within the legislation but the remaining PAYE payments cannot be disregarded.  The Appellants’ argument in respect of the PAYE is that HMRC were holding a credit balance of £15,254.53 because of an overpayment in the previous year and that this could be regarded as reducing the amounts of late payments.  However, this credit balance is less than any of the monthly scheme payments in point, thus leaving an amount unaccounted for each month.  Accordingly, it was decided that the lateness remains a failure.  

17.	The Tribunal decided that on their own there would have been a reasonable excuse for the failures in respect of the late payment of the £100 for the filing of the corporation tax return and for the late payments of the monthly scheme payments.  However the Tribunal decided that these failures together with the remaining PAYE payment failures and in particular the late payment in respect of the corporation tax the majority of which was paid 287 days late that the company does not have a reasonable excuse.  The change of ownership into a group with loss relief available was carefully considered and there may have been a reasonable excuse had the corporation tax been paid on or before 31 December 2007 but it was decided that there could be no reasonable excuse for such late payment by 14 April 2008, 287 days late.   Corporation tax for the accounting period ended 31 December 2006 in the amount of £1,583.27 due on 1 October 2007 was paid on14 April 2008 196 days late.

18.	The Tribunal accepts that there have been and will be considerable difficulties in respect of the recession. However, the company must comply with all obligations imposed on it unless those obligations can be treated as satisfying the conditions as regards those obligations where the failure is of a kind prescribed by regulations.  The Tribunal did also consider the Appellant’s submission that withdrawal of the gross status would have an adverse effect on the business. However, the purpose of Parliament in creating the legislation was to procure strict compliance with tax obligations by making such compliance the price of obtaining a certificate and there could be an unfair competitive advantage to allow the gross payment status to continue despite clear failures.  The consequences of cancellation of gross payment status is not relevant to the issue of whether or not there is a reasonable excuse.  The Appellant submitted that the loss of gross payment status for the company could mean that the company would go into receivership.  The Appellant submitted a balance sheet as at 31 December 2008 showing a loss of £150,361 but a profit in 2007 of  £55,106 as supporting this contention.    This raises further questions in respect of the test within the legislation for the period after the qualifying period.  This test states that there must be reason to expect that the Appellant would, in respect of the period after the qualifying period, comply with all such obligations and requests imposed on it.  The Tribunal however decided that the reason to expect test was actually failed by the fact that corporation tax for the accounting period ended 31 December 2007 in the amount of £5,387.39 due on 1 October 2008 was paid in full on 7 January 2009, 98 days late.

19.	The Appellant submitted that the Respondents had failed to provide advice to the company and its officers.  However in March 2006 general advice was issued headed “keeping on top” and further information and guidance issued in April 2007 and by further mailshot again in April 2007.  Although no warning was issued, the mailshot and public guidelines provided information and advice.

20.	In accordance with the gross payment status the company must, subject to the regulations, comply with all obligations imposed on it and all requests in respect of its accounts or other information in relation to its business to HMRC.  This is a stand alone test which also applies to the company’s future obligations; every time a subcontractor payment is made there is an element of tax payable to HMRC.  The Appellant had also raised liquidity  issues if gross payment status was withdrawn with possible receivership and any concerns relating to the precarious financial situation would mean a possible loss to the Exchequer.   

21.	Having carefully considered all of the evidence and regulations and case law it was decided that the compliance test has not been met and that there is no reasonable excuse and there is furthermore no reason to expect future compliance.  

22.	We therefore dismiss the appeal.  

MRS FIONAGH GREEN
TRIBUNAL JUDGE
RELEASE DATE: 4 December 2009