[2010] UKFTT 58 (TC)

TC00371

Appeal number TC/2009/11918

CONSTRUCTION INDUSTRY SCHEME – Cancellation of registration for gross payment – whether compliance failure of which account could be taken in cancelling registration – held no – whether the Appellant had a reasonable excuse for compliance failure – held yes – appeal allowed

FIRST-TIER TRIBUNAL
TAX CHAMBER

	TERENCE BRUNS	Appellant
trading as TK FABRICATIONS

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Construction Industry Scheme)	Respondents

				TRIBUNAL: 	JOHN WALTERS QC
						MARK BUFFERY FCA						

Sitting in public in London on 20 November 2009

The Appellant in person 

There was no appearance by or on behalf of the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	When this appeal was called on for hearing there was no appearance by or on behalf of the Respondents (HMRC). The Tribunal through its clerk made enquiries and ascertained that HMRC had been notified of the hearing. The Tribunal decided that in the circumstances the proper course would be to proceed with the hearing in the absence of HMRC.
2.	This is an appeal against the decision of the Respondents (HMRC) in the administration of the Construction Industry Scheme (CIS) to refuse to allow the Appellant (Mr. Bruns), a sub-contractor, to be paid gross, that is, without deductions on account of tax and national insurance contributions.  The decision was communicated to the Appellant by a letter to his then representatives, Freemans Partnership LLP (Freemans), from HMRC, dated 8 February 2008.
3.	The letter stated that the Appellant’s tax treatment for CIS purposes would change from “gross” to “payment under deduction” with effect from 90 days from the date of the letter (8 February 2008).  However the letter also stated that “loss of gross payment status normally rakes effect 90 days from the date of this letter, but this may be delayed if you make an appeal against this decision”.  An appeal has of course been made.  In the absence of any representation at the appeal on behalf of HMRC, the Tribunal was unable to obtain HMRC’s confirmation that the Appellant’s gross payment status continued.  We have, however, been told that it does, pending the result of this appeal.  We notice that this is the effect of section 67(5) Finance Act 2004 (FA 2004).
4.	The Tribunal heard evidence from the Appellant and also had a bundle of documents supplied with its papers.  From that evidence we find facts as follows.
5.	The reason for HMRC’s decision to withdraw gross payment status from the Appellant was provided in HMRC’s letter dated 8 February 2008 as follows:
“Compliance failures
1.	The Self Assessment first payment on account of £3,286.50 due on 31 January 2007 was not paid in full until 23 April 2007.
2.	Your Contractor’s monthly return for [a given reference number] for period ending 5 May 2007, due on 19 May 2007, is still outstanding.”   
6.	The correspondence between HMRC and Freemans since the letter dated 8 February 2008 was issued indicates that the first stated alleged compliance failure was material to the decision to withdraw gross statement status and the second stated alleged compliance failure was not.
7.	In particular, it is stated in a letter from Freemans to HMRC dated 4 March 2009 that in March or April 2008 the Appellant contacted the Inland Revenue requesting a contractor’s annual return form for completion, he being unaware that this was no longer required, and was advised that the monthly returns were now sufficient for Inland Revenue purposes.  The letter went on to state that the Appellant’s record of submissions of monthly returns was checked at that time and he was told that all were present and that ‘he had nothing more to do’.  Freemans added that this seems to indicate that no there was no failure to submit monthly returns.
8.	In the subsequent correspondence, HMRC did not revert to the allegation that there had been a compliance failure consisting of non-submission of monthly returns.  The Appellant told the Tribunal that there had in fact been notices of 34 penalties of £100 each for late submission of a return or returns served on him, which were followed by 34 notices of withdrawal of the penalties.
9.	On the basis of this evidence we find that there was no compliance failure related to the non-submission of contractor’s monthly returns.
10.	As to the allegation that the self assessment first payment on account of £3,286.50 due on 31 January 2007 was not paid in full until 23 April 2007, this is factually correct.
11.	However, the Tribunal was shown a bank statement which recorded that an account of the Appellant was £7,678 in credit on 31 January 2007, and we were told, and accept, that the Appellant did have the funds to make the self assessment first payment on account on time. 
12.	The Appellant told us that he was at the time distracted by personal problems in the nature of serious health problems affecting both himself and his immediate family and then-current work commitments, and that this was the cause of the payment being made not quite three months’ late.
13.	 The Appellant told us, and we accept, that his self-assessment tax bills due on 31 July 2007, 31 January 2008, 31 July 2008, 31 January 2009 and 31 July 2009 were all paid on time. (Any payment not later than 28 days after the due date would anyway be likely to fall to be treated as a payment on time in the light of regulation 32 of the Income Tax (CIS) Regulations 2005 – see: below.) The Appellant told the Tribunal that he had money put by to meet the tax due on 31 January 2010. 
14.	Freemans however did in correspondence with HMRC present cash flow problems in early 2007 as the reason for the late payment of the tax payment due on 31 January 2007, and HMRC specifically rejected cash flow difficulties prior to 1 June 2008 as being capable of amounting to a reasonable excuse, on the basis of which the decision to withdraw gross payment status could be reversed.  Freemans stated that, in their opinion, if the Appellant had discharged the tax payment due on 31 January 2007 by the due date, it would have proved detrimental to his ability to continue funding his business and also stated that the Appellant made the payment (on 23 April 2007) as soon as he could, having regard to this factor.
15.	Another relevant fact is that withdrawal of gross payment status from the Appellant would have very serious consequences indeed for his ability to continue in trade.
16.	The Appellant has been self employed since 1983.  He supplies services in the area of thermal insulation and duct work. He has been registered for VAT since 1986.  Three VAT inspections have all been satisfactory to HMRC.  He has two main customers, who between them account for about 90% of his work.  He told us, and we accept, that neither would continue to trade with him if his gross payment status was withdrawn.  We were told that this is because that would give rise to additional administrative burdens which the customers were not willing to carry.
17.	The Appellant rents a workshop from his main customer, which is fitted out with his own sheet metal machinery.  He pays rent for the workshop of about £5,000 per year.  His machinery has cost £14,000 and, although now old, it remains in fine working condition.  However its resale value is very low.
18.	The Appellant is 61 years old.  He told us, and we accept, that withdrawal of gross payment status was likely to result in his having to close down his business, and that he would have no success in seeking employment. In that event, he would change from being a tax payer to being a recipient of benefits.  It seems to us that it is overwhelmingly likely that the result of these developments would be an overall loss to the public purse. 
19.	The Appellant told us that he did not realise the serious nature and the consequences of delaying the payment of the tax due on 31 January 2007.
20.	Our jurisdiction on an appeal from a cancellation of the Appellant’s registration for gross payment “shall include jurisdiction to review any relevant decision taken by the Board of Inland Revenue in the exercise of their functions under section 63, 64, 65 or 66 [FA 2004]” – see: section 67(4) FA 2004.
21.	The functions relevant to this appeal are those under sections 66 FA 2004. HMRC’s case appears to be that their determination cancelling the Appellant’s registration for gross payment was correct because if an application to register the Appellant for gross payment had been made on 8 February 2008, “the Board would refuse so to register him” (section 66(1)(a) FA 2004).
22.	Part I of Schedule 11 FA 2004 gives the conditions to be satisfied by individuals for registration for gross payment.  They are listed under three heads, “the business test”, “the turnover test” and “the compliance test”.  The Tribunal understands HMRC to take the point that the Appellant does not satisfy the compliance test – see: para. 4, Sch. 11, FA 2004.
23.	Para.4, Sch. 11, FA 2004 relevantly provides as follows:
“(1) The applicant must, subject to sub-paragraphs (3) and (4) have complied with-
(a)	all obligations imposed on him in the qualifying period (see paragraph 14) by or under the Tax Acts or the Taxes Management Act 1970 (c.9) [(TMA)]…
(3) An applicant or company that as failed to comply with such an obligation … as-
(a)	is referred to in subparagraph (1), and
(b)	is of a kind prescribed by regulations made by the Board of Inland Revenue,
is, in such circumstances as may be prescribed by the regulations, to be treated as satisfying the condition in that sub-paragraph as regards that obligation …
(4) An applicant or company that has failed to comply with such an obligation … as is referred to in sub-paragraph (1) is to be treated as satisfying the condition in that sub-paragraph as regards that obligation … if the Board of Inland Revenue are of the opinion that-
(a) the applicant or company had a reasonable excuse for the failure to comply, and
(b) if the excuse ceased, he or it complied with the obligation … without unreasonable delay after the excuse had ceased.”
24. Paragraph 14, Schedule 11, FA 2004 provides that “[i]n this Schedule ‘the qualifying period’ means the period of 12 months ending with the date of the application in question”.
25. As the Tribunal understands HMRC’s case, the relevant obligation with which the Appellant has not complied (for the purposes of paragraph 4(1), Sch. 11, FA 2004) is the obligation under section 59A(2) TMA to make a payment on account of his liability to income tax for 2006/7 on or before 31 January 2007.
26. That obligation was imposed on the Appellant on 31 January 2007.  The ‘qualifying period’ in relation to the imposition of obligations which must have been complied with in order that there should not be a determination cancelling the Appellant’s registration for gross payment on 8 February 2008 is the period of 12 months ending with 8 February 2008.  31 January 2007 does not, therefore, fall within that ‘qualifying period’ and in the Tribunal’s judgment HMRC may not therefore rely on non-compliance with that obligation for the purposes of cancelling the Appellant’s registration for gross payment by a determination on 8 February 2008. There is no other non-compliance apparent in the papers which would justify such a determination.
27.  The Appellant complied with the obligations imposed on him under section 59A(2) TMA in the ‘qualifying period’ of 12 months ending with 8 February 2008, in that he made both the payments on account due on 31 July 2007 and 31 January 2008 on time.  (As it happens, he also complied with the obligations imposed on him by that provision in the period of 12 months ending with the date of the hearing of the appeal.) 
28. Our decision on this point is a sufficient basis for us to allow the appeal.
29. It is relevant to note that by regulation 32 of the Income Tax (CIS) Regulations 2005 (SI 2005/2045) the obligation to pay income tax is, for the purposes of para. 4(1) and (3) Schedule 11 FA 2004, to be taken to have been satisfied if 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.  The payment here was made 82 days after the due date.
30. We add that we are satisfied that the Appellant has also, on the facts, shown a reasonable excuse for his failure to make a payment on account of his liability to income tax for 2006/7 on or before 31 January 2007 and that if the excuse ceased before 23 April 2007, he made the payment on account (on 23 April 2007) without unreasonable delay after it had ceased.
31. The reasonable excuse consisted of two elements, each of which we regard as amounting independently to a reasonable excuse.  The first is the inability to make the payment on account without prejudicing his business cash flow. The second element is the stress suffered by the Appellant by reason of his health and other personal problems in the nature of family illnesses.
32. We add that we consider that an excuse can arguably be regarded as reasonable by reference to the consequences of the withdrawal of gross payment status. This would be the case where such a withdrawal would, on the facts, be a disproportionate sanction for the non-compliance in question. The fact, which we find, that a withdrawal of gross payment status would be likely to cause the Appellant to lose his livelihood and suffer severe economic loss on the sale or scrappage of his equipment, could render his excuse reasonable on this further stand-alone ground.  These consequences which would be likely to flow from a withdrawal of gross payment status would, in our judgment, be wholly disproportionate to the late payment of tax in this case (for which HMRC were, we assume, in any case compensated in interest).  This factor could well render the Appellant’s excuse reasonable even if, contrary to our findings above, there was no other basis on which his excuse could be held to be reasonable. 
33. For these reasons we allow the appeal and quash HMRC’s determination to cancel the Appellant’s registration for gross payment.

                             JOHN WALTERS QC

JUDGE OF THE FIRST-TIER TRIBUNAL
RELEASE DATE: 8 February 2010