[2010] UKFTT 199

                                                               TC00501

              Appeal number TC/2009/12162

 Construction Industry Scheme – Appeal against cancellation of registration for gross payment – failure of ‘Compliance test’ –  Reliance on Company Secretary – Whether a reasonable excuse on facts – Yes – Appeal allowed – section 66 &  schedule 11 Finance Act 2004

FIRST-TIER TRIBUNAL

TAX 

	DEVON & CORNWALL SURFACING LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

				TRIBUNAL: 	JOHN BROOKS (TRIBUNAL JUDGE)
						ALAN REDDEN FCA (MEMBER)

Sitting in public in Exeter on 23 March 2010

Brian Vincent (director of the Appellant Company) for the Appellant

Colin Brown of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Devon & Cornwall Surfacing Limited (the “Company”) appeals against the cancellation of its registration for gross payment status within the Construction Industry Scheme (“CIS”) following a review by HM Revenue and Customs (“HMRC”) for the year ended 18 July 2008.
2.	A company’s registration for gross payment may be cancelled by HMRC at any time under section 66(1)(a) of the Finance Act 2004 (the “Act”) if it appears that “if an application to register the person for gross payment status were to be made at that time” it would be refused.
3.	Section 63(2) of the Act provides that HMRC “must” register a company if satisfied that the requirements of section 64 of the Act are met. To meet these requirements, insofar as they are relevant to the present appeal, a company must satisfy the “business test”; the “turnover test”; and the “compliance test” as set out in Part 3 of schedule 11 to the Act (see section 64(4)(a) of the Act). 
4.	As HMRC accept that the Company has satisfied both the business and turnover tests this appeal is concerned with the “compliance test” which requires which requires a company to comply with its obligations under the tax legislation.
5.	It is common ground that the Company was late in filing Contractors monthly returns between November 2007 and February 2008; made late payment of PAYE, National Insurance Contributions (“NIC”) and Subcontractors Deductions during the review period and cannot be treated as having satisfied the compliance test by virtue of Regulation 32 of the Income Tax (Construction Industry Scheme) Regulations 2005.
6.	However, a company will be treated as having satisfied the compliance test, in accordance with paragraphs 12(3) & (7) of schedule 11, if it can establish that it has a reasonable excuse for the failure to comply with its tax obligations, has complied with its obligations without unreasonable delay after the excuse ceased and can be expected to comply in respect of periods after the review period (see paragraph 14 of schedule 11).
7.	It is clear from the letter of 15 September 2009 from Mrs Barratt, HM Inspector of Taxes, to R T Marke & Co Ltd, the Company’s accountants, and confirmed by Mr Brown before us, that HMRC are satisfied that the Company can be expected to comply with its future obligations. 
8.	Therefore, the issue for the Tribunal is whether the Company had a reasonable excuse for failing to comply with its obligations during the review period and has complied without unreasonable delay thereafter.
9.	Mr Vincent told us that when he was made redundant in 2006 he established the Company to carry out a business of laying tarmac, paving and ground works which he saw as a business opportunity and to be able employ people who had worked for him over the previous 20 years. 
10.	He explained that as he had no personal knowledge of what was required to meet his tax and VAT obligations and was concerned that these matters were properly and promptly administered. He therefore entered into an agreement with a business contact giving him a 50% interest in the Company in return for the use of business premises and the provision of a person, employed as a company secretary, who subsequently became the company secretary of the Company to undertake all responsibility for the Company’s accounting and tax matters including dealing with HMRC.
11.	The company secretary, who retained his position of company secretary with his previous employer and was also responsible for the administrative affairs of four other loosely associated companies, took no part in the management of the Company.
12.	Mr Vincent was not sure whether the company secretary was a qualified or part qualified accountant but told us that before being employed as a company secretary had been employed by the Company’s accountants and explained that was why the Company relied on him to ensure that it complied with its tax obligations.
13.	Until 28 April 2008 Mr Vincent was under the impression that the Company’s tax affairs were being efficiently dealt with by the company secretary, on whom it relied for this purpose, and was not aware of any problems.
14.	However, this was not the case. The Company’s Contractors Monthly Returns for the months to 5 November, 5 December 2007, 5 January 2008 and 5 February 2008 were filed 60, 30, 25 and 23 days late respectively. Also, there was late payment of PAYE, NIC and Subcontractors deductions by the Company during 2007-08 with delays varying from 3 days for a payment due in September 2007 to 686 days until payment in full of a balancing payment due by 21 April 2007. 
15.	On 28 April 2008 the Company was faced with a demand for £1,600, delivered by a bailiff, for penalties for submission of late returns. Mr Vincent told us that he had issued a cheque for that amount on the day and that the Company has since complied with all of its subsequent obligations arranging for its external accountants to check the position on a regular basis and for them to have all passwords to access the computer systems in the event of the company secretary’s absence on holiday or sickness.
16.	Mr. Vincent explained that the problem with the Contractors Returns was due to a combination of a problem with a broadband connection and absence of the company secretary due to sickness and holiday. Correspondence in the papers submitted by HMRC shows that the broadband problem was accepted as a reasonable excuse in an associated company dealt with by the company secretary.
17.	As regards the late payment of the balancing payment for 2007-08 Mr. Vincent explained that this was due to confusion on the part of the company secretary who made the payment at the appropriate time but under the reference number for another company he dealt with. Therefore one company showed an overpayment matched by the underpayment in the Company. It took a long time to resolve this leading to the delay but the money had been paid to HMRC. Mr Brown was not able to confirm the position but could tell from his papers that no payment had been made in month six
18.	We therefore have to consider whether reliance by the Company on its secretary in these circumstances can amount to a reasonable excuse. 
19.	There is no definition in the legislation of a “reasonable excuse” which “is a matter to be considered in the light of all the circumstances of the particular case” (see Rowland v HMRC [2006] STC (SCD) 536 at [18]).
20.	Having carefully considered all the circumstances of the case, in particular Mr Vincent’s concerns in relation to tax matters which lead to the appointment of the company secretary who had previously been employed by the Company’s accountants, we find that it was reasonable for the Company to rely on its secretary to comply with its tax obligations and it was this reliance which led to the failures to meet its obligations.
21.	Although this appeal concerns reliance on a company secretary who, as Mr Brown pointed out, is an officer of the Company he is also an “other person” or “third party” on whom the Company relied as was the “trusted employee”, an accountant, employed by a company in Profile Security Systems v Customs & Excise Commissioners [1996] STC 808) and the company secretary in Polarstar Ltd v Customs & Excise Commissioners (1996) Decision No 14445, both of whom were regarded as third parties by the Court and VAT Tribunal respectively for the purposes of what is now s. 71(1)(b) VAT Act 1994 which precludes reliance on “any other person” from being a reasonable excuse for VAT purposes.
22.	In the case of Rowland the Special Commissioner (Adrian Shipwright) said at [22 – 26]: 
“The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes. 
Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd). 
The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse. 
I conclude that in the direct tax context reliance on a third party can be a reasonable excuse. 
The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default.” 
23.	We agree with the conclusion of the Special Commissioner in Rowland that reliance on a third party, such as the company secretary, can be a reasonable excuse in the direct tax context and, like him, having found it was reasonable for the Company to rely on its secretary and that it was this reliance led to the failure to meet its obligations conclude that the Company, which on becoming aware of the failures to meet its tax obligations took steps to remedy the situation, has a reasonable excuse and should be treated as having satisfied the compliance test.
24.	The appeal is therefore allowed.
25.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

JOHN BROOKS
TRIBUNAL JUDGE
RELEASE DATE:  05 May 2010