[2010] UKFTT 456 (TC)

TC00721
CIS Scheme – withdrawal of Gross Payment Status – S.66 and S.67 Finance Act 2004 – Appeal Dismissed

IN THE FIRST TIER TRIBUNAL	Reference No: TC/2010/01465
TAX CHAMBER

BETWEEN

	DESMOND MAGEE & SONS (A PARTNERSHIP)	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (“HMRC”)	Respondents

TRIBUNAL : IAN WILLIAM HUDDLESTON (JUDGE)

		 Ms. Paula O'Riley, Officer for HMRC
		 Tony Stanney, Accountant, for the Appellant

Sitting in Belfast on 22nd June 2010

© CROWN COPYRIGHT 2009

DECISION

Appeal
1.	The appeal in this case is by Desmond Magee and Shaun Magee trading as partners as Desmond Magee & Sons.  The partnership is a building and civil engineering contracting partnership which has operated within the construction industry scheme since November 1995 ("the Scheme").
2.	HMRC took the decision to withdraw Gross Payment Status from the partnership in accordance with Section 66(1) of the Finance Act 2004 as a result of a compliance review which was undertaken on the 20 March 2009.  That compliance review related to the 12 month qualifying period 15 March 2008 to 15 March 2009.
The Circumstances
3.	As indicated above, the Appellants are partners in a trading partnership operating as a building and civil engineering contractors.  Since November 1995 the partnership had operated under the Scheme which, in basic terms, entitles traders to receive payments from their employers without deduction of tax.  To qualify for this particular status traders must comply with, broadly speaking, three tests, namely:
(a)	"the business test";
(b)	"the turnover test"; and, finally
(c)	"the compliance test".
Details of each are provided for in Schedule 11 of the Finance Act 2004.
4.	In essence a business that qualifies is awarded gross payment status and retains that status until such time as the business fails to qualify for it.  All participants within the scheme are subject to a review which is referred to variously as "the ongoing tax treatment qualifying test" or, more usually "the scheduled review" to ensure continual compliance with the requirements of the Scheme.
5.	As indicated above, the scheduled review in this case was undertaken on the 20 March 2009 and related to the 12 month period from 15 March 2008 to 15 March 2009.
6.	Upon the conclusion of that review the following deficiencies (which were not disputed by the Appellants) were found to exist:
(a)	in the case of Mr. Desmond Magee:
(i)	the payment on account for income tax which was due on the 31 July 2008 in the amount of £4,643.15 was paid on the 22 October 2008 – 83 days late;
(ii)	the balancing payment for the previous year which was due on the 31 January 2009 became the subject of an arrangement to pay on the 7 March 2009 and, accordingly, has been treated by HMRC as 35 days late;
(iii)	the first payment of account which was due on the 31 January 2009 in the sum of £5,314.44  became subject to an arrangement to pay on the 7 March 2009 and therefore is treated as being 35 days late;
(b)	in the case of Mr. Shaun Magee, there were similar breaches:
(i)	the second payment of account due on the 31 July 2008 in the sum of £3,847.89 was paid on the 22 October 2008 – 83 days late;
(ii)	the balancing payment of £965.02 due on the 31 January 2009 became the subject of an arrangement to pay on the 26 February 2009 and therefore is treated as being 26 days late;
(iii)	the payment on account which was due on the 31 January 2009 in the sum of £4,330.40 became the subject of an arrangement to pay on the 26 February 2009 and therefore was 26 days late.
7.	HMRC took the view that these six failures exceeded the "de minimus" level of default that can be effectively overlooked pursuant to Regulation 32 of the Income Tax (Construction Scheme) Regulations 2005 and, therefore, were of sufficient significance to withdraw gross payment status.  Notice of that withdrawal was served on both partners on the 29 March 2009.
8.	An appeal was made by Mr. Stanney on behalf of the Appellants on the 10 April 2009.  Mr. Stanney in his letter put forward the following basis of the appeal:
"I wish to appeal against this [ie. the determination of the 29 March 2009] as my clients have taken advantage of the extended payment facility introduced by Government.  The idea that their gross payment status is withdrawn because of this is plainly contradictory to the intention of the legislation and compliance should not be affected".
9.	In due course the matter became the subject of an internal HMRC review which was determined against the tax payer, and HMRC wrote to Mr. Stanney on the 28 September 2009 advising that, on the back of the review, they did not feel that reasonable excuse had been established and that the original withdrawal would be upheld.  In that letter HMRC explained that the due date for payment of the outstanding tax was the 31 January 2009 and that an arrangement for time to pay was not requested until (at the earliest) 26 February 2009 (in the case of Mr. Shaun Magee) and on the 7 March 2009 (in the case of Mr. Desmond Magee).  Both dates obviously fell after the due date for the payment of tax, and that no reasonable excuse had been put forward as to why payment had not been made before the due date in either case.
The Appellant's Case
10.	Mr. Shaun Desmond Magee gave evidence to the Tribunal on behalf of the partnership.  On his own evidence there was no dispute that the defaults occurred, but Mr. Magee explained the cash flow difficulties which the partnership had experienced during the review period.  He gave evidence that the partnership undertook a lot of work for the Northern Ireland Housing Executive ("NIHE"), and that approximately some 60% of its turnover related to NIHE contracts.  That relationship had been built up over a period of 15 to 20 years and it involved, principally, the supply and fitting of kitchens and general refurbishment of Housing Executive accommodation.
11.	Evidence was given that, in the normal course of events, NIHE would discharge their accounts within four weeks of receipt of the account, although that sometimes that was delayed to perhaps six to eight weeks.
12.	In the present case, Mr. Magee gave evidence that when the tax fell due for payment, the partnership was not in a position to discharge it because of a number of outstanding invoices which had not been paid by the NIHE and were overdue.  During that period the partners continued to pay their wages bill, but were unable to pay the Inland Revenue because of the delay on the part NIHE.  Mr. Magee gave evidence that when the NIHE payment was made, all tax liabilities were either brought up to date or became the subject of the "time to pay" scheme (ie. that which the partners entered into in late February / early March 2009).
Decision
13.	I must confess to being somewhat disturbed as to the number of these types of cases which seem to now come before the Tribunal – in spite of government's initiative to create "time for pay" arrangements and the concessionary scheme which resulted from the Chancellor's budget speech of 2008.  Given that such initiatives set, to some extent, the policy context, it is regrettable in the present economic climate that life is made more difficult for traders by pursuing unfortunate cases such as this one.
14.	I found Mr. Magee to be an entirely credible witness and his frustration that technical breaches could result in a threat to the livelihood of both himself and his employees is entirely understandable.  
15.	I say this because the legislative scheme which applies to the CIS requires (understandably) strict compliance.  It is a concessionary scheme and, in the past has been open to abuse.  HMRC are right to ensure that compliance is adhered to, but where (such as in this case) the tax has been collected and there is an otherwise good trading record, it seems unfortunate that such a threat to so many livelihoods should be pursued.  The effect, or likely effect, on the Appellant's business is not, however, something that I am allowed to take into account (see John Grosvenor v HMRC ([2009] 283 TC).
16.	The law, however, is clear.  Where the compliance tests are failed then the onus passes to the Appellant to establish reasonable excuse.  The evidence in support of that argument before this Tribunal has focused on the late payment of the Housing Executive, which obviously was material to the Appellant's business.
17.	There is no doubt in certain exceptional cases late payment by a public authority can form the grounds of reasonable excuse – but the circumstances need to be exceptional (see the case of Customs and Excise Commissioners v Steptoe [1992] STC 757) IWH to check
18.	On the evidence adduced, however, it seems to me that although the Housing Executive were late on this particular occasion, they were not exceptionally late, nor did the payment pattern fall substantially outside the norm of the trading relationship which had existed between NIHE and the Appellant.  Equally, the timing of the payments did not, I find, coincide with the due date for the payment of tax and, therefore, do not provide a complete explanation as to why there was delay.
19.	On the facts, as so found, therefore, I do not find that reasonable excuse is established and, although it is with regret, must dismiss the appeal.
20.	No order as to costs.
21.	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.

IAN WILLIAM HUDDLESTON
TRIBUNAL JUDGE

Release Date: 29 September 2010