[2010] UKFTT 477 (TC)

TC00738
Appeal number: TC/2009/15350

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

FIRST-TIER TRIBUNAL

TAX 

	R W WESTWORTH LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN BROOKS (TRIBUNAL JUDGE)
				PAUL ADAMS FCA (MEMBER)									

Sitting in public at Vintry House, Wine Street Bristol on 11 August 2010

Steve Taylor of Smarter Accounting Services Ltd for the Appellant

Colin Brown of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal, by R W Westworth Limited (the “Company”), against the cancellation of its gross payment status within the Construction Industry Scheme following a review by HM Revenue and Customs (“HMRC”) for the year from 28 December 2007 to 27 December 2008 (the “Review Period”).
Facts
2.	Although there was not an ‘Agreed Statement of Facts’ and we heard no oral evidence, the underlying facts, derived from the documents contained in the Appeal Bundle and the submissions of the parties, were not disputed. 
3.	The Company which was established in October 1998 by Mr and Mrs Westworth is a ground work contractor in the construction industry. During the Review Period and beyond the Company, like many others in the construction industry, has faced cash flow difficulties. However, in the case of the Company these were exacerbated by the failure of a major local customer owing the Company over £100,000
4.	Although both are directors of the Company, neither Mr or Mrs Westworth spend much time in the office dealing with its administration. Mr Westworth, who describes himself as “digging holes for a living”, is very much engaged in the construction side of the Company while Mrs Westworth’s time is taken up with family commitments. As neither professes any expertise in accounting or taxation matters around Christmas 2007, about the start of the Review Period, until April 2009 the Company retained the services of an individual whose business was to supply support and consultancy to the construction industry. He worked almost full time for the Company spending six hours a day at its office. The annual cost to the Company for the provision of his services was £60,000 for which the consultant was given, and exercised, the authority and assumed responsibility for all strategic decisions in relation to the Company’s day to day cash management and dealt with all correspondence from HMRC. Even though he was not authorised to sign cheques (which were signed by Mr or Mrs Westworth) he made the decisions as to when payment should be made, prioritising creditors and delaying sending cheques that had already been signed if he thought it was in the Company’s interest to do so.
5.	As a result, during the Review Period, the following payments due under the PAYE regulations, were not made on time:
Year	        Month	  Due		 Paid  	      Days Late
2007-08	9	19/01/08	01/02/08	13
		10	19/02/08	05/03/08	15
		11	19/03/08	29/03/08	10
		12	19/04/08	24/04/08	5
2008-09	1	19/05/08	03/06/08	15
		2	19/06/08	01/07/08	12
		3	19/07/08	01/08/08	13
		4	19/08/08	03/09/08	15
		5	19/09/08	11/10/08	22
		6	19/10/08	24/10/08	5
		7	19/11/08	10/12/08	21
		8	19/12/08	09/01/09	21	
Law
6.	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. 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). As it is accepted that the Company has satisfied both the business and turnover tests this appeal is concerned with the “compliance test” which requires a company to comply with its obligations under the tax legislation. 
7.	A Company that has failed to comply with his tax obligations, for example by late payment of amounts due under the PAYE regulations, “is, in such circumstances as may be prescribed by the [Income Tax (Construction Industry Scheme) Regulations 2005], to be treated as satisfying” the test (see paragraph 12(2) of schedule 11 to the Act). In effect this allows one or two late payments to be ignored and is not applicable in the present case
8.	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).
9.	There is no definition of “reasonable excuse” in the legislation which therefore “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]).
Submissions
10.	For the Company, Mr Taylor submits that by relying on the consultant to provide management services the Company has a reasonable excuse for the failures to comply with the PAYE regulations.
11.	Mr Brown, for HMRC, accepted that the Company did have a reasonable excuse for the late PAYE payments during the first six months or so during which the consultant was engaged. However, he submitted that thereafter the failure of the directors to address the problems would be akin to “culpable default” and could not therefore be a reasonable excuse with the six month period being derived, by analogy, from the unreported decision of the VAT and Duties Tribunal in Fat Sam’s American Food and Beverage Co Ltd v Customs and Excise Cmrs (LON/90/1408) to which Scott LJ  referred in his (dissenting) judgment in Customs and Excise Cmrs v Steptoe [1992] STC 757 at 763 as follows:
“the company had been surcharged for defaults occurring in four accounting periods from September 1989 to June 1990. The events put forward as constituting the reasonable excuse included burglaries in March 1989 and November 1989 in which losses of £2,000 and £4,000 not covered by insurance were sustained. The tribunal held that the March 1989 burglary was too remote an event to excuse the default in the quarter ending 30 September 1989, that the November 1989 burglary constituted a reasonable excuse for the defaults in the quarters ending 31 December 1989 and 31 March 1990 and that there was no reasonable excuse for the default in the quarter ending 30 June 1990. This application of the yardstick suggested by Nolan J is interesting. Both burglaries could accurately have been described as ‘unforeseeable and inescapable misfortune’. Both, in the opinion of the tribunal, had left the company with serious cash flow problems and were ‘the real cause’ of the defaults. But the tribunal applied a time factor and did not allow the burglaries to constitute a reasonable excuse in respect of defaults occurring six months or more after the event.”
Discussion and Conclusion
12.	Given that it is common ground that the Company has made 12 late payments under the PAYE scheme 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 and that in his letter of 25 November 2009 to the Company’s previous accountants Mr Brown, who appeared before us for HMRC, wrote:
As well as looking at past payments [of PAYE] the tax laws say there must be reason to expect the company will do things on time in the future. I am happy to accept this is so and will not be using it as a further reason to oppose the appeal.
the issue for us to determine is whether the Company has a reasonable excuse throughout the Review Period for the late PAYE payments or whether we should apply a time factor as in the Fat Sam’s case and not allow reliance on the consultant to constitute a reasonable excuse occurring six months or so after his appointment. 
13.	Having regard to the circumstances we consider that this appeal can be distinguished from the situation in Fat Sam’s. In that case the burglary, which was held to be the “real cause” of the defaults, was an identifiable single event from which the business could be expected to recover after a period of time whereas in the present case the Company placed a continuing reliance on the consultant which, we find, was the real cause of the late payments. In view of Mr and Mrs Westworth’s lack of experience and expertise in accounting, administrative and taxation matters we consider it was reasonable for the Company to retain the services of the consultant and would have expected him to ensure that it fully complied with its obligations especially as he was being paid £60,000 a year to do so. 
14.	As such we do not consider the imposition of a time factor to be appropriate in this case and find that, by relying on the consultant to undertake its administration, the Company had a reasonable excuse for the late PAYE payments during the Review Period and should therefore be treated as having satisfied the compliance test.   
15.	We therefore allow the appeal.
16.	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: 3 September 2010