[2009] UKFTT 292 (TC)

TC00236
Appeal number TRANS/09/970

Construction Industry Scheme – removal of gross payments status – reasonable excuse – proportionality.

FIRST-TIER TRIBUNAL

TAX 

	STRONGWORK CONSTRUCTION LIMITED
	
Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	
Respondents

				TRIBUNAL: 	P PETHERBRIDGE (Chairman)
						B MOSEDALE

Sitting in public in Birmingham on 9 June 2009

Mr G Harper, director of the Appellant, for the Appellant

Mr Sensier, Officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction
1.	The Appellant company appeals against the decision of HMRC made after an internal review and notified to its accountant on 11 March 2008 to withdraw its gross payment status for the construction industry scheme.  We did not have a copy of this decision in front of us but the Appellant accepted that he had received it.
2.	HMRC periodically check compliance by taxpayers registered for gross payments.  They run the check looking at compliance in the twelve months prior to the test to decide whether the taxpayer is eligible for registration at that time – it is as if the taxpayer is having to make a fresh application and HMRC deciding afresh whether to register him.
3.	Under the new rules introduced in 2007 HMRC ran a compliance check on the Appellant company and they considered that it had failed – that is if it had made an application at that time to be registered for gross payment status they would have refused it.  
4.	The Appellant company notified HMRC of their appeal on 28 March 2008, HMRC were asked to review the decision which they did by 10 December 2008, upholding the decision.  This was too late for the appeal to be listed in front of the General Commissioners and it came before the new tax tribunal in June 2009, nearly 18 months after the original decision to remove gross payment status.
Law
5.	The current construction industry scheme (“CIS”) came into force on 6 April 2007.  It is contained in the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005 SI no 2045 (“the Regulations”).
6.	HMRC’s decision to de-register the Appellant from gross payment status was taken under s66(1)(a)  Finance Act 2004.  This provides:
“The Board of Inland Revenue may at any time make a determination cancelling a person’s registration for gross payment if it appears to them that-
(a) if an application to register the person for gross payment were to be made at that time, the Board would refuse so to register him,”
7.	In other words, HMRC considered that had the Appellant not been registered but applying for registration, they would not have registered it.  So to determine whether this is correct, the Tribunal needs to look at the test for registration for gross payments.
8.	This is contained in Schedule 11 of the Finance Act 2004.  There are three tests and all must be passed:  the business test, the turnover test and the compliance test.  HMRC did not suggest that the Appellant had not met the business and turnover tests and we did not consider them.  HMRC deregistered the Appellant company because they considered it failed the compliance test.
9.	The compliance test for companies is set out in paragraph 12 of Schedule 11.  This provides that:
“(1) The company must, subject to sub-paragraphs (2) & (3) have complied with – 
(a)	all obligations imposed on it in the qualifying period (see paragraph 14) by or under the Tax Acts or the Taxes Management Act 1970,…
(b)	….”

10.	Paragraph 14 gives the qualifying period as “the period of 12 months ending with the date of the application in question”.  In this case there was a deemed application on 23 January 2008.
11.	Going back to the compliance test, paragraph 12(2), to which sub-paragraph (1) above is expressed to be subject, brings certain tolerances into the rules:
“A company that has failed to comply with such an obligation or request as-
(a)	is referred to in sub-paragraph (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 or request.”
12.	The effect of sub-paragraph 12(2) above is that failures to comply with tax obligations within the permitted tolerances will not amount to breaches of the compliance test.  The tolerances are set out in the Regulations.  The Regulations are the Income Tax (CIS) Regulations 2005 SI No 2045 at Regulation 32.  This provides the following relaxation in so far as relevant:
“32 (2) The circumstances prescribed in which the …company is to be treated as satisfying the conditions in paragraphs  … 12(1) of Schedule 11 to the Act as regards each of the prescribed obligations are given in column 2 of Table 3.

Table 3	
Obligation to pay – 
(a)….
(b) tax liable to be deducted under the PAYE regulations	(1) Payment is made not later than 14 days after the due date, and
(2) the applicant or company – 
(a) has not otherwise failed to comply with this obligation within the previous 12 months, or (b) has failed to comply with this obligation on not more than two occasions within the previous 12 months.

13.	Going back to sub-paragraph (3) of paragraph 12 of Schedule 11 to the Finance Act 2004, this provides:
“A company that has failed to comply with such an obligation or request as is referred to in sub-paragraph (1) is to be treated as satisfying the condition in that sub-paragraph as regards that obligation or request if the Board of the Inland Revenue are of the opinion that – 
(a)	the company had a reasonable excuse for the failure to comply, and
(b)	if the excuse ceased, it complied with the obligation or request without unreasonable delay after the excuse had ceased.”

14.	The effect of this is that a failure to comply with tax obligations outside the tolerances permitted by the Regulations will not lead to the application for registration being refused (or, as in this case, the gross payment status registration being removed) if the taxpayer can demonstrate a reasonable excuse.
15.	In this case HMRC were not satisfied that the Appellant had a reasonable excuse.  His appeal is under s67 Finance Act 2004, which provides that:
“(4) the jurisdiction of the commissioners on such an appeal 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.”
16.	Therefore we have jurisdiction to decide whether or not the Appellant failed the compliance test including whether or not he had a reasonable excuse for paying tax late.  We therefore move on to consider the facts in this case.
Defaults
17.	The decision to remove the Appellant’s gross payment status taken by HMRC was based on 10 late PAYE payments in the year to 23 January 2008.  Mr Harper did not dispute the defaults in the hearing.  They were as follows:
Due date	Date paid	Days late	
22/3/7	26/4/7	35	
22/4/7	16/5/7	24	
22/5/7	12/6/7	21	
22/7/7	3/8/7	12	
22/8/7	10/9/7	19	
22/9/7	4/10/7	12	
22/10/7	30/10/7	8	
22/11/7	19/12/7	27	
22/12/7	7/1/8	16	
22/1/8	1/2/8	10 (only 1 day late at the time the test was run on 23 January 2008)	

18.	These 10 defaults are clearly beyond the tolerances allowed for by the Regulation cited above (as only a maximum of 3 defaults are permitted and then only if less then 15 days late).  The question for the tribunal was therefore whether the Appellant had a reasonable excuse for the late PAYE payments.
Reasonable excuse?
19.	The reasons given by Mr Harper were as follows:
•	Cashflow;
•	Personal injury; and
•	The adverse impact on the Appellant company’s business.
Cashflow
20.	Mr Harper’s evidence was that one debtor (Palmac Construction) went bust in early 2008 and another (he had forgotten the name) went bust in mid-2007.  The total owed to the company was about £52,000.  HMRC did not dispute this evidence and we accept it.
21.	The Tribunal did not find that these bad debts were a reasonable excuse for the late PAYE payments.  There was a pattern of late PAYE payments by the company commencing in March 2007 which did not appear to be caused by the two large bad debts:  it was not a case of a sudden unexpected shortfall of funds giving rise to temporary difficulties in paying, which might be a reasonable excuse if dealt with reasonably promptly.  Instead the company made consistent late payments enduring over an 11 month period.  
Personal injury
22.	Mr Harper, a director and main employee in the company, broke his back while motorcycling in September 2007 and was off work for 5-6 months.  Mr Harper’s wife, the other director, took over running the business in Mr Harper’s absence. The Tribunal would accept Mr Harper’s broken back as a reasonable excuse where it caused the defaults and if within a reasonable time the business took steps to get back into compliance.  However, in this case, by the time Mr Harper broke his back the company was already in default sufficient times to lose its gross payment status and secondly, in any event, as the company continued to trade in his absence, it should have made arrangements to meet its compliance obligations within a few months of losing Mr Harper’s services, yet the defaults continued until January 2008.  
Proportionality
23.	Mr Harper thought the law unreasonable to remove his gross payment status for 10 fairly minor defaults when the effect of the loss of status might be to put the company out of business.  Mr Harper feared the company could go out of business because it supplies plant and materials as well as labour and a 20% deduction from all payments due to it could cause major cashflow problems as the company would still have to pay for the plant and materials (even though it could set off CIS and PAYE liabilities against the 20%). He also pointed out that the company has now realised the seriousness of the need to comply and had taken steps to ensure that PAYE is now paid on time:  they now pay PAYE by BACS.  Further, he said that it would be of no benefit to HMRC to remove the company’s gross payment status as by putting the company out of business they would lose tax revenue.  Some 22 jobs were at stake. Although he did not phrase it like this, Mr Harper was saying that the penalty was out of all proportion to the defaults.
24.	Unfortunately, our understanding of the law is that we have no discretion to take these factors into account and that the High Court has ruled, in a decision which is binding on us, that neither HMRC nor we the Tribunal can consider proportionality:  Barnes v Hilton Main Construction [2005] EWHC 1355 (Ch).  In that case the judge considered the Human Rights Act and concluded that it did not require the UK courts to read in a test of proportionality in the gross payment status rules.   The court also thought that in any event the rules were not disproportionate as there was (then) the “minor and technical” exemption (replaced now by the “reasonable excuse” exemption which must be even more likely to be seen as proportionate) and because in the last resort the taxpayer could always seek to recover gross payment status 12 months after it was removed if it could demonstrate compliance.
25.	HMRC were of the opinion that had the Appellant company applied for registration on 23 January 2009 they would have refused it and the Tribunal agrees that they would have been right to do so.
26.	The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   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.

TRIBUNAL JUDGE
RELEASE DATE: 3 November 2009