[2009] UKFTT 288 (TC)

									TC00232

Appeal number Trans 09/145

GROSS PAYMENT STATUS - Compliance test – Cancellation - Carpentry Business hit by drop in orders -Insufficient cash to pay tax liabilities on due dates - Whether reasonable excuse – Yes - Appeal allowed - Finance Act 2004 Schedule 11 para 4 (4) 

FIRST-TIER TRIBUNAL

TAX

	STEPHEN MUTCH	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Tax)	Respondents

		             TRIBUNAL: SIR STEPHEN OLIVER QC

Sitting in public in London on 30 June 2009

The Appellant appeared in person 

 H O’Leary for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Mr Stephen Mutch carries on business as carpenter and provider of carpentry services. He appeals against the withdrawal of gross payment status within the Construction Industry Scheme (CIS). 
1.	It is not in dispute that Mr Mutch failed to comply with his obligations during the qualifying period, 30 May 2000 to 30 May 2008. The failures were as follows:
(I)	for 06/07 the second POA due on 31 July 07(£14,344) was not paid until 11 September 2007. 
(II)	for 07/08 the first POA due on 31 January 08 (£17,861) was not paid until 15 April 08. 
(III)	for 07/08, PAYE  month 5, the amount due on  20 September 07 (£3,468) was not paid until 23 October 07.
(IV)	for 07/08, PAYE month 7, the amount due on 22 Nov 07 (£4,643) was not paid till 22 Dec 07.
3.	The questions for my determination are whether Mr Mutch had a reasonable excuse for those failures and whether things were done promptly subsequently (See Finance Act 2004 Schedule 11 paragraph 4 (4)) and whether there is reason to expect future compliance on Mr Mutch’s part (Schedule 11 paragraphs 10-12).
4.	The reason for the failures listed above was, as will be explained, that Mr Mutch had insufficient funds to make the tax payments to HMRC by the due dates. To decide whether a reasonable excuse exists, when insufficiency of funds causes the failure, the Tribunal should take for comparison a person in a similar situation to that of the actual taxpayer who is relying on the reasonable excuse defence. The Tribunal should then ask itself with that comparable person in mind, whether, notwithstanding that person’s exercise of reasonable foresight and of due diligence and a proper regard for the fact that the tax would become payable on the particular dates, those factors would not have avoided the insufficiency of funds which led to the failures. That was the approach taken by the court of appeal in a VAT context where the taxpayer, on account of insufficient funds, had failed to make periodic payments of tax. See C and EC V Salevon (1989) STC 907 per Nolan LJ and C and EC V Steptoe STC 757 at 770p per Donaldson MR. That approach, I think, is suitable for determining whether or not a reasonable excuse exists in the context of the CIS.
5.	The first step is to find the facts and identify the reasons for the failures. Mr Mutch has for many years carried on business providing carpentry services. His main client has been a house building company of national standing with a high sales turnover. The client had building operations in the Corby area of Northamptonshire and much of Mr Mutch’s work related to those operations.
6.	In the first half of 2007 Mr Mutch employed 20 carpenters. The house building industry in the Corby area was thriving, prospects were good and there was ample work for the 20 carpenters. By Mid 2007 the economic climate in the area had changed. Mr Mutch’s main client stopped new building and left much of it’s stock in a part-built state. 
7.	Mr Mutch was left with very little work for his carpenters. He still had to pay overheads such as the cost of EL insurance and meeting compulsory health and safety standards. He tried to keep the carpenters working by quoting and charging lower fees but this did not help. Consequently he was driven to dismiss 14 carpenters. Even when he had 6 carpenters on his payroll he was losing money. At one stage he had had to reduce his workforce to two carpenters. Mr Mutch kept his carpenters on his workforce for as long as he could. There was always the prospect of an improvement in orders and he could ill afford to be without craftsman to service them. And from a purely humanitarian angle the dismissal of his staff, many of whom had worked for him for years, would have deprived them of their livelihoods and this was something that was hard for him to do.
8.	As already mentioned Mr Mutch had to carry certain overheads, which were necessary if he were to continue in business at all. Mr Mutch’s main client had insisted on keeping retentions to cover faults. As time went by (although this was not proved in evidence to have been the position in late 2007) the main Client changed its terms of payment from 30 days to 3 months. 
9.	By the time the four tax payments fell due for payment (leading to the failures identified by HMRC as the grounds for removing gross payment status), Mr Mutch had hardly any work. Mr Mutch was trying to get work from other builders but the fees that those builders were prepared to pay were so low as to rule out any possibility of profit to Mr Mucth. When the due date for the four payments arrived, Mr Mutch was unable to pay. 
10.	The first failure (£14,344) was made in good within 41 days by instalments of £10,000 and £4000. The second failure (£17,841) was made good within 2 ½ months of the due date.
11.	HMRC do not dispute the factual scenario summarised above. Those therefore were the reasons for the failure. 
12.	Did those reasons amount to a reasonable excuse? This requires as an exercise of judgment, a consideration of what the reasonable competent businessman (taken for comparison purposes) in a similar situation would have done. The Tribunal needs to be persuaded that that reasonable competent businessman would have defaulted when faced to by the same or similar predicament.
12.	The assumed reasonable competent businessman must be taken to have exercised reasonable foresight. In the present circumstances the drop in building work in the Corby area was sudden and severe. It followed a time of what Mr Mutch described as “high life” in the industry. Mr Mutch had build up his workforce and taken on commitments that were suitable for the heavy demands before mid 2007. The violent running down of his business that necessarily followed cost him dearly. It seems to me that the reasonable competent businessman taken for comparison would have reacted in the same way both to the demand before in 2007 and to the drop in work after that; he would not have had any better foresight than Mr Mutch.
13.	Then the reasonable competent businessman must be taken to have exercised due diligence and a proper regard for his tax obligations. Unlike Mr Mutch he might have shed his workforce earlier and so saved money and improved his cash flow. But that is to judge the position with too much hindsight. In the circumstances I think Mr Mutch operated in the real world as it existed at the end of 2007. He dealt in a fair and business-like way with the demands on his available cash resources. I think that he came up to the required standards contemplated by the expression “reasonable excuse ” in the context of the CIS. 

14.	I am satisfied that Mr Mutch dealt with his tax obligations as promptly and as reasonably possible by paying the tax outstanding as soon as he had funds available. The building climate has not changed much since then; but assuming Mr Mutch had a reasonable excuse in the year 2007/08, his compliance arrangements have apparently been carried out promptly since the. Finally in this connection I have no reason to doubt future compliance on the part of Mr Mutch. 

15.	For all those reasons I allow the appeal. 

SIR STEPHEN OLIVER QC
CHAMBER PRESIDENT
RELEASE DATE: 7 July 2009