[2010] UKFTT 147 (TC)

TC00453

Appeal number TC/2009/121112

CONSTRUCTION INDUSTRY SCHEME- Appellant suffered a debt of £200,000 in 2003 – failed compliance test Finance Act 2004 Schedule 11 paragraph 12 for periods 19/07/07 to 18/07/08 - bad debt and potential closure of business not reasonable excuses – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	EDWARD CHATTERTON 	Appellant

	- and -

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

				TRIBUNAL: David S Porter     (Judge)
						Phillip G Jolly      (Member)						
	
Sitting in public in Liverpool on 29 September 2009

Christopher Barrington Chartered Accountant for the Appellant

Kath Douglas, an Inspector instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

.
1.	Edward Chatterton (the Appellant) appeals against the withdrawal of his Gross Payment Status under section 66 Finance Act 2004. He was notified by the Respondents in a letter dated 10/06/09 from the Respondents, arising from his non-compliance for the period 19/07/07 to 18/07/08 with the tax compliance test in paragraph 32 of the Income Tax (Construction Industry Scheme) regulations 2005. He says that his non-compliance arose as a lack of funds arising from a bad debt of £200,000 in 2003. The Respondents say that he had had adequate time to recover from the bad debt and the delays for the appropriate payments for compliance purposes were considerably out side the time allowances in the regulations.
2.	Kath Douglas, an Inspector appeared for the Respondents and produced a bundle for the tribunal. Christopher Barrington and Daniel Carson, Chartered Accountants from Jackson Stephenson of Brosley House, 116 Bradshawgate, Leigh, Lancashire appeared for the Appellant and the Appellant gave evidence.
3.	We were referred to the following cases:
•	Barnes (HM Inspector of Taxes) v Hilton Main Construction [2005] BTC 568
•	Revenue and Customs Commissioners v Facility and Maintenance Engineering Ltd  [2007] BTC 231
The facts.
4.	The background to the case was succinctly set out in a letter from Mr Barrington of Jackson Stephens on 21 April 2009 and was expanded by him at the tribunal. The Appellant is a contractor in the construction industry specialising in road maintenance, principally resurfacing of public roads for the Highways Agency. He trades under the name of Origan General Contractors from Wavertree, Liverpool. He has been in business for approximately 16 years and employs four men on a full time basis. He has held Gross Payment Status for the last twelve years and, not withstanding the usual commercial difficulties facing any business such as non-payments by customers, quiet periods and other restrictions to cash flow, he has always eventually paid his creditors in full. The business suffered cash flow difficulties some five years ago, when a major customer, Data Optics Ltd, went into liquidation owing the Appellant over £200,000. Mr Jackson produced to the tribunal a Final Account Statement from Data Optics Limited. It is unclear from that account as to the actual indebtedness.  The account shows that the original contract debt was £908,980 and that £743,627.48 had been paid. This left a balance £120,000 outstanding (after deducting £45,449 for 5% retention for 24 months). We consider that the retention would be a natural exigency in this type of business. We accept that VAT would have been payable on some or all of the contract, but we consider that the VAT could be recovered under the VAT bad debt provisions. It would appear, therefore, that the outstanding debt was £120,000 not £200,000. We were not shown any accounts, but we were told that the turnover at the time was about £1,000,000 and we were told that Data Optics Ltd was his principal customer. Mr Barrington accepted that there had been a very high incidence of defaults and delays by the Appellant in meeting his tax obligations over the last five years. However, after five years of contending with the cash flow the Appellant has settled all his outstanding liabilities including those due to the Respondents and is now fully compliant.
The Appellant’s non-compliance for the periods 19/07/07 to 18/07/08 was as follows:

  Liability 				         Due Date   	Date Paid		Days Late

PAYE 					22/01/08	21/02/08		30
Income Tax 2nd payment on account	31/07/07	21/11/07		113
Balancing payment			31/01/08	10/05/08		68
Income tax 1st payment on account	31/01/08	28/08/08		209
Surcharge					18/04/08	28/08/08		131

The Law.
5.	Under Schedule 11 paragraphs 4,8,12,and 14 of Finance Act 2004 during the qualifying period ( the 12 months prior to the date of application) the business must have:
•	Completed and returned all tax returns;
•	Supplied any information to do with tax that has been requested;
•	Paid all tax /NIC due as an individual, business and employer, both in the UK and overseas;
•	Paid any deduction due as a contractor under the construction industry scheme.
It is not sufficient that a business brings its tax affairs up to date prior to making an application, as the following two requirements must be demonstrated:
•	It is expected that the tax affairs of the business will remain up to date in the future;
•	Throughout the qualifying period the business must have run its tax affairs on a timely basis. There must have been:
o	 no failings other than the exceptions listed below.
o	A reasonable excuse  for any failure, and the failure must be rectified  without unreasonable delay after the excuse ceased.
•	S1 2005/2045 paragraph 32 sets out the requirements for the Compliance Test.

1. Prescribed obligation	2. Prescribed circumstances	
Obligation to submit monthly contractor return within the required period	(1)	Return is submitted no later than 28 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 last 12 months	
Obligation to pay-
(a)	the amount liable to be deducted under section 61 of the Act from payments made during the tax period, or
(b)        tax liable to be deducted under the PAYE Regulations	(1) Payment is not made 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.	
Obligation to pay income tax - 	(1)	Payment is made not later than 28 days after the due date, and
(2)	The Applicant has not otherwise failed to comply with this obligation within the previous 12 months	
Obligation to submit a return under regulation 73,74, and 85  of the PAYE Regulations (annual returns) within the required period	Return submitted after the due date	
Obligation to pay corporation tax for which the applicant or company is liable.	(1)	Payment made not later than 28 days  after the due date ,and 
(2)	any shortfall in that payment has incurred an interest charge but not a penalty	
Obligation to submit a self assessment return within the required period	Return submitted after the due date	
Obligations and requests referred to in paragraphs 4(1), 8 (1) and 12(1) of Schedule 11 to the Act 
(Repealed with effect from 6 April 2007).	The failure to comply occurred before the appointed day and was within section 562 (10). 564 (4) 0r 565 (4) of ICTA (conditions to be satisfied: minor and technical failures).	

Taxes Management Act 1970 
Section 118.Interpretration (2)
For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within  such further time, if any, as the Board or tribunal or officer concerned may have allowed; and where a person has a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased…
The Cases. 
In Barnes (HM Inspector of Taxes) v Hilton Main Construction [2005] BTC 568 the General Commissioners accepted that the late payments by the taxpayer were not minor and technical, but the Commissioners allowed the appeal on the basis that the Taxpayer’s business would close down and that result was disproportionate and inequitable. Lewison J held:
	“ there may be social, economic and administrative arguments for and against the imposition of such a burden or there may be other solutions to perceived injustices in the statutory scheme, but they are matters for debate and legislation not for interpretation by the court. In those circumstances, I consider that the General Commissioners’ application of a test of proportionality was not a test that the legislation allowed them to apply”.
In Revenue and Customs Commissioners v Facility and Maintenance Engineering Ltd  [2007] BTC 231 the General Commissioners decided that although there were seven occasions during the qualifying period  when payments had been late by a month  and 24 other occasions when payments had been late by a fortnight or more, the certificate should be issued because the Revenue had not drawn attention  to the lateness of the payments  during the three year period of default.  The payments were always made eventually and were in any event minor and technical. Park J held:
        “Whether failures of compliance were minor and technical could not depend on whether the Revenue had warned the company of the consequences of them….”
He held that “… the Commissioners finding that FAME’s failures were minor and technical. In my judgment, on the basis of the undisputed facts, that was not a finding which was open to the Commissioner’s to make”..
Submissions
6.	Mrs Douglas submitted that the Appellant was fully aware of the terms of the Construction Industry Scheme. It is for the Respondents to prove that the Appellant was in default. The Appellant accepts that he had not complied with the terms of the compliance test under the scheme and that he is, therefore, in default. He says, however, that he has a reasonable excuse. The Respondents do not accept that a bad debt of approximately £150,000 out of a turnover of over £1,000,000 in 2003, is a reason for non-compliance for the period 19/07/07 to 18/07/08. There had been adequate time for the Appellant to resolve his affairs. The cases confirm that the subsequent failure of the business arising from the withdrawal of the Gross Payment Status is not a reasonable excuse. Further, the withdrawal of the Gross Payment Status is a proportionate response to that failure. As the compliance tests requirements had not been fulfilled and the Appellant did not have a reasonable excuse the appeal should be dismissed.
7.	Mr Barrington submitted that the Appellant had held a Gross Payment Status for the previous twelve years. Over the last five years the Appellant has contended with cash flow problems arising from his principal customer’s liquidation, which left him with a bad debt of approximately £200,000. The Appellant received no remuneration from this collapse and the resultant commercial damage has taken years from which to recover. Mr Barrington accepted that the Appellant‘s tax compliance over the last five years had been poor, but since the bad debt incurred by Data Optics Ltd’s liquidation the Appellant had slowly improved his compliance record. He has now settled all his outstanding liabilities and he is tax compliant. He has arranged a credit line with his bank which will accommodate his cash flow requirements so long as he retains his Gross Payment Status. There is a very real concern that if he loses his Gross Payment Status, his principal customer may dispense with his services. Should the Appellant’s business be forced to close, this would not only affect him and his immediate family of five, but also his four employees and their respective families. In the circumstances the Appellant has a reasonable excuse and the appeal should be allowed.
Decision
8.	We have considered the facts and the law and we dismiss the appeal. We think it is helpful to look at the history of the scheme. The Construction Industry Scheme was set up because, during the latter part of the last century, some parts of the construction industry had become notorious for their failure to pay their appropriate tax liabilities.  Many sub-contractors engaged in the construction industry disappeared without settling their tax liabilities, with a consequential loss of revenue to the Exchequer. The scheme was introduced by section 559 of the income Tax and Corporation Taxes Act 1988 and has been reviewed and changed over the intervening years. The most recent change has been the removal of the allowance for failure if the failure was “minor and technical”. General Commissioners, who often dealt with local businesses with which they were familiar, considered that the scheme was unduly harsh where there was a danger that the business would close if the Gross Payment Status was lost. As a result there were several appeals by the Revenue to the High Court on the basis that General Commissioners had allowed appeals because the failures were “minor and technical” when they were clearly not. Park J in Revenue and Customs Commissioners v Facility and Maintenance Engineering Ltd  [2007] BTC 231 stated:
“Between 2002 and 2005 there have been seven cases in the High Court…. In all seven cases a subcontractor company has been refused a certificate by the Revenue, and appealed to the General Commissioners. In all seven cases the general Commissioners allowed the appeal, and the Revenue appealed onward to the High Court. In five cases the Revenue’s appeal was successful. In all cases the Revenue’s reasons for having refused certificates to the companies were that the companies had unsatisfactory records of compliance”
It was against this background that the “minor and technical” allowance was removed from 6 April 2007. The non-compliance requirements are consequently very stringent. The Appellant’s records for the period reveal that non-compliance ranged from 30 days to 209 days. The tolerances under the scheme are 14 to 28 days. As a result we find that the Appellant was non-compliant. We have also decided that the Appellant does not have a reasonable excuse for his non-compliance. Whilst we accept that it might well be possible to establish that a bad debt could amount to a reasonable excuse we do not accept that the bad debt, allegedly of £200,000 in 2003, could reasonable be the cause of the Appellant’s current non compliance. We were advised that the bad debt was of the order of £200,000, but having examined the only evidence deduced in that regard via the statement from Data Optics Ltd we consider the debt was nearer to £120,000 than £200,000.  It also appears that the contract, the subject of that bad debt, was approximately £908,980, and that a retention of 5% for 24 months had been agreed. The bad debt would have given rise to a reclaim for VAT purposes so that approximately £21,000 could have been recovered. Further more, the retention was a normal exigency of the sort of business that the Appellant conducted. We were not shown any accounts for the periods in question, so that we do not know what the capital position of the business was. We were told that the Appellant had an overdraft facility of £10,000. It would appear that the Appellant was content to work within that overdraft limited in spite of the fact that the contract with Data Optics Ltd was over £900,000. As a result, we do not think that a debt of approximately six weeks turnover is sufficiently large to amount to a reasonable excuse.
The legislation and the cases do not allow us to take into account that the Appellant’s business might have to close down as a result of the Respondent’s refusal to grant a Gross Payment Status certificate. We therefore dismiss the appeal and make no order for costs.
9.	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: 1 February 2010