G C Ware Electrics v Revenue & Customs [2010] UKFTT 197 (TC) (30 April 2010)

DECISION

Introduction

1. Mr Ware appeals against a decision of HMRC withdrawing, under section 66 FA 2004,his gross payment status under the construction industry scheme (CIS).

2. HMRC say that, under section 66, they were empowered to cancel Mr Ware's registration under CIS since within the 12 months before 16 April 2009 Mr Ware failed to make payments of his income tax liabilities on time. They rely on a delay in payment of 18 or more days in relation to a liability of £14,757 due on 31 July 2008 for the year ending April 2008 (the 07/08 year), and the delay of several months in the payment of his first payment on account for the 08/09 year which was due on 31 January 2009.

The Relevant Statutory Provisions

3. Sections 57-70 FA 2004 impose the Construction Industry Scheme under which payments made by contractors to subcontractors are made subject to deduction of income tax at source. But if a subcontractor is registered for gross payment there is no obligation to deduct on making payment to him. A person may apply to be registered for gross payment, and if HMRC are satisfied that specified conditions are met, they must register that person. The relevant conditions for the purposes of this appeal are set out in Part 1 Schedule 11 of the Act.

4. Section 66 provides for the cancellation of registration if it appears 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,”

5. Among the conditions in Schedule 11 is the "compliance test" in paragraph 4:

“(1) the applicant must, subject to subparagraphs (3) and (4), have complied with –

(a) all obligations imposed on him in the qualifying period [the period of 12 months ending with the date of application] by or under the Tax Acts or the Taxes Management Act 1970”.

6. But by paragraph 4 (4):

“ an applicant ... that has failed to comply with such an obligation or request as is referred to in subparagraph (1) is to be treated as satisfying the condition and that subparagraph as regards that obligation or request if the Board of the Inland Revenue of the opinion that --

(a) the applicant ... had a reasonable excuse for the failure to comply, and

(b) if the excuse ceased, he ... complied with the obligation or request without unreasonable delay after the excuse had ceased.”

7. Regulations made under Schedule 11 (SI 2005/2045) provide, in Regulation 32, an exemption in respect of a failure to pay income tax if:

“(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.”

8. There is a further slightly different version of a reasonable excuse provision in section 118 TMA which provides:

“(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 the Commissioners or officer concerned may have allowed; and where a person had 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 so ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.”

9. We note that there are two limbs to this provision. The first deals with permission given by HMRC, the second deals with reasonable excuse. We note that it may be that the first limb of this provision may confer retrospective relief for a failure if the further time is allowed after the limited time has expired.

10. The obligations to make payments on account of income tax and payments of income tax are contained in sections 59A and 59B TMA 1970. Section 59A provides that a person shall make, on dates determined by that section, two payments on account of his income tax liability for the year. The payments are initially fixed by reference to the tax payable as a result of his last self assessment. But subsection (4) provides that a taxpayer may make a claim to reduce the amount of his payments on account to a stated amount. The section concludes:

“ the amount of the payments on account required to be made shall be, and shall be deemed always to have been, equal to 50% of the stated amount.”.

As a result of this provision it seems to us that a failure to pay an initial payment on account which is later reduced by claim can only be a failure to pay to the extent that the amount to which it is reduced by the claim is not paid on time even if the claim is made after the date on which the amount originally became due.

11. As a result the issues for us to determine are:

(1) whether there was any failure in the period between 15 April 2008, and 16 April 2009 to comply with TMA or Taxes Act requirements, bearing in mind the provisions of the first limb of section 118(2);

(2) if there was, whether that failure was excepted by regulation 32; and

(3) if it was not so excepted, whether there was a reasonable excuse for that failure.

12. We note at this stage that there is no statutory amplification of the meaning of reasonable excuse. In the VAT Act 1994 there are specific exclusions from the ambit of a reasonable excuse for failures which are simply due to an insufficiency of funds or the reliance upon another (see section 71 VATA).

The Evidence

13. We heard oral evidence from Mr Ware. HMRC also provided a bundle of correspondence and internal documents.

Our Findings of Fact

(a) The Late Payments

(i) tax for the year 06/07

14. Mr Ware made a balancing payment for this year of £5,852 on 18 August 2008, some seven months after the due date.

(ii) tax for the year 07/08

15. A second payment on account of this year of £14,757 was due to be paid on 31 July 2008. (Later in this decision we call this the First Payment Obligation)

16. A payment was made on 18 August 2008 which discharged all this liability bar £960. The payment also discharged the outstanding liability for the first payment on account for this year which had been due on 31 January 2008. (The balancing payment for 07/08 of £19,800 was made two days early on 29 January 2009).

(iii) tax for the year 08/09

17. The first payment on account for this year was initially determined as £24,691 and was due on 31 January 2009. (We refer to this as the Second Payment Obligation)

18. A claim to reduce the payment to £8,458 appears to have been made on 24 July 2009. It seems to us that there was some confusion between the aggregate amount of the reduced payments on account and the amount of each of them, for, on 21 October 2009, it appeared from HMRC’s records that the claim to reduce the payments on account was adjusted so that the amount of each payment was twice the amount which appeared in the original reduction, namely £16,916.

19. Payments were made as follows:

(a) £5000: 27 February 2009

(b) £5000: 30 March 2009

(d) £3000: 15 May 2009

(e) £3000 1 June 2009

(f) £4000 30 June 2009

(g) £9000 29 July 2009.

20. Even taking into account the claim to reduce the payments on account to £8,458, there was a delay of more than 30 days in the discharge of the liability to pay the first (reduced) payment on account which was due on 31 January 2009.

Time to pay

21. HMRC's log of communications with Mr Ware indicates that on 25 February 2009 he phoned and indicated that he needed time to pay his 31 January liability and wanted to pay £5000 per month "until his accountant had worked out what the POA should be". It was not until July 2009 that his accountant made application for reduced payments on account.

22. As a result of Mr Ware's call it seems that on the same day, 25 February, HMRC wrote to Mr Ware accepting monthly payments of: £5000 on 27 February, £9923 on 31 March, and £9923 on 30 April 2009. This letter appears to have been sent by an officer different from the one to whom Mr Ware spoke on the telephone.

23. Mr Ware told us that:

(1) when he received notification that the 31 January 2009 payment on account was £24,691 he was surprised. His accountant had given him no inkling that this was the amount due;

(2) when his accountant returned from holiday in the third week in January Mr Ware spoke to him about it and understood that his accountant would make an application to reduce the payment on account (because his taxable profit for 08/09 was lower than the payments warranted);

(3) he had expected his accountant to make the application quickly but it took him until July 2009 to get the paperwork together to submit the claim;

(4) on about 14 February his accountant had advised him to ring HMRC and ask if he could pay something on account;

(5) Mr Ware had then spoken to HMRC. Someone there had taken over and had put in writing the concerssion recorded above. Mr Ware told us he had rung back and asked whether they could do £5000 plus £5000 plus £5000 instead.

24. On the evidence before we were not able to conclude that HMRC had agreed to allow Mr Ware to pay on any basis other than that set out in the letter of 25 February 2009.

(b)Mr Ware's business

25. Mr Ware is a shopfitter. He works for a number of well known retailers in fitting out their shops when they open new premises. He employs others to assist with these operations. His business requires him and his employees to travel around the country from "Aberdeen to Truro". Each engagement may last up to 8 weeks.

26. Mr Ware accounts for PAYE and National Insurance for his employees and for VAT. When he is away he calculates PAYE and National Insurance on the payments he makes to employees, takes a paying in book with him and accounts for the deductions to HMRC. Generally he can get his VAT returns done in the intervals in which he returns home.

27. His business depends upon the state of the economy - and the willingness of his major customers to open new outlets. In the year to 30 April 2008 he was kept busy and was profitable. Then the recession bit: between May and September 2008 he remained busy but work began to dry up later in that year, and during the first part of 2009 four jobs planned for that period were pulled and his income plummeted. His net profits for the year to 30 April 2009 were about 50% of those preceding year. As a result by January 2009 he was short of funds.

(c) Communication with HMRC

28. On 23 September 2008 HMRC reviewed Mr Ware’s gross payment registration (in the light, we believe, of the delay in the payment of his second payment on account for the year 07/08). Although, the following review, his gross payment status was maintained, he was warned to "adhere to due dates or risk losing gross status in future review".

(d) The circumstances surrounding the late payment for the year 07/08: the First Payment Obligation

29. From about May 2008 Mr Ware had been working away from home. He started a job in Weymouth in May then went on to one in Bournemouth and to a job in Truro whence he returned at the end of September. He had not been able to deal with correspondence while he was away. When he returned home he found the letter seeking payment and went to see his accountant. He made payment. He had not been trying to avoid paying the tax.

(e) The circumstances surrounding the late payment for the year 08/09: The Second Payment Obligation

30. By 31 January 2009 when the first payment on account for the year 08/09 was due, Mr Ware had become short of funds (as his bank statements evidenced). The payment on account reflected the previous year's profits which were significantly in excess of the profits which would fall into tax for the 08/09 year.

The parties' arguments

31. Mr Robinson said:

(1) because of the delay in making the 06/07 balancing payment the exemption in regulation 32 did not apply to excuse the 18 days’ delay in making the 07/08 payment.

(2) The payment due on 31 July 2008 407/08 was made late. There was no reasonable excuse. There had been no allowing by HMRC.

(3) The 08/09 payment on account due on 31 January 2009 was late. Had Mr Ware sought time to pay before 31 January 2009 he could have obtained the advantage of section 118 (2). He did not. As a result he failed to comply with his obligations under TMA. There was no reasonable excuse:

(a) Mr Ware had previously been warned of the need to comply with its obligations to pay on time; and

(b) a simple lack of funds was not a reasonable excuse.

32. Mr Ware said:

(1) he had only been 18 days late with the payment for 07/08 due on 31 July 2008. He had been really busy and away from home at the time;

(2) he got in touch with HMRC about the £24,691 sought for the first payment on account for 08/09 due on 31 January 2009. He had kept his side of the bargain and made the payments in instalments. He was in straightened circumstances at the time and his payment on account was overstated;

(3) he paid his July 2009 payment on account on time;

(4) revocation of gross payment status would bear very harshly on him. He would find it difficult to get new business without it. Contractors did not want the hassle of making net payment.

Discussion

33. (1) a failure to comply with Taxes Act obligations

34. It seems clear that Mr Ware had not complied with his obligations to make payment in respect of the First and Second Payment Obligations.

35. In relation to the second payment -- that due on 31 January 2009, it seems to us that it is possible that section 118 (2) might have retrospective effect, and that the letter of 25 February 2009 might thus retrospectively excuse the failure to pay on 31 January 2009 to the extent that the payment was made as allowed by that letter. However payments were not made in accordance with that letter since only £5000, and not £9923 was paid on 31 March 2009.

36. If the proper payment on account had been £8458 (rather than £16,916) then, because of the retrospective effect of section 59A(4) the amount due would have been only £8458, and we would read the letter of 25 February 2009 as allowing this to be paid as to £5000 on 27 February 2009, and as to £3458 on 31 March 2009. In that case Mr Ware would not have been in default of what was allowed. However it seems to us that the stated amount was properly £16,916, and that the letter of 25 February 2009 should thus be read as allowing £5000 to be paid on 27 February 2009, and at least half the remainder, namely £5858, on 31 March 2009 with the balance on 30 April 2009. Mr Ware’s payments did not comply with what thus would have been allowed.

37. Thus we conclude that, even if section 118(2) had retrospective effect, Mr Ware had not complied with his obligations.

(2) Were the failures excused by regulation 32?

38. Neither failure was so excused.

39. The failure in relation to the First Payment Obligation followed a failure in relation to 06/07 in relation to an amount which was due to be paid within the 12 months before the date of the First Payment Obligation. The 28 days' grace was not available.

40. The failure in relation to the Second Payment was by more than 28 days.

(3) Was there a reasonable excuse for any failure?

41. Whilst we were persuaded that Mr Ware may have had a reasonable excuse in relation to the First Payment Obligation, we were not so persuaded in relation to the Second.

42. It seems to us that it would have been reasonable to expect Mr Ware to have got in touch with HMRC sooner and had to have required his accountant to have made speedier application for a reduced payment on account. Mr Ware had been warned of the need to adhere to payment dates, and should have had a sense of urgency in relation to this payment. The payments he actually made indicated that he would have had the resources to comply with a payment regime under which £5000 was to be paid in February, and half the balance of a revised payment on account in each of the following months. He did not have in our view a reasonable excuse for the delay in acting to ensure that he could meet such a regime.

43. It did not seem to us that the shortage of funds to pay an amount due on 31 January 2009 was unexpected, or that, with a reasonable foresight and a proper regard to his tax obligations, the failure could not have been avoided. In determining whether a person has a reasonable excuse, the consequences of the relevant failure for CIS status are not relevant. We therefore find that he did not have a reasonable excuse.

Conclusion

44. We dismiss the appeal. It gives us no pleasure to do so. It seemed unfair to penalise Mr Ware's business for such administrative shortcomings in his dealings with HMRC in relation to his personal tax liability. But that is what the legislation requires.

First-tier Tribunal (Tax)

FIRST TIER TRIBUNAL

TAX

Respondents

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS

CHARLES HELLIER

TRIBUNAL JUDGE

RELEASE DATE: 30 April 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> G C Ware Electrics v Revenue & Customs [2010] UKFTT 197 (TC) (30 April 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00499.html Cite as: [2010] UKFTT 197 (TC)