[2010] UKFTT 358 (TC)

TC00640

Appeal number TC/2010/01467

Construction Industry Scheme – Appeal against cancellation of registration for gross payment – Failure of ‘Compliance test’ –  Reliance on general manager  – Trusted employee - Whether reasonable excuse on facts – Yes – Appeal allowed

FIRST-TIER TRIBUNAL

TAX 

		M R HARRIS GROUNDWORKS (A Partnership)	                  Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS       	Respondents

TRIBUNAL: 		Paulene Gandhi (Judge) 
			Caroline Small (Member)

Sitting in public in Bedford on 27 May 2010

Ms Carstems, VAT consultants, appeared on behalf of the Appellant

Mr Robinson, for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.   Ms Carstems acting on behalf of M R Harris Groundworks requested full written findings of fact and reasons for the decision.  

2.   This was an appeal against the withdrawal of gross payment status within the Construction Industry Scheme (CIS).

3.  Evidence was given by Mrs Harris, one of the partners in M R Harris Groundworks.

4.    There does not appear to be a dispute between the parties as to the relevant facts.

5.   Mr M Harris and Mrs P Harris are partners in M R Harris Groundworks.  Mr Harris is the registered partner. 

6.  The tax treatment qualification test was performed on 26 May 2009. The qualifying period was 21 May 2008 to 21 May 2009.

7.      The failures during the period 21 May 2008 to 21 May 2009 were:
Late payment of CIS deductions as follows: 

Month ended         Amount                        Due date            Date of payment
05/08/08               £34,509.60                    22/08/08            10/09/08
05/09/08               £35,905.78                    22/09/08            08/10/08

8.     HMRC notification advising Mr Harris (as the registered partner) of the above failures was issued on 27 May 2009. The partnership’s accountant appealed against the withdrawal of gross payment status in a letter dated 22 June 2009.

9.   M R Harris Groundworks employ 20 staff and have approximately five subcontractors although this varies day to day depending upon the work available. Their clients are in the main building contractors. Mr Harris sources the contracts on the site and oversees the main management of the business. Mrs Harris deals with the office side of the business and liaises with the staff. She is not in the office on a day-to-day basis due to other business commitments but is always in touch with the office. 

10.   They had a general manager, Mr BM, who had overall responsibility for the office to ensure that any issues arising were dealt with promptly and he provided the day-to-day management as Mr and Mrs Harris were not always in the office due to other business commitments. Mr BM has been with the company for approximately 12 years and was a cheque signatory and signed 90% of all cheques. They also had a part qualified accountant, Ms SD, who dealt with all internal accounting, including cash flow, payment to subcontractors, CIS forms, and making payments to HMRC.

11.    Mr BM was also the manager of Ms SD and Ms SD was answerable to Mr BM and ultimately to Mr and Mrs Harris. Mr and Mrs Harris had instructed that all returns to HMRC and payments being made on time. Periodically Mrs Harris would review cash flow is to ensure that everything was as it should be. When undertaking these checks nothing appeared to be amiss.

12.   It is not in dispute that the cheque dated 15 August 2008 was not received by HMRC until 10 September 2008 because it was not sent until 9 September 2008. There is a record held by HMRC of a telephone call received on 9 September 2008 from M R Harris Groundworks’ bookkeeper in which she states a cheque for £34,509.60 was posted that day (9 September 2008) and she advised that payment was made late due to personal problems. M R Harris Groundworks also advised HMRC that the second cheque was sent late as a result of an administrative error.

13.    In May 2009 when Mrs Harris received notification from HMRC informing her that their gross payment had has been taken away Mrs Harris was very surprised as she had always made it clear to her employees how important the payments were especially since the failures highlighted in 2008. (There was a previous issue in relation to gross payment status where gross payment status was reinstated upon appeal.)

14.   At the point they received notification from HMRC their General Manager had been made redundant due to the downturn in work (May 2009) and they also became aware that he was not doing his job properly.  This was prior to realising these failures had occurred. Ms SD had also resigned due to a difficult working relationship with the General Manager. 

15.   In respect of the procedures in place Ms SD always wrote the cheques and passed them to Mr BM to sign. Mr BM indicated to Ms SD which cheque should be sent out and then Ms SD sent the cheques out according to Mr BM’s instruction. Ms SD was aware of the obligations of sending in the tax payments on time not only due to the procedures in place but also due to her qualifications.

16.    Mr and Mrs Harris were not made aware by Ms SD that the two payments of tax had been made late and assumed that the procedures they had in place were being followed. They were aware that there were tensions between the General Manager and Ms SD but were not made aware to what extent.

17.    Mr and Mrs Harris accept they are ultimately responsible for the failures but they put in place what they felt were good procedures to ensure compliance and were let down by their General Manager. 

18.    Since the failures have occurred Mrs Harris now personally ensures that the cash flow is reviewed daily so that she can see all payments are being made as they should be. The cash flow has the PAYE cheque highlighted in yellow with the posting and clearance date detailed to ensure that it cannot be missed.

19.   It is not in dispute that M R Groundworks can be expected to comply with its future obligations.  

20.  The legislation requires that the partnership must have complied with all obligations imposed on them in the qualifying period under the Taxes Management Act 1970. There is no dispute that the partnership failed the compliance test in the qualifying period 21 May 2008 to 21 May 2009. Certain compliance failures can be disregarded. For instance a late payment can be ignored if it is not made later than 14 days after the due date and the applicant has not otherwise failed to comply with this obligation within the previous 12 months or has not failed to comply with its obligations on not more than two occasions within the previous 12 months. In this case the partnership made the payments late  - the first payment was 19 days late and the second 16 days late.

21.  Section 118(2) Taxes Management Act 1970 ("TMA"), so far as is material to this appeal, provides as follows:
"... 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."

22.   There is no definition in the legislation of a “reasonable excuse” which “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). The fact of reliance on a third party is not precluded from being a reasonable excuse for the purpose of Section 118(2) TMA. 

23.  As set out in Stephen Mutch v HMRC [2009] UKFTT 288 (TC) the assumed reasonable competent business person must be taken to have exercised reasonable foresight. Then the reasonable business person must be taken to have exercised due diligence and a proper regard for their tax obligations.  

24.	In the case of Rowland the Special Commissioner (Adrian Shipwright) said at [22- 26]: 

“The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes. 
Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd). 
The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse. 
I conclude that in the direct tax context reliance on a third party can be a reasonable excuse. 
The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default.”
25.   Although Rowland concerned reliance on outside advisers whilst the present appeal concerns reliance on an employee i.e. the General Manager Profile Security Systems v Customs & Excise Commissioners [1996] STC 808 did not restrict reliance to outside advisers but included reliance on trusted employees.
26.    It is quite clear that M R Harris Groundworks relied on a trusted employee, the General Manager, who had been with the firm for 12 years and who had a lot of financial autonomy.  Mr and Mrs Harris were often not in the office due to their other business commitments and he was thus the cheque signatory on 90% of all cheques. The partnership had put a significant amount of trust in him. 

27.  In the above circumstances we find that the trust placed in Mr BM was not unreasonable.  It is clear from the evidence of Mrs Harris that Mr and Mrs Harris were focusing on the building company and the responsibility for ensuring that payments were made to HMRC was ultimately with the General Manager.  It was clear from Mrs Harris’s evidence that the General Manager was paying whoever would ‘pester’ him the most for payment.  Of course because HMRC did not ‘pester’ Mr BM for payment they were last in line to be paid. His order of priority of payments was different to the instructions he had been given by Mr and Mrs Harris.

 28.  In our view as per Rowland reliance on a third party, such as the General Manager, can be a reasonable excuse in the direct tax context.  Having found it was reasonable for the partnership to rely on its General Manager, and that it was this reliance which led to the failure to meet its obligations we conclude that the partnership who, on becoming aware of the failures to meet its tax obligations, took steps to remedy the situation, has a reasonable excuse and therefore should be treated as having satisfied the compliance test.
29.	The appeal is therefore allowed.
30.	 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.

TRIBUNAL JUDGE 
 RELEASE DATE: 30 July 2010