[2010] UKFTT 585 (TC)

TC00835

Appeal number: TC/2010/06556 

Construction Industry Scheme – Appeal against cancellation of registration for gross payment – ‘Compliance test’ –  Whether there was a reasonable excuse on the facts – Yes  – Appeal allowed – section 66 &  schedule 11 Finance Act 2004 – Regulation 32 Income Tax (Construction Industry Scheme) Regulations 2005

FIRST-TIER TRIBUNAL

TAX 

	S MORRIS GROUNDWORK LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN BROOKS (TRIBUNAL JUDGE)							NORAH CLARKE (MEMBER)		

Sitting in public at Eastgate House, Cardiff on 9 November 2010

B Esterhuizen of Hayvenhursts Chartered Accountants for the Appellant 

Colin Ward of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Having orally announced our decision to allow this appeal Mr Colin Ward, who appeared before us for HM Revenue and Customs (“HMRC”), requested that we provide these full written findings of fact and reasons.
2.	S Morris Groundwork Limited (the “Company”) appeals against the removal of its gross payment status under the Construction Industry Scheme following a review by HMRC during the period between 26 March 2009 to 26 March 2010. 
3.	A company’s registration for gross payment may be cancelled by HMRC at any time under section 66(1)(a) of the Finance Act 2004 (the “Act”) if it appears that “if an application to register the person for gross payment status were to be made at that time” it would be refused. Section 63(2) of the Act provides that HMRC “must” register a company if satisfied that the requirements of section 64 of the Act are met. To meet these requirements, insofar as they are relevant to the present appeal, a company must satisfy the “business test”; the “turnover test”; and the “compliance test” as set out in Part 3 of schedule 11 to the Act (see section 64(4)(a) of the Act). This appeal is concerned with the “compliance test” which requires a company to comply with its obligations under the tax legislation.
4.	It is accepted that the Company made late payments under the PAYE scheme and submitted late monthly contractors returns in addition to making a late corporation tax payment of £7,772.94 during the review period. It is also accepted that it cannot be treated as complying with its obligations under Regulation 32 of the Income Tax (Construction Industry Scheme) Regulations 2005 under which one or two small delays in payment can be ignored and is not applicable in the present case.  However, the Company will be treated as having satisfied the compliance test, in accordance with paragraphs 12(3) & (7) of schedule 11, if it can establish that it has a reasonable excuse for the failure to comply with its tax obligations, has complied with its obligations without unreasonable delay after the excuse ceased and can be expected to comply in respect of periods after the review period (see paragraph 14 of schedule 11 of the Act).
5.	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 at [18]).
6.	Before us, Mr Ward, for HMRC, accepted that the Company can be expected to comply with its future obligations and that it has a reasonable excuse in respect of both the late PAYE payments and late submission of contractors returns but not in respect of the late payment of corporation tax which in itself was sufficient grounds for the decision by HMRC to withdraw the Company’s gross payment status to be upheld.
7.	We heard from Mr Simon Morris, the director of the Company, who explained that he had not sent a cheque in payment of Corporation Tax, which was due on 1 June 2009, until 26 August 2009 as he was not aware of the amount due until shortly before the cheque was sent as his previous accountants had not completed the Company’s accounts and ascertained its tax liability until then. However, having considered the circumstances of this case we do not find that this amounts to a reasonable excuse. 
8.	Mr Morris also told us, which we accept, that if the Company, which has a turnover of approximately £4.5m, lost its gross payment status it was likely that it would also lose a contract worth £3.2m. If this were to happen the future existence of the Company could be threatened which would have a devastating effect on its 100 employees especially in the current economic climate.
9.	Mr Ward referred us to the decision of the Tribunal in Grosvenor v HMRC [2009] UKFTT 283 (TC) in which the Tribunal Judge (Dr Christopher Staker) said, at [37]:
“I further find that the consequences of cancellation of gross payment status is not relevant to the issue whether or not there is a reasonable excuse …”
10.	However, in the later case of Terence Bruns t/a T K Fabrications v HMRC [2010] UKFTT 58 it was found that a withdrawal of gross payment status would be likely to cause the Appellant to lose his livelihood and suffer severe economic loss on the sale or scrappage of his equipment. The Tribunal Judge (John Walters QC) said, at [32]:
“These consequences which would be likely to flow from a withdrawal of gross payment status would, in our judgment, be wholly disproportionate to the late payment of tax in this case (for which HMRC were, we assume, in any case compensated in interest).  This factor could well render the Appellant’s excuse reasonable even if, contrary to our findings above, there was no other basis on which his excuse could be held to be reasonable.” 
11.	Given the experience of the Tribunal Judge in Bruns we prefer that decision over Grosvenor and have taken account of the consequences of the withdrawal of gross payment status in the present appeal. As we consider these to be disproportionate to the late payment of tax we find that, in the circumstances of this case, the Company has a reasonable excuse and therefore allow the appeal.
12.	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.

JOHN BROOKS
TRIBUNAL JUDGE

RELEASE DATE: 18 November 2010