[2011] UKFTT 14 (TC)

TC00891

Appeal number: TC/2010/04951 

FIRST-TIER TRIBUNAL

TAX 

CONSTRUCTION INDUSTRY SCHEME – Withdrawal of gross payment status – Appellant did not meet the compliance test – whether Appellant had a reasonable excuse for his failure – No – Appeal dismissed 

	PAUL WRIGHT	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE)
				JULIAN STAFFORD LLB ACA CTA

Sitting in public at The Old Bakery, 115 Queens Road, Norwich NR1 3PL on 15 September 2010. 

Hearing  adjourned part-heard for further submissions in writing
		
Caroline Flowers of Thain Wildbur, Chartered Accountants for the Appellant	

Philip	Rowe for HMRC			

© CROWN COPYRIGHT 2010

DECISION
The Appeal
1.	The Appellant appealed against HMRC’s decision dated 7 December 2009 withdrawing gross payment status within the Construction Industry Scheme (CIS). 
2.	The Appellant was also a non-salaried partner of Breckland Roofing Services (hereinafter referred to as the Partnership), which undertook roofing contracts. The Appellant as a sole trader provided the labour for these contracts, and was paid for his supplies by the Partnership. The monies received from the Partnership constituted the sole source of income for the Appellant’s business. The Partnership lost its gross payment status as a result of the Appellant’s non-compliance with his obligations under the Tax Acts. On 5 February 2010 the Tribunal dismissed the Partnership’s appeal against HMRC’s decision to withdraw gross payment status.     
3.	HMRC withdrew gross payment status from the Appellant because he failed to meet the compliance test, which was one of the three statutory tests a sub-contractor must satisfy for registration for gross payment status.
4.	 The Appellant’s failure was that he did not comply with his obligations imposed in the qualifying period by or under the Tax Acts or the Taxes Management Act 1970. The qualifying period in the Appellant’s case was the 12 months to 2 December 2009. His specific failures during that period were that
(1)	His income tax self assessment balancing payment for year ended 5 April 2008 of ₤24,424.91 due on 31 January 2009 was not paid in full until 30 June 2009 (151 days late).
(2)	His income tax self assessment first payment on account for year ended 5 April 2009 of ₤8,319.20  due on 31 January 2009 was not paid in full until 29 July 2009 (180 days late).
5.	Certain compliance failures can be disregarded under the legislation. In this respect a late payment of income tax can be ignored if it is not later than 28 days after the due date and the tax payer has not failed to comply with this obligation within the previous 12 months. This specific disregard did not apply to the Appellant because his self assessment payments due 31 January 2009 were more than 28 days late. 
6.	The dispute concerned whether the Appellant had a reasonable excuse for his failure to make the said balancing payment and payment on account on time. The Appellant contended that his failure was due to cash flow difficulties which arose from a significant reduction in his income because of the recession, coupled with a mistake by the Partnership’s accountants regarding a reduction in the Appellant’s payments on account for the year ended 5 April 2008. The Appellant also pointed out that this was first time that he had defaulted on his income tax payments, and that he did everything possible to meet the outstanding debt, which was now paid off in full. Finally the Appellant asserted that he was being punished twice for the same failure with the withdrawal of gross payment status from the Partnership which would seriously jeopardise the viability of his business if that also was denied gross payment status.
7.	The law regarding the Construction Industry Scheme is governed by sections 57-58, schedules 11 and 12 of the Finance Act 2004, and the Income Tax (Construction Industry Scheme) Regulations 2005.  Section 64 of the 2004 Act provides the requirements for registration for gross payment. Section 64(2) obliges the Applicant to comply with the three statutory tests set out in part 1 of schedule 11 to the 2004 Act. Paragraph 4(1), schedule 11 of the 2004 Act specifies the criteria for the compliance test. 
8.	Paragraph 4(4), schedule 11 of the 2004 Act  deals with the issue of reasonable excuse, providing that
“An applicant or company that has failed to comply with such an obligation or request as is referred to in sub-paragraph (1) (compliance test) is to be treated as satisfying the condition in that sub-paragraph as regards that obligation or request if the Board of Inland Revenue are of the opinion that 
 a) the applicant or company had a reasonable excuse for the failure to comply, and
 b) if the excuse ceased, he or it complied with the obligation or request without unreasonable delay after the excuse had ceased.
9.	On the 15 September 2010 the Tribunal heard the Appellant’s evidence and the parties’ submissions. The Tribunal decided in the interests of justice that it required further information on the circumstances surrounding the reduction in the Appellant’s payments on account for the year ended 5 April 2008. In this respect the Appellant supplied witness statements from Mr G Deakin, his fellow partner of the Partnership, and Mr S Bennett of Griffin Chapman, the Partnership’s accountants. The parties were also given opportunities to make written submissions on the additional evidence. The Tribunal indicated that it would make its decision in the absence of the parties by no later than 4pm on 15 December 2010.
The Facts
10.	The actual amount of income tax owed by the Appellant as at 31 January 2009 was ₤58,826.17. This was made up of the ₤24,421.91 for the balancing payment for the year ended 5 April 2008 plus ₤17,200.63 for each of the first and second payments on account in 2008.  The reason for the large deficit on the payments on account was that the Appellant had on 12 February 2008 submitted a claim (SA303) to reduce his payments on account on 31 January and 31 July 2008 to ₤4,200.00. When the Appellant’s tax return for the year ended 5 April 2008 was submitted on 31 January 2009 the original payments on account of ₤21,400.63 were restored, creating the debt of  ₤17,200.63 for each of the first and second payments on account in 2008.
11.	On 31 January 2009 the Appellant did not have the funds to pay the outstanding debt of ₤58,826.17. His business suffered a significant downturn in the year ended 5 April 2009 from the previous year as a result of the recession. In 2007/08 the Appellant’s turnover and net profit were ₤498,788 and ₤130,142 respectively. The corresponding figures for 2008/09 were ₤270,070 and ₤45,348 respectively. 
12.	The Appellant considered that the circumstances surrounding the SA303 claim was a major contributor of his financial difficulties as at 31 January 2009. If no claim had been made, he would not have faced the large income tax demand on 31 January 2009. The Appellant believed that the Partnership accountants had wrongly advised him to make the said claim.
13.	The facts regarding the SA303 claim were:
(1)	The Appellant believed that the SA303 claim related solely to his income from the Partnership. The Appellant did not realise that it affected the tax paid on his income as a sole trader. The Appellant’s accountant who dealt with his personal tax affairs was unaware of the claim until January 2009 when she compiled the Appellant’s tax return for the year ended 5 April 2008.
(2)	On 20 December 2007 Mr Bennett of the Partnership’s accountants wrote to Mr Deakin confirming an earlier conversation to reduce the forthcoming payments on accounts in respect of the 2007/08 tax liability for the Partnership, the anticipated profits of which were expected to fall in the current year. Mr Bennett enclosed SA303 forms for Mr Deakin and the Appellant, requesting Mr Deakin to sign the form where indicated and return to him for onward submission to HMRC. Mr Bennett advised Mr Deakin to give the other partly completed SA303 form to the Appellant who should insert the missing details, sign and date it and forward it on as necessary.
(3)	Mr Deakin gave the SA303 form to the Appellant instructing him to insert the missing details and send the completed form to HMRC. Mr Deakin accepted with hindsight that he should have advised the Appellant to send the form to his accountant before onward transmission to HMRC. Mr Deakin blamed the ambiguous wording of Mr Bennett’s letter dated 20 December 2007 for telling the Appellant to send his form direct to HMRC.
(4)	HMRC received the Appellant’s SA303 claim around 12 February 2008. The Appellant’s tax  return for the year ended 2006/07 was made on 31 January 2008 by internet.
(5)	The SA 303 form  completed by the Appellant stated that he believed that 
“The total income tax and Class 4 NIC payable for the tax year of claim would be less than the total of the payments on account based on the liability for the previous tax year”. 
The form carried the usual warnings regarding incorrect statements fraudulently or negligently made. 
14.	The Appellant did not contact HMRC regarding time to pay arrangements prior to the 31 January 2009. The Appellant hoped that he could settle his debt in one payment by re-mortgaging his home but this took longer than expected because of the restrictions on lending following the banking crisis. The re-mortgage was completed on 5 June 2009 when he was advanced the sum of ₤59, 146.91. 
15.	The Appellant’s first contact with HMRC regarding his difficulties in meeting his tax obligations for the 31 January 2009 was on the 25 February 2009 when he was unable to agree a time to pay arrangement. According to the Appellant, he found the approach of the HMRC Officer unhelpful who was insisting on payment in full of the outstanding tax. On the 28 April 2009 the Appellant reached a time to pay arrangement with HMRC to which he adhered, clearing the outstanding sums by 31 July 2009.
Consideration
16.	The Appellant accepted that he did not meet the compliance test for the grant of a gross payment certificate in relation to his business as a sole trader. The purpose of the legislation dealing with the Construction Industry Scheme is to procure strict compliance with tax obligations by making such compliance the price of obtaining a gross payment certificate.
17.	The sole issue before the Tribunal is whether the Appellant had a reasonable excuse for his failures to meet his tax obligations during the qualifying period. The failures were not making the balancing payment for the year ended 5 April 2008 and the first payment on account for the year ended 5 April 2009 by the due date of on 31 January 2009. 
18.	The term reasonable excuse is not defined by statute The Tribunal considers that the term reasonable excuse has restricted application and is not the same as mitigation. The Tribunal assesses whether the Appellant had a reasonable excuse from the perspective of a prudent business person exercising reasonable foresight and due diligence with a proper regard for the fact that the tax would become payable on particular dates.   
19.	The Appellants principal reason for not paying his tax on time was because of cash flow difficulties which he said arose partly from the misleading advice of the Partnership’s accountants regarding the SA303 claim. The Appellant’s representative pointed out that the Partnership’s accountant should not have issued a SA303 claim form to the Appellant because he was not aware of the full state of the Appellant’s income. 
20.	Mr Rowe for HMRC disagreed with the Appellant’s version of events. According to Mr Rowe, it was clear from the additional evidence that it was the Appellant’s partner, Mr Deakin, who instructed him to send the SA303 claim direct to HMRC, not the accountant for the Partnership. Further Mr Rowe did not understand why Mr Deakin informed the Appellant to transmit the completed form direct to HMRC, when Mr Deakin was advised to return his claim form to the Partnership’s accountant. The Appellant’s representative challenged Mr Rowe’s interpretation of the additional evidence, arguing that the Appellant was taking advice from the Partnership’s accountant. 
21.	The Tribunal prefers Mr Rowe’s interpretation of the additional evidence. In the Tribunal’s view, the Appellant sent the SA303 claim on his partner’s instruction and was not misled by the Partnership’s accountant. As with Mr Rowe, the Tribunal does not understand why Mr Deakin told the Appellant to send the claim direct to HMRC rather than to his accountant first which would have been a more logical interpretation of Mr Bennett’s letter. The Tribunal considers that a prudent business person in the Appellant’s position having read the SA303 form would have recognised that the claim related to all the income earned during that tax year. In those circumstances a prudent business person would not rely solely on the advice of his partner but would confer with his accountant about sending the SA303 claim to HMRC. The Tribunal concludes from the facts surrounding the SA303 claim that the Appellant should have exercised more care and sought the advice of his accountant before sending the claim direct to HMRC.
22.	The other reason put forward by the Appellant for the cash flow difficulties was the significant downturn in business turnover in 2008/09 from the previous year, which meant that he did not have the wherewithal to meet his tax obligations on the 31 January 2009. The Tribunal finds that the Appellant did not anticipate the difficulties arising from the fall in his income and reacted slowly to the events, waiting until 25 February 2009 before contacting HMRC about time to pay arrangements. The Appellant’s actions were not those of a prudent business person who at the very least would have negotiated a time to pay arrangement with HMRC prior to the 31 January 2009. 
23.	The Tribunal is satisfied that the cash flow difficulties relied upon by the Appellant did not amount to a reasonable excuse. The difficulties arose from the Appellant not exercising reasonable foresight and due diligence with a proper regard to his obligations to pay tax by the due date.
24.	The Appellant’s submitted that the Tribunal should have regard to the adverse impact of withdrawal of the gross payment status on his business and, that effectively he was being punished twice for the same contravention of his tax obligations. The Tribunal finds that his submission did not deal with reasons for why he failed to make the tax payments on time but with the consequences of his failure. The Tribunal holds that consequences by definition did not meet the description of a reasonable excuse. Finally the Appellant pleaded his hitherto unblemished record of compliance with his tax obligations, which in the Tribunal’s view constituted mitigation but not a reasonable excuse.
Decision
25.	The Tribunal finds that the Appellant did not have a reasonable excuse for failing the compliance test, which was an essential pre-requisite for the award of gross payment status. The Tribunal, therefore, dismisses the Appeal and upholds the decision withdrawing gross payment status from the Appellant.    
26.	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.

MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 20/12/2010