[2011] UKFTT 155 (TC)

TC01029

Appeal number: TC/2010/01154

Construction Industry Scheme – cancellation of Appellant’s registration for gross payment – whether notice of cancellation had been given (Finance Act 2004 section 66(5)) - no -  appeal allowed

FIRST-TIER TRIBUNAL

TAX 

	MR & MRS PHILIP and TRACEY ITHELL	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MICHAEL S CONNELL (TRIBUNAL JUDGE)									

Sitting in public at Cunard Building, Pier Head, Liverpool  on 11th October 2010

Mr Robert Ellis, Accountant,  for the Appellant

Mrs Catherine Douglas, Senior Officer of HMRC, on behalf of  the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This is an appeal against HMRC's decision to cancel the Appellants gross payment status under s 66 (1) Finance Act 2004, following a review of their compliance with the Construction Industry Scheme Regulations. 

2.	The Appellants operate a plant hire business and have been trading for 20 years. Their compliance position was considered under an ongoing review which took place on 11 May 2009 for the period 6 May 2008 to 5 May 2009 (‘the qualifying period’). The Appellants had satisfied the ‘turnover’ and ‘business’ tests. The issues raised in this appeal relate to the ‘compliance’ test.

3.	The Appellants  accepted that during the qualifying period they had not complied with their obligations to pay income tax due pursuant to the requirements of paragraph 8 (1), Schedule 11, Finance Act 2004.

4.	The questions for determination by the Tribunal were:

a)	whether HMRC, when cancelling the Appellants  registration the gross status, they had  given them notice without delay stating the reasons for the cancellation under s 66 (5) FA 2004, and
b)	if such notice was given whether the Appellants  had a reasonable excuse for the alleged compliance failures, whether things are done promptly subsequently pursuant to the requirements of Finance Act 2004 Schedule 11 paragraph 4 and whether there is reason to expect future compliance on the part of the Appellants (Schedule 11 paragraphs 10-12)

5.	The Appellants had made a larger than average profit in the year ended 31 August 2007. Profits for the year ended 31 August 2007 were approximately £303,000 whereas profits for the year to 31 August 2008 were approximately £192,500. Payment of tax in respect of the balancing payment for 2007-08 and the first payment on account for 2008-09 fell due for payment on 31 January 2009.  Following telephone advice from their accountants Milne Thomas & Co on 22 January 2009, the Appellants  sent a cheque in the sum of £71,200.66 to HMRC to pay their balancing payment for 2007-08 and make a part payment of the first payment on account for 2008-09. It is not clear how the accountants had calculated this figure, because as subsequently became clear, the sum paid was considerably less than the amount required to discharge the tax due, in particular the first payment on account for 2008-09. The sum of £71,200.66 represented £35,765.15 payable by Mrs. Tracey Ithell and £35,434.91 payable by Mr. Philip Ithell. Unfortunately the cheque was inadvertently sent unsigned. However, the Appellants produced a copy bank statement to show that there would have been sufficient monies in their bank account to clear the cheque. 

6.	On 31 January 2009 an automated receipt was issued by HMRC acknowledging the payment made by Mr. Ithell.  It appears that no receipt was issued for the payment made by Mrs. Ithell. Nonetheless the Appellants assumed everything to be in order.

7.	The Appellants unsigned cheque was returned to HMRC marked ‘unpaid’ and then returned to the Appellants Bank Lloyds TSB. For reasons which are not clear, it appears that the bank did not follow its usual practice of returning the unsigned cheque to the Appellants, so that it could be signed and re-sent or another cheque issued. Because of what the Appellants describe as a ‘bookkeeping error’, they say that they failed to notice that the cheque had not cleared. Consequently they say they were unaware that payment had not been made to HMRC until notified on 7 April 2009, when HMRC wrote to them to say that their cheque had not been signed and that interest was accruing on the outstanding monies.

8.	The following schedule details the amounts due and the compliance failures: 

	Amount
due	Due 
date	Date
paid	Days
late	Amounts 
paid	Note	
Mr P Ithell
Balancing payment
2007-2008	
£35,254.59
	
31/01/09
31/01/09	
08/04/09
11/07/09	
67
161	
£2,500.00
£32,754.59
£35,254.59	
part
part
Total
	
Payment on
Account (1)
2008-2009
*Claim to reduce	
£20,008.49	
31/01/09	
08/07/09

11/07/09	
158

161	
*£12,008.49

£8,000.00
£20,008.49	
Total	
Mrs T Ithell
Balancing
Payment
2007-2008	

£35,513.12

31/01/09
31/01/09	

08/04/09
10/04/09	

67
69	

£2,500.00
£33,013.12
£35,513.12	

part
part
Total	
Payment on
Account (1)
2008-2009	
£20,137.76	
31/01/09
31/01/09
31/01/09	
10/04/09
06/05/09
02/06/09	
69
95
122	
£2,500.00
£10,000.00 
£7,637.00
£20,137.00	
part
part
part
Total	
It can be seen that – 
                                                                                 
•	On 8 April 2009, Mrs. Ithell  made a payment of £2,500 on account of the balancing payment for 2007-08, and a further payment of £33,013.12 on 10 April 2009. These payments were respectively 67 and 69 days late. No payment was made in respect of the payment on account for 2008-09 
•	On 8 April 2009 Mr. Ithell similarly made a payment of £2,500 on account of the balancing payment for 2007-08. (67 days late). Mr. Ithell also made no payment on account for 2008-09. 
•	On 6 May 2009 Mrs. Ithell made a further payment of £10,000 in respect of her 2008-09 payment on account, (95 days late), and a further sum of £7,637 on 2 June 2009, (122 days late). 
•	On 8 July 2009 Mr. Ithell paid the further sum of £12,008.49 in respect of the balancing payment for 2007-08 and by way of part payment on account for the year 2008-09, (158 days late); he paid an additional sum of £8,000 on 11 July 2009 (161 days late).

The failures identified by the review did not fall under those which can be disregarded under regulation 32 (statutory instrument 2005/2045) of regulation to (statutory instrument 2008/1282). It was accepted by HMRC that the Appellants had ultimately remedied their failures in full.

9.	The Appellants knew that the 2008-09 tax liability would be less than that of 2007-08 and intended to lodge ‘claim to reduce’ (which was subsequently lodged on 8 July 2009). As at 31 January 2009, the total balancing sum payable by the Appellants for 2007-08 was in fact £70,767. This meant that, had the cheque for £71,200.66 been signed, there would have been £432.95 to set against the first payments on account for 2008-09. However, even if payment had been made, that would still have left a total of £39,713 outstanding and paid late.

10.	Because balancing payments for one year and the payments on account for the next are separate payments due to HMRC, the Appellants had each twice failed to make payments of tax due. HMRC therefore say that the Appellants failed the CIS compliance test on a total of four occasions.

11.	On 11 May 2009 due to the Appellants failures to meet their tax obligations, HMRC issued a decision on form CIS308 cancelling their registration to receive gross payments with effect from 9 August 2009. HMRC says that the notice was sent to the Appellants and their Accountants Milne Thomas and Co. During May 2009 the Appellants were in the process of changing accountants and had appointed Ellis and Co. In answer to enquiries made of them by Ellis and Co, Milne Thomas and Co made no mention of the Appellants having had their CIS gross payment status withdrawn or any other issues with HMRC.

12.	The Appellants say that they did not receive the notice and were unaware of cancellation of their gross payment status until notified by one of their subcontractors on 6 July 2009. It was shortly after this; on 11 July 2009 that Mr. Ithell paid the balance of the amount due for 2007-08. 

13.	The Appellants accept that the payments due to HMRC were paid late and that they had therefore not complied with their obligations during the relevant qualifying period. They say however that this was in part due to erroneous advice from their accountants and also due to an innocent mistake on their part.

14.	HMRC, in response, say that once the Appellants cheque had been dishonoured one would have expected them, operating due diligence, to have redressed the mistake immediately but non-payment continued for some considerable time afterwards. HMRC also say that even if it is conceded that the unsigned cheque was issued in good faith and accepted as a reasonable excuse, and that they were unaware of non-payment, they have not proven grounds for reasonable excuse for the late payment of the 2008-09 first payment on account. Late payment of tax on four separate occasions justified the cancellation of the Appellants registration for gross payment status.

15.	The Appellants  offered the following as reasons why they were able to show good excuse for late payment :
a) that they placed reliance on their first accountants and that the 2008-09 return would subsequently show that a lower payment was due. As HMRC point out however reliance upon a third party is no excuse and payment of the lower amount was still late.
b) they have been greatly affected by a severe downturn in construction activity. However there was no contract by the Appellants with HMRC in advance of the payment date to discuss any financial deficiencies nor any request for a time to pay agreement.
c) they would suffer severe repercussions in the event of withdrawal of their CIS gross payment status and that the loss of their gross payment status would be disproportionate to the alleged breach of the regulations. HMRC responded that it is established case law that the consequences of loss of CIS gross payment status and issues of proportionality cannot be considered as a reasonable excuse (Barnes  v Hilton Main Construction (2005) 77 TC 255) as neither of those matters were the causes of the compliance failures and therefore cannot amount to reason excuse.

16.	The Appellants  accept that there had been further breaches in respect of late payments of monthly PAYE but explained that their previous accountants had told them that these payments had to be settled by the end of each month, as opposed to the 22nd of each month. The issue was relevant under the ‘reason to expect’ provisions. The Appellants said that having been made aware of the correct date for payment, there had been no further breaches since February 2010. HMRC contend however that the Appellants had been trading for over 20 years, and should have been conversant with payment dates in respect of PAYE.

17.	The questions for determination by the Tribunal were:
a) whether HMRC when cancelling the Appellants registration for gross payment gave them notice without delay stating the reasons for the cancellation under section 66 (5) Finance act 2004. 
b) if such notice was properly given, whether or not HMRC's decision to withdraw the Appellants gross payment status was correct, including whether there was ‘reason to expect’ future compliance on the part of the Appellants  - the onus of proof rests initially with HMRC to prove default and then with the appellant to prove the reasonable excuse and duration - s50 (6) Taxes Management Act 1970), and if so, 
c) whether the Appellants had a reasonable excuse throughout the failures which led to that HMRC decision. (Section 118 TMA 1970)

18.	Section 66 (5) Finance Act 2004 states that ‘on making a determination to cancel a person's registration for gross payment, HMRC must without delay give the person notice stating the reasons for the cancellation.’

19.	At the Tribunal hearing, HMRC was unable to produce a copy of the CIS 308 notification issued on 11 May 2009 but says there is a clear note on the computer which indicates that CIS 308 was sent to both the Appellants and their appointed agent. However, although there is a copy screen-print record of the CIS 308 being issued, there is no copy of the actual notice or any of the related correspondence. It was explained by HMRC that the notices are computer generated and a paper copy of the notification (rather than simply a copy of a screen-print recording the issue of a CIS 308), and the accompanying correspondence are not retained.

20.	HMRC say that in the absence of evidence to the contrary, it has to be assumed that first class post , properly addressed, prepaid and sent to the last known address will have been received in the ordinary course of post. Nonetheless HMRC conceded that they could not produce proof of postage or any other unequivocal evidence of receipt by the Appellants of form CIS 308. 

21.	It was not therefore possible to establish with certainty that the Appellants had been given notice of cancellation of the registration of their gross payment status without delay or what reasons for cancellation had been given in the notice.

22.	The Appellants say they were entitled to be notified of gross payment status cancellation without delay with clear reasons for the cancellation and that this had not been done. They therefore say that, irrespective of their failures under the CIS compliance test, HMRC have not established with any certainty that notification of non compliance was properly and timeously given.

23.	When HMRC issues a CIS 308 notification it is clearly important that the taxpayer is notified without delay. It seemed to the Tribunal that it would have been good practice for a copy of the notice and accompanying letter to the taxpayer and their agent, particularly in matters of such importance, to be retained, in order that copies could be supplied to the taxpayer if necessary; for example, if the initial notice had gone astray. Although the Appellants requested a copy of the notice, it appears that none was forthcoming, even after the Appellants had lodged notice of appeal to the Tribunal.

24.	It is not known whether the CIS 308 notice was accompanied by a covering letter, whether or what reasons were given and whether they specifically addressed  the ‘reasonable excuse’ reasons proferred by the Appellants.

25.	Section 66 (1) FA 2004 says that HMRC ‘may…………. make a determination cancelling a person's registration for gross payment……..’. The wording of the subsection indicates that HMRC has an element of discretion. Section 67 (1) provides that the person aggrieved by the cancellation of his registration for gross payment may appeal the decision and that notice must be given of appeal within 30 days after the cancellation. Clearly a person cannot lodge or prepare for an appeal if he is unaware of cancellation of his gross payment status or the reasons for cancellation. 

26.	The Tribunal must decide whether a CIS 308 notice was given, and if it was, whether the notice constituted sufficient notice for the purposes of s 66(5) FA 2004.

27.	Although there is no specific statutory provision on the point, it has to be concluded that notice of cancellation is not effective if the appellant has not in fact received it.

28.	HMRC's computer records certainly indicate that the notice was issued and there is no suggestion that HMRC records contained an incorrect address for the Appellants. Normally this would give rise to an inference that the notice of cancellation was sent by HMRC to the Appellant and that it was duly delivered to their address.

29.	The question of whether the Appellants received the notice of cancellation must be determined on the balance of probabilities. The burden of proof is on HMRC. 

30.	Any Appellant could of course deny having received a cancellation notice of cancellation but the fact that HMRC have not been able to produce either a copy of the notice or any accompanying  correspondence, the fact that the Appellants  previous accountants appeared to be unaware of the cancellation and also the fact that the Appellants  paid the outstanding tax almost immediately after being told by a third party that the gross payment status had been cancelled all indicate that they had not in fact received the notice.

31.	Taking all the evidence into account the Tribunal finds on a balance of probabilities that notice of cancellation of the Appellants gross payment status was not delivered to the Appellants. Therefore HMRC did not comply with its obligation under section 66 (5) FA 2004, on making a determination to cancel the Appellants  registration for  gross payment, by giving the Appellants notice without delay, stating its reasons for the cancellation.

32.	In consequence of the Tribunal's findings on the issue of notification under s66 (5) FA 2004 it was not necessary for the Tribunal to consider whether the Appellants had shown a reasonable excuse for late payment.

33.	For the above reasons the Tribunal allowed the appeal. 
34.	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 S CONNELL

TRIBUNAL JUDGE
RELEASE DATE: 3 March 2011