[2011] UKFTT 225 (TC)

TC01090

Appeal number TC/2010/07557

CONSTRUCTION INDUSTRY SCHEME – Withdrawal of gross payment status – Appellant did not meet the compliance test – whether Appellant had a reasonable excuse for his failure – Yes – ‘reason to expect’ test failed – No - Appeal allowed 

FIRST-TIER TRIBUNAL

TAX 

	MR ALAN KINCAID T/A A K CONSTRUCTION	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			TRIBUNAL: JOHN WALTERS QC (TRIBUNAL JUDGE)
                                                IAN MENZIES-CONACHER FCA CTA (FELLOW)

Sitting in public at St Katherine’s House. St Katherine’s Street, Northampton NN1 2LX on 21 March 2011

There was no appearance by or on behalf of the Appellant

Paul Reeve of HM Revenue and Customs appeared for the Respondents

© CROWN COPYRIGHT 2011

Issues

1.	The Tribunal received a letter from the Appellant’s accountant (Thomas, Wood & Co) advising that they would not be attending the hearing of the appeal, on grounds of cost, but asking that their written submissions be taken into account by the Tribunal. We decided to continue with the hearing in the absence of the Appellant or his representative as, in accordance with Rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, it was clear that condition (a) of the Rule was satisfied (prior notification of the hearing) and we considered that it was in the interests of justice to proceed, so that condition (b) of the Rule was also satisfied. 
2.	The Appellant appealed against HMRC’s notice dated 29 March 2010 (which was confirmed following an internal review in a letter dated 25 August 2010), withdrawing gross payment status from the Appellant, within the Construction Industry Scheme (CIS). This was a determination cancelling the Appellant’s registration for gross payment pursuant to section 66(1) Finance Act 2004 (“FA 2004”).
3.	HMRC withdrew gross payment status from the Appellant because he failed to meet the compliance test, one of the three statutory tests a sub-contractor must satisfy for registration for gross payment status (see: paragraphs 1 to 4, Schedule 11, FA 2004).
4.	The letter of 25 August 2010 set out HMRC’s reasons. These were the Appellant’s failure to comply with his obligations imposed in the qualifying period by or under the Tax Acts or the Taxes Management Act 1970 (compare paragraph 4(1)(a), Schedule 11, FA 2004). The qualifying period in the Appellant’s case was the 12 months to 19 March 2010. His specific failures during that period were that
(1)	The 1st self-assessment surcharge payment for year ended 5 April 2008 of ₤1,236.71 due on 6 May 2009 was not paid in full until 23 March 2010 (322 days late); and
(2)	The 2nd self-assessment surcharge payment for year ended 5 April 2008 of ₤1,236.71 due on 15 September 2009 was not paid in full until 23 March 2010 (189 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 made not later than 28 days after the due date and the taxpayer has not failed to comply with this obligation within the previous 12 months. This specific disregard did not apply to the Appellant because his payments were more than 28 days late.
6.	HMRC submitted that no ‘reasonable excuse’ had been provided by the Appellant as to why the tax obligations (viz: the payments of the self-assessment surcharge payments) were not met on the due dates.
7.	In addition HMRC also contended at the hearing that the Appellant failed the separate requirement of the compliance test (see: paragraph 4(7), Schedule 11, FA 2004) that there must be reason to expect that the same requirements would be complied with in respect of periods after the qualifying period (i.e. post 19 March 2010) in that an amount of £24,734.25 due on 31 January 2009 was paid late, as follows:
Amount Paid	Date Paid	Days Late	
13,559.14	25 November 2009	298	
2,000.00	19 December 2009	322	
2,000.00	27 January 2010	361	
4,224.17	31 January 2010	365	
2000.00	24 February 2010	389	
950.94	23 March 2010	416	
24,734.25			

8.	The issue before the Tribunal was therefore whether the Appellant had failed the compliance test; either by failure to make the surcharge payments in question on time without a ‘reasonable excuse’ or because there were reasons to expect that there would be failures to comply in subsequent periods. 
9.	In relation to the dispute concerning whether the Appellant had a reasonable excuse for his failure to make the two surcharge payments on time, a letter written by his accountants of 28 June 2010 stated that these payments had been due at a time when the Appellant was suffering severe cash flow problems arising from 20% CIS tax being deducted from payments made to him whilst having to continue to make payments to HMRC of amounts deducted from payments to his own subcontractors. (As a self employed individual the Appellant had no right of offset.) This cash flow situation was worsened by a doubling in turnover of the Appellant’s business between 2008 and 2009.
10.	The Appellant had been subject to a previous notice of withdrawal of gross payment status arising from a test of a qualifying period of 12 months to 11 April 2008. This had also been the subject of an appeal to the Tribunal but that case was finally withdrawn by HMRC before a hearing and in a letter of 24 December 2009 HMRC had advised the Appellant that his status would remain as gross.
11.	The Appellant had entered into a time to pay arrangement with HMRC on 23 November 2009, pursuant to which his self-assessment tax would be paid in the instalments indicated in the table at paragraph 7 above
The Law
12.	The law regarding the Construction Industry Scheme is contained in sections 57-68 of and schedules 11 and 12 to FA 2004, and the Income Tax (Construction Industry Scheme) Regulations 2005.  Section 64 of the FA 2004 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 FA 2004.  ‘Qualifying period’ is defined in paragraph 14 of Schedule 11 to FA 2004 and section 66 FA 2004 deals with the cancellation of registration for gross payment.
13. Paragraph 4(1), schedule 11 to FA 2004 specifies the criteria for the compliance test.
“The applicant must, subject to sub-paragraphs (3) and (4), have complied with – 
(a) all obligations imposed on him in the qualifying period...by or under the Tax Acts or the Taxes Management Act 1970, and
(b) all requests made in the qualifying period to supply to the Inland Revenue accounts of, or other information about, any business of his.
14. Paragraph 4(4), schedule 11 to FA 2004 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) 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.
13.	Paragraph 4(7), schedule 11 to FA 2004 provides that:
“There must be reason to expect that the applicant will, in respect of periods after the qualifying period, comply with –
a)	such obligations as are referred to in sub-paragraphs (1) to (6), and 
b)	such requests as are referred to in sub-paragraph (1)
14.	Section 66(1) FA 2004 provides that:
“The Board of Inland Revenue may at any time make a determination cancelling a person’s registration for gross payment if it appears to them 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,
(b)	he had made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or
(c)	he has failed to comply (whether as a contractor or as a sub-contractor) with any such provision.
15.	Section 67(5) FA 2004 provides that:
“Where a person appeals against the cancellation of his registration for gross payment by virtue of a determination under s 66(1), the cancellation of the registration does not take effect until whichever is the latest of the following-
(a)  the abandonment of the appeal,
(b) the determination of the appeal by the Tribunal, or
(c) the determination of the appeal by the Upper Tribunal or a court.
Discussion
‘Reasonable Excuse’
16.	The Appellant did not dispute that the two surcharge payments had been made late and therefore (as the obligations to make the surcharge payments were obligations imposed on him in the qualifying period – the year ended 19 March 2010 – under the Taxes Acts or the Taxes Management Act 1970) we find 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 as at 19 March 2010 – and if an application to register the Appellant for gross payment had been made on 19 March 2010, the Board would have refused so to register him (in terms of section 66(1)(a) FA 2004). This finding is, of course, subject to the Appellant being able to show a reasonable excuse for the non-compliance.
17.	HMRC’s position was that a cash flow problem can only be accepted as a reasonable excuse where it arises from an unforeseeable or inescapable event – something more than the normal hazards of being in business.  An insufficiency of funds itself was not a reasonable excuse – though no authority was given for this proposition.  HMRC contended that the reasonable excuse offered in this case, which they saw as simply the Appellant having difficulties with his customers, amounted to no more than such a normal hazard of being in business.  It was neither unforeseeable nor inescapable.
18.	The term reasonable excuse is not defined by statute – rather it “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]). 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.	In this case HMRC accepted that the amount of £4,224.17 shown in the table at 7 above represented deductions of CIS tax which had been overpaid in 2008/09 and, on 31 January 2010, set off against the balancing payment of self-assessment tax due for 2007/08 on 31 January 2009.  This supported the explanation of the difficulties put forward by the Appellant (see: paragraph 9 above). This amount of £4,224.17 significantly exceeded the £2,473.42 due in respect of the two late paid surcharges. The Appellant had done all that he could to avoid this problem by his appeal against the earlier notice of withdrawal of gross payment status arising from a test of a qualifying period to 16 April 2008 – see: paragraph 10 above – but this was not resolved, by confirmation of his gross status, until towards the end of the qualifying period now in question.  In any event, the Appellant’s gross payment status should not have been withdrawn following his appeal against the earlier notice of withdrawal – see: section 67(5) FA 2004.  These circumstances left the Appellant for most of the period under review (the year ended 19 March 2010) in the almost impossible trading position of receiving income net of CIS deductions but having to make payments gross. For this reason, the Tribunal considers that the Appellant does have a reasonable excuse for making the two surcharge payments as late as 23 March 2010. 
‘Reason to expect’
20.	HMRC relied upon the table shown at 7 above to demonstrate that the amount of £24,734.25 due on 31 January 2009 was not paid on the due date and therefore there was no reason to expect that the Appellant would, in respect of periods after the qualifying period, comply with his tax obligations (see: paragraph 4(7), Schedule 11, FA 2004).
21.	They acknowledged that a time to pay agreement was made between HMRC and the Appellant on 23 November 2009.  However they say that the failure to pay the 2007/08 balancing payment on time is not a failure that can be overlooked because, to achieve this result, any arrangement must have been put into place before the tax became due, and that this did not happen in this case.  The time to pay arrangement was not entered into until 296 days after the tax became due.
22.	HMRC therefore contends that the Appellant’s failure to pay on time (or agree an instalment arrangements prior to the tax becoming due) in the post qualifying period means that the reason to expect test has been failed.
23.	We saw no representations from the Appellant on this point, possibly because this argument was not advanced by HMRC in their letters to the Appellant’s accountants but only appeared in their skeleton argument for this hearing.
24.	We found some difficulties with HMRC’s contention, due to the wording of the legislation (whilst qualifying period is defined ‘periods’ are not), and HMRC were unable to refer us to any previous decisions in support of their position on this point. 
25.	We concluded that the context of this test meant that it was necessary to determine a point of time from which to judge future expectations as to compliance or non-compliance. The Tribunal considered that, having first applied the tests to the qualifying period in question – the year ended 19 March 2010 – the  only possible time to judge future expectations as to compliance was the time of the determination to cancel the registration for gross payment, i.e. 19 March 2010.  Whilst there had been failure to comply with tax obligations after 19 March 2010, there had also been reasonable excuses for these failures.  Such reasonable excuses had been (a) in respect of the payment of the final instalment of the balancing payment of self-assessment tax due for 2007/08 on 31 January 2009 – the payment of £950.94 shown in the table in paragraph 7 above, which was made on 23 March 2010 – the fact that a time to pay agreement covering that payment had been reached beforehand, on 23 November 2009, and (b) in respect of the late making of surcharge payments, also on 23 March 2010, the incorrect withdrawal of gross payment status on the earlier appeal being made – see: paragraph 19 above.  It followed that in our view gross payment status should not be revoked on the basis of the failures to comply with tax obligations after 19 March 2010. The purpose of the additional (reason to expect) test was to provide an override in cases where there was a reasonable excuse for the withdrawal of gross payment status by reference to what had happened in the qualifying period, but nonetheless there was doubt as to continuing compliance and that therefore gross status should be revoked notwithstanding the reasonable excuse. 
26.	If we were alternatively to assess this point by reference to 29 March 2010 (when the decision letter to revoke gross status was issued), the position at that date was that the full amount shown as due (as per the table at paragraph 7 above) had been paid – on 23 March 2010, the same day as the two surcharge liabilities were also settled. 
27.	Furthermore we considered that the existence of the time to pay agreement entered into on 23 November 2009 was relevant to determining the behaviour of the Appellant. Firstly because it indicated that he was acting to address his problems and had approached HMRC to make this arrangement. Secondly HMRC confirmed that the subsequent monthly payments of £2,000 were made pursuant to this agreement. On this basis we concluded that the evidence presented showed that at the relevant time, described broadly as the second half of March 2010, the Appellant was behaving responsibly in relation to his tax affairs and it was not therefore reasonable for HMRC to conclude at that time that there were reasons to expect that there would be future compliance failures.
Decision
28.	For the reasons given above: 
(a) The Tribunal finds that the Appellant did have a reasonable excuse within the meaning of paragraph 4(4), Schedule 11, FA 2004 for failing the compliance test in relation to the requirements of paragraph 4(1), Schedule 11, FA 2004 as at 19 March 2010; and 
(b) The Tribunal also finds in relation to the determination of 19 March 2010 cancelling the Appellant’s registration for gross payment that there was no reason to expect post-qualifying period non-compliance by the Appellant within paragraph 4(7), Schedule 11, FA 2004 and that therefore the Appellant did not fail the compliance test for this reason. 
29. The Tribunal therefore allows the appeal.
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.

         JOHN WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 6 April 2011

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