[2011] UKFTT 241 (TC)

TC01105

Appeal number:  TC/11/01291

Income Tax - Gross Construction Industry Status – whether status should be withdrawn – whether reasonable excuse for failing to meet obligations under Section 66(1)(c) Finance Act 2004 – incorrect information as to ability to pay – payment late by 61 days - Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX 

	NORMAN BRUCE 
	T/A NORRIE BRUCE PLANT HIRE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE:	W Ruthven Gemmell, WS	

Sitting in public in Edinburgh on 24 March 2011

Norman Bruce, for the Appellant 

Joyce Ballingal, for the Respondents 

© CROWN COPYRIGHT 2011

DECISION
The Appeal
1.	The Appellant, Norman Bruce, trading as Norrie Bruce Plant (“NB”), appealed against the withdrawal and cancellation of Gross Construction Industry Status under sections 66 and 67 of the Finance Act 2004 by the Respondents (“HMRC”)
2.	Evidence was given by Norman Bruce for the Appellant and by Joyce Ballingal for the Respondents and both witnesses were credible.
3.	The Construction Industry Scheme was introduced in its form from 6 April 2007 whereby a sub contractor receives gross payments for a contractor without any deduction being taken from the payment.
4.	Participants in the scheme are subject to a review of the sub contractor’s compliance records by HMRC once a year by running a “scheduled review” which is an automated check on whether the sub contractor has complied with all their obligations as a tax payer including, if appropriate, as an employer or contractor.
The Legislation
5.	Finance Act 2004 provides:- 
Section 66 Cancellation of registration for gross payment
(1) 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 has 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.
(2) Where the Board make a determination under subsection (1), the person’s registration for gross payment is cancelled with effect from the end of a prescribed period after the making of the determination (but see section 67(5)).
(3) The Board of Inland Revenue may at any time make a determination cancelling a person’s registration for gross payment if they have reasonable grounds to suspect that the person—
(a) became registered for gross payment on the basis of information which was false,
(b) has fraudulently 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) has knowingly failed to comply (whether as a contractor or as a sub-contractor) with any such provision.
Schedule 11 Conditions for Registration for Gross Payment
Part 1 Conditions to be satisfied by individuals
General
1 (1) In the case of an application for an individual to be registered for gross payment, the following conditions must be satisfied by the individual.E+W+S+N.I.
(2) But where the application is for the registration of the individual as a partner in a firm, this Part of this Schedule has effect with the omission of paragraphs 2 and 3…………
The compliance test -+W+S+N.I.
4 (1) The applicant must, subject to sub-paragraphs (3) and (4), have complied with—E+W+S+N.I.
(a) all obligations imposed on him in the qualifying period (see paragraph 14) by or under the Tax Acts or the Taxes Management Act 1970 (c. 9); 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.
(2) An applicant who at any time in the qualifying period had control of a company is to be taken not to satisfy the condition in sub-paragraph (1) unless the company has satisfied that condition in relation to the period or periods within the qualifying period during which he had control of it; and for this purpose “control” is to be construed in accordance with section 416(2) to (6) of the Taxes Act 1988.
(3) An applicant or company that has failed to comply with such an obligation or request as—
(a) is referred to in sub-paragraph (1); and
(b) is of a kind prescribed by regulations made by the Board of Inland Revenue,
is, in such circumstances as may be prescribed by the regulations, to be treated as satisfying the condition in that sub-paragraph as regards that obligation or request.
(4) 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.
(5) Where the applicant states, for the purpose of showing that he has complied with all obligations imposed on him as mentioned in sub-paragraph (1), that he was not subject to any of one or more obligations in respect of any period within the qualifying period—
(a) he must satisfy the Board of Inland Revenue of that fact by such evidence as may be prescribed in regulations made by the Board; and
(b) if for that purpose he states that he has been outside the United Kingdom for the whole or any part of the qualifying period, he must also satisfy them, by such evidence as may be so prescribed, that he has complied with any obligations imposed under the tax laws of any country in which he was living during that period which are comparable to the obligations mentioned in sub-paragraph (1).
6.	The Income Tax (Construction Industry Scheme) Regulations 2005 provides:- 
No. 2045, Regulation 32 
Compliance Test
Obligation to pay income tax.
(1) Payment is made not later than 28 days after the due date, and
(2) the applicant has not otherwise failed to comply with this obligation within the previous 12 months.
7.	The Income Tax (Construction Industry Scheme) (Amendment No.2) Regulations 2008 provides:- 
No. 1282, Regulation 2
Amendment to the Income Tax (Construction Industry Scheme) Regulations 2005
In Table 3 in regulation 32 (exceptions from compliance obligations) of the Income Tax (Construction Industry Scheme) Regulations 2005(1) insert at the end—
(1) Obligation to make a payment under the Tax Acts or Taxes Management Act 1970.
(2) Late or non payment of an amount under £100.
The Facts and Submissions
8.	This appeal was late but HMRC raised no objection to the hearing taking place.
9.	HMRC say that NB failed a scheduled review covering the period 16 June 2009 to 16 June 2010 for the following reasons:-
a)	NB did not comply with his tax obligations during the qualifying period of the scheduled review as required under Schedule 11 of the Finance Act 2004.
b)	The failures identified by the scheduled review did not fall under those which can be disregarded under Section 32 (Statutory Instrument 2005/2045) or Regulation 2 (Statutory Instrument 2008/1282); and
c)	The grounds of appeal put forward by the Appellant did not constitute a reasonable excuse as to why the tax obligations were not met.
10.	HMRC issued a letter on 21 June 2010 advising NB that the status would be changed from gross status to payment under deduction.  This would cancel the registration for gross payment.
11.	NB wrote on 5 July 2010 stating “There were no funds available to pay my tax bill.  As I have been subjected to late payments from contractors myself.  As soon as the funds became available I paid £927.74 immediately bringing everything up to date”.
12.	HMRC replied on 27 August 2010 noting the reason put forward for not paying tax due by 31 January 2010 was due to NB receiving late payments from his contractors.
13.	HMRC asked for documentary evidence to support this.
14.	On 13 September 2010, NB enclosed NB’s bank statements and invoices which showed the account to be in credit and stating that he had a number of sub contractors to pay from the credit figures shown in the statements. NB stated “I made a mistake stating in my last letter there were late payments from contractors”.
15.	A bank statement showed a balance brought forward at 24 December 2009 of just over £30,688 and a bank statement to 25 February 2010 showing a closing balance of just over £24,969.  The account generally held a minimum balance of approximately £19,000.
16.	HMRC wrote on 27 September 2010 stating they were unable to accept an appeal against their decision because they had not yet received documentary evidence.  
17.	NB say they had sent the evidence to the Newry office of HMRC and for reasons of internal delay within HMRC this took over 14 days to reach the appropriate individual within the HMRC office.  
18.	On 6 October 2010, then, responding to NB’s letter of 13 September 2010, HMRC stated that they were unable to change their original decision on the basis that the reason originally given for late payment, being that no funds were available, was untrue.  This letter stated that the credit balance at 28 January 2010 was just over £19,990.
19.	NB wrote an undated letter received by HMRC on 26 October 2010 that he wished an appeal.  This letter said that the business was concentrating on getting and keeping contracts and tax matters were left to an accountant, paid and trusted to give proper advice.  NB stated that the accountant had told him to say there were insufficient funds when there were not and he admitted that he may have been “a bit naive”.
20.	NB say that as soon as this was realised a cheque in full settlement was sent.  NB also say that if NB was changed to the Payment under Deduction Scheme it would have a very bad effect on business and would result in a reduction in their workforce.
21.	HMRC wrote on 9 December 2010 stating that the failure of the scheduled review related to one compliance failure on self assessment in that the balancing payment for 2008/2009 which was due for payment on or before 31 January 2010 was not settled until 2 April 2010 which was 61 days after the date payment was due.
22.	HMRC say that reasons given by NB did not constitute a reasonable excuse for the tax obligations not being met.  Principally, they stated that the initial explanation of experiencing cash flow problems and then relying on an agent were not reasonable excuses as the legislation places a responsibility on the contractor and that responsibility cannot be transferred to an agent or other third party.
23.	HMRC say that statements of account were issued on 14 December 2009 and, again on 4 March 2010, as reminders of unpaid tax and that the bank statement submitted by NB showed that there were sufficient funds to cover the tax liability at the time it was due.
24.	HMRC say that if NB were experiencing difficulties of being able to make the payment they should have contacted HMRC for advice and furthermore that HMRC provide measures of flexibility and some failures can be overlooked.  HMRC say they cannot overlook late payment of self assessment tax unless there is a reasonable excuse.
25.	On 21 January 2011, NB wrote stating that the business was going well and that being taken off the Gross Payment Scheme would have a bad effect on future work.
26.	HMRC wrote on 1 February 2011 sympathising and noting this point but stating that possible effect on future trade was not a relevant consideration in considering a reasonable excuse.
27.	NB say that they had always paid tax on time before and subsequent to the assessment which resulted in the withdrawal of the Gross Payment Scheme being the subject of this appeal.
28.	NB say that it had been naive to take the accountant’s advice when stating that there were no funds available to pay the tax bill and that payments were due from contractors and then to subsequently say that there were a number of sub contractors to pay from the cash held.
29.	NB say that Mr Bruce had been too busy to deal with matters due to the expansion of the business at that time.  
30.	NB say they could not remember receiving the statement of accounts issued on 14 December 2009 and on 4 March 2010.  NB stated that they had no knowledge of the scheme available in the event of difficulty in paying liabilities.
31.	NB say that the late payment was an oversight.
Findings
32.	The Tribunal was sympathetic to NB’s statements that the payment was an oversight and had not happened before or after, and to the consequences of the possible current economic consequences in the event of withdrawal of Gross Payment Status.  The Tribunal was unable to reach the decision that the factors put forward by NB constituted a reasonable excuse.
33.	The payment of tax was over two months late at a time when funds appeared to be available for its payment.
34.	Insufficient evidence was put forward to prove that the accountant had been negligent or why the accountant’s advice had been accepted without query when the bank statements issued on 25 January 2010 and 25 February 2010 clearly showed a balance of cash more than sufficient to meet the self assessment tax liability.
35.	The HMRC guidance setting out failures of compliance which can be overlooked insofar as they relate to late payment, allows only one late payment of self assessment tax of £100 and even then this has to be no more than 28 days late.  The circumstances in this case did not meet these criteria.
36.	The Tribunal accepts that there have been and will be considerable difficulties in the current economic climate but the scheme requires the Appellant to comply with all obligations imposed on it unless where failure to comply is of a kind prescribed by the regulations.  
37.	The Tribunal also considered and was sympathetic to the Appellant’s submission that withdrawal of the Gross Payment Status may have an adverse effect on the business but the consequences of cancellation of Gross Payment Status is not relevant to the issue of whether or not there is a reasonable excuse.
38.	The purpose of Parliament in creating the legislation was to procure strict compliance with tax obligations by making such compliance the price of obtaining a certificate and there could be unfair competitive advantages to allow the Gross Payment Status to continue despite clear failure.
39.	Whereas there was a reason to expect that the Appellant would in respect of the period after the qualifying period comply with such obligations and requests imposed upon it was not sufficient to displace the lack of a reasonable excuse.
40.	Having carefully considered all the evidence and regulations it was decided that the compliance test had not been met and that there is no reasonable excuse.
41.	The Appeal is therefore dismissed.
42.	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.

W RUTHVEN GEMMELL, WS
TRIBUNAL JUDGE

RELEASE DATE:  11 APRIL 2011