[2011] UKFTT 378 (TC)

TC01233

Appeal number TC/2010/02186

Appeal against the withdrawal of the gross payment status under the Construction Industry Scheme – Appellant failed the compliance test due to the late payment of income tax by the Appellant partners – appeal dismissed – the Appellant had no reasonable excuse

FIRST-TIER TRIBUNAL

TAX 

	SHAW CLEANING SERVICE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: S.M.G.RADFORD (TRIBUNAL JUDGE)
						DAVID.E.WILLIAMS CTA (MEMBER)

Sitting in public at Holborn Bars, London EC1N 2NQ on 18 February 2011

The Appellant did not attend

Ms Thorn for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	The Appellant telephoned earlier on the day of the hearing to state that due to ill-health a statement would be sent for perusal at the hearing and that there was no objection to the appeal going ahead in its absence.
2.	This was an appeal against the withdrawal of gross payment status under the Construction Industry Scheme (“CIS”). The gross payment status was withdrawn as a result of the failure of the compliance test. The qualifying period was the twelve months to 14 May 2009.
Facts and background
3.	The business at the material time was a partnership between Mr D F Hawkins, Mr B J Dunn and Mr D W Dunn.
4.	The partner Mr Hawkins was due to make his second interim payment of income tax in the amount of £6,932.03 in respect of tax year 2007/08 on 31 July 2008. HMRC records showed that Mr Hawkins did not start paying this until 9 August 2008 and a time to pay arrangement was only made on 16 April 2009.
5.	The partner Mr D W Dunn was due to pay his second interim payment of income tax in amount of £6,932.03 on 31 July 2008 but did not start paying it until 9 October 2008 and a time to pay arrangement was not made until 16 April 2009. He did not pay interest of £13.09 due on late payment of a first surcharge in respect of the year 2006/07 which was due on 9 October 2008 until 12 December 2008. He was late paying interest due on late payment of the tax due on 31 January 2008 and late paying the first surcharge in respect of the tax year 2006/07.
6.	The partner Mr B J Dunn was late paying his second interim payment of income tax of £6,932.03 due on 31 July 2008. He did not start paying this until 9 August 2008 and a time to pay arrangement was only made on 16 April 2009.
7.	For the purposes of the qualifying test certain failures such as late or non payment of less than £100 can be ignored but a late payment of income tax can only be ignored if it is not later than 28 days late and the applicant has not failed to comply with this obligation within the last twelve months.
8.	All three partners owed income tax of £6,932.03 due by 31 July 2008. None of them paid and they did not make a time to pay arrangement until 16 April 2009. The Appellants claimed that the late payments should be ignored because there was an agreement in force for payment of the amounts due. However in order for HMRC to ignore the late payments the time to pay agreements were required to be in place before the due date for payment of the tax.
Legislation
9.	Schedule 11 of the Finance Act 2004 sets out the conditions which apply for registration for gross payment to apply.
10.	The conditions which have to be satisfied are:
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.
(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

4.  (1)The applicant must, subject to sub-paragraphs (3) and (4), have complied with—

(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 applicant must, if any contribution has at any time during the qualifying period become due from him under—
(a)Part 1 of the Social Security Contributions and Benefits Act 1992 (c. 4), or
(b)Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7),have paid the contribution when it became due.
(7)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).
(8)Subject to sub-paragraphs (3) and (4), a person is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraphs (1) to (5) if there has been a contravention of a requirement as to—
(a)the time at which, or
(b)the period within which,
the obligation or request was to be complied with.
5	 In the case of an application for an individual or a company to be registered for gross payment as a partner in a firm, the following conditions must be satisfied by the firm.
The Compliance test
8	(1)Subject to sub-paragraphs (2) and (3), each of the persons who are partners at the time of the application must have complied, so far as any such charge to income tax or corporation tax is concerned as falls to be computed by reference to the profits or gains of the firm’s business, with—
(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 him as such a partner to supply to the Inland Revenue accounts of, or other information about, the firm’s business or his share of the profits or gains of that business.
(2)Where a person 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,
the firm is, in such circumstances as may be prescribed by the regulations, to be treated, in relation to that partner, as satisfying the condition in that sub-paragraph as regards that obligation or request.
(3)Where a person has failed to comply with such an obligation or request as is referred to in sub-paragraph (1), the firm is to be treated, in relation to that partner, 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 person had a reasonable excuse for the failure to comply, and
(b)if the excuse ceased, he complied with the obligation or request without unreasonable delay after the excuse had ceased.
(4)There must be reason to expect that each of the persons who are from time to time partners in the firm will, in respect of periods after the qualifying period, comply with such obligations and requests as are referred to in sub-paragraph (1).
(5)Subject to sub-paragraphs (2) and (3), a person is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraph (1) if there has been a contravention of a requirement as to—
(a)the time at which, or
(b)the period within which,
the obligation or request was to be complied with.
Qualifying Period

14	In this Schedule “the qualifying period” means the period of 12 months ending with the date of the application in question.
The Appellant’s Submissions
11.	The Appellant partners claimed that they were unable to pay their tax by the due date as a result of cash flow difficulties. 
12.	The Appellant agreed that the issue was whether the Appellant had failed the compliance test however that extreme financial hardship was the cause.
13.	The Appellant submitted that HMRC accepted that late payment as a result of such extreme financial hardship was not excluded by statute as a reasonable excuse for the failure of the compliance test.
14.	The Appellant’s agent stated that the background to their client’s difficulties was the well publicised downturn in the housing market as a result of which the Appellant was now struggling with the tax and NIC due in respect of the years of good profits during the years of poor profits.
15.	The Appellant’s agent also informed the Tribunal that effective from 31 August 2009 Mr D W Dunn had left the partnership and they were no longer responsible for the preparation of his personal tax return but they understood that he had cleared his current outstanding tax liabilities.
16.	The Appellant’s agent submitted that it was simply not just and equitable for a struggling small business working within a depressed construction industry to have its gross payment status challenged in August 2009 only six months after the Appellant had successfully challenged at the General Commissioners in February 2009 the previous attempt to remove its gross payment status.
17.	The Appellant’s agent stated that the cash flow problems caused by the credit crunch and sudden loss of business had been accepted by the General Commissioners as a reasonable excuse for failing the compliance test.
18.	Further the Appellant submitted that the late payments should be ignored because a time to pay arrangement was in force.
19.	The Appellant stated that the loss of the gross payment status would have an adverse effect on its business.
HMRC’s Submissions
20.	HMRC submitted that the Appellant had failed the compliance test. The Qualifying Period was the twelve months to 14 May 2009. The legislation required that each of the partners of the Appellant must have complied with all the obligations imposed on them under the Taxes Acts or the Taxes Management Act 1970.
21.	Mr D F Hawkins had not paid his second interim payment of tax for the 2007/08 tax year by the due date of 31 July 2008. He did not start paying it until 9 August 2008. He did not make a time to pay arrangement until 16 April 2009 and amounts were still outstanding.
22.	Mr D W Dunn had not paid his second interim payment of tax for the 2007/08 tax year by the due date of 31 July 2008. He did not start paying it until 9 October 2008. He did not make a time to pay arrangement until 16 April 2009 and amounts were still outstanding. Additionally he was late paying a surcharge and the interest due on it together with the interest due on the late payment of tax due on 31 January 2008.
23.	Mr B J Dunn had not paid his second interim payment of tax for the 2007/08 tax year by the due date of 31 July 2008. He did not start paying it until 9 August 2008. He did not make a time to pay arrangement until 16 April 2009 and amounts were still outstanding.
24.	HMRC submitted that certain compliance failures can be ignored such as a late or non payment of an amount less than £100. The late payment of interest by Mr D W Dunn on the first surcharge could therefore be ignored.
25.	HMRC submitted however that although a late payment of tax could be ignored if it was not later than 28 days late this did not apply to any of the other failures by the partners.
26.	Had the time to pay agreements been in force before the due date for payment then the late payments could have been ignored but they were not made until 16 April 2009.
27.	HMRC submitted that an insufficiency of funds was not itself a reasonable excuse. The insufficiency must have been caused by an unforeseeable or inescapable event.
28.	HMRC submitted that it was the partner’s personal responsibility to pay their own income tax not that of the partnership and so the cash flow of the partnership was irrelevant.
29.	HMRC submitted that the partnership profits within the 2007/08 return showed drawings of £153,975. It was the individual partner’s responsibility to make provision out of those drawings for the tax liabilities which they knew would arise from them.
30.	HMRC submitted that during the accounting period ended 31 August 2008 each partner made substantial drawings to the extent that two of the partners had overdrawn accounts at the end of the year and drew a total of £87,778 in the following year.
31.	HMRC stated that the computer carried out automatic tests every twelve months. The last test had been for the period 4 June 2007 to 4 June 2008 which was more than twelve months since this qualifying period. It was very likely that if the Appellant had won a previous appeal a further test would be carried out.
32.	HMRC stated that the legislation made no allowance for the possible consequences of the loss of the gross payment status to be taken into account. In the case of John Grosvenor v The Commissioners for Her Majesty’s Revenue and Customs Judge Staker stated at paragraph 37:
“I further find that the consequences of cancellation of gross payment status is not relevant to the issue as to whether or not there is a reasonable excuse     ”
33.	HMRC submitted that there was a further test within the legislation for the period after the qualifying period. This test states that there must be a reason to expect that the Appellant and its partners will, in respect of the periods after the qualifying period comply with all such obligations and request imposed on it.
34.	In respect of Mr B J Dunn all payments expected on 31 July 2009, 31 December 2010 and 31 July 2010 remained outstanding and the time to pay arrangement has now been cancelled due to failure to comply with it.
Findings
35.	The Tribunal found that despite their claim that this was due to cash flow problems, during the accounting period ended 31 August 2008 each partner made substantial drawings to the extent that two of the partners had overdrawn accounts at the end of the year and drew a total of £87,778 in the following year. 
36.	Insufficiency of funds is not a reasonable excuse except for an unforeseeable or inescapable event as was decided in the case of Customs and Excise Commissioners v Steptoe. The statement provided to the Tribunal by the Appellant dealt with the partnership cash flow but it was the individual partners who made substantial drawings.
37.	The Appellant contended that the reason for the late payments was shortage of funds and the exceptional reason which could not have been foreseen was the exceptional economic circumstances especially in the building industry. HMRC submitted that for such an argument to be successful it would be necessary for the Appellant to show for each partner that there was a personal shortage of funds due to some unforeseeable exceptional circumstance. 
38.	The Tribunal found that the Appellant had no reasonable excuse for failure of the compliance test which was caused by the partners continuously paying their interim income tax payments late without having a time to pay arrangement in place before the due date for payment of the interim amount.
39.	A late payment of income tax can only be ignored if it is not later than 28 days late and the Appellant partners failed to comply with this obligation within the qualifying period.
40.	The Tribunal found that it was the responsibility of the partners to make provision from their drawings for the tax due and they had not done so.
Decision
41.	The appeal is 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.

TRIBUNAL JUDGE
RELEASE DATE: 9 JUNE 2011