[2011] UKFTT 419 (TC)

TC01272

Appeal number:  TC/10/09360

Construction industry- verification of status of sub-contractor – transitional provisions of Reg. 6(4) of the Income Tax (Construction Industry Scheme) Regulations 2005 – appeal allowed.

FIRST-TIER TRIBUNAL

	CROFTPORT LTD	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE:John M Barton, WS
         Member: Ian Malcolm

Sitting in public in George House, 126 George Street, Edinburgh on Tuesday 14 June 2011

Dennis Ward, Director, for the Appellants, 

William Kelly, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	Croftport Ltd had appealed against an assessment in the sum of £17,593.40 made under the provisions of regulation 7(1) of the Income Tax (Construction Industry Scheme) Regulations 2005 and a penalty determination to the extent of £1,759 made under the provisions of s 98A(4) Taxes Management Act 1970.  Having considered the circumstances in full, the Tribunal allows the appeal. 
2.	A Notice of Appeal dated 6 December 2010 had been lodged on behalf of Croftport Ltd.  A Statement of Case was lodged by Her Majesty’s Revenue and Customs (“HMRC”), and the Appeal was set down for hearing in Edinburgh on 14 June 2011.
3.	 Each party lodged with the Tribunal a bundle incorporating all the documents on which they respectively intended to rely. 
4.	The documents in the bundles were as follows:-
(1)	Notice of Appeal dated 6 December 2010.
(2)	Correspondence and notes of telephone calls. 
(3)	Bank Statements.
(4)	Notification of tax treatment change for three subcontractors.
(5)	Penalty Determination.
(6)	HMRC Screen Print registration details for Croftport Ltd.
(7)	HMRC News Release 10 November 2006.
(8)	HMRC Calendar of Events.
(9)	Extract from booklet CIS 340.
(10)	Extracts of relevant legislation.
(11)	HMRC Statement of Case.
5.	Mr Ward and Mr Kelly addressed the Tribunal.  In the course of Mr Ward’s submissions, he provided certain evidence but he was not cross-examined by Mr Kelly.  Mr Kelly did not lead any evidence for HMRC.
Material Facts
6.	The material facts were as follows:-
(1)	Croftport Ltd is a property developer engaged in house building.  Mr Ward is one of the two directors of the company; and the only employee is a sales person.  The company usually undertakes only one development at a time, engaging up to twelve sub-contractors in the construction of up to twenty houses.  Croftport Ltd has been registered under the Construction Industry Scheme (“CIS”) since 2002.
(2)	In January 2007, Croftport Ltd began a development at Law in Lanarkshire; and in this connection, accepted a tender from the firm of T & S Joinery.  Mr Ward met with one of the partners of T & S Joinery on site and was informed that they had gross payment status under the CIS and was shown a card which apparently supported this.
(3)	T & S Joinery commenced work on the site on or about 19 March 2007.
(4)	From August 2005, there was considerable publicity for new procedures under the Income Tax (CIS) Regulations 2005 which were to come into force on 6 April 2007.  Mr Ward was aware of these new Regulations and understood that the effect of them was that a contractor was required, in relation to every new sub-contractor, to telephone HMRC to ascertain whether that that sub-contractor had gross payment status under the CIS; but that this requirement did not apply to existing sub-contractors.
(5)	On the basis of that understanding, Mr Ward did not telephone HMRC in relation to T & S Joinery as that firm had been working as a sub-contractor since prior to 6 April 2007.
(6)	During the year from 6 April 2007, Croftport Ltd made payments to T & S Joinery, of sums totalling £87,967.40  As Mr Ward believed that T & S Joinery had gross payment status, Croftport Ltd did not deduct tax from any of those payments.  
(7)	HMRC had no record of T & S Joinery ever having had gross payment status and on 14 August 2009, HMRC opened an enquiry by writing to Croftport Ltd enquiring why they had not deducted tax at 20% from said sums totalling £87,967.40.
(8)	After some correspondence, HMRC wrote to Croftport Ltd on 18 May 2010 pointing out that under the new CIS scheme, they should have deducted tax at the rate of 20% (from the sums totalling £87,967.40) and that Croftport Ltd were liable to repay the tax under deducted.
(9)	On 19 August 2010, a Penalty Determination was issued requiring Croftport Ltd to pay a penalty of £1,759 in respect of their failure to include said deductions in their monthly returns.
(10)	At the request of Croftport Ltd, HMRC carried out a review and on 10 November 2010, wrote to Croftport Ltd confirming said decisions. 
Legislation
7.	Section 61 of the Finance Act 2004 provides that in relation to the construction industry, tax at the specified rate must be deducted from “contract payments”.  However, in s 60 of that Act, it is declared that any payment to a person who is “registered for gross payment” is excluded from the definition of a contract payment.
8.	Section 69 of the same Finance Act declares that Regulations may be made for the verification of the registration status of sub-contractors; and the Income Tax (CIS) Regulations 2005 are made under that section.
9.	The Income Tax (CIS) Regulations 2005 provides that 
Monthly return
4.—(1) A return must be made to the Commissioners for Her Majesty’s Revenue and Customs in a document or format provided or approved by the Commissioners—
(a) not later than 14 days after the end of every tax month, by a contractor making contract payments or payments which would be contract payments but for section 60(4) of the Act (contract payments: exceptions), 
(2) The return under paragraph (1) must contain the following information—
(d) in respect of each sub-contractor to whom, or to whose nominee, payments under construction contracts were made by the contractor during that month,—
(i) the sub-contractor’s name;
(ii) the sub-contractor’s national insurance number (NINO) or company registration number (CRN), if known; and
(iii) the information specified in paragraph (3).
(3) The information specified is—
(a) if the sub-contractor is registered for gross payment—
(i) the sub-contractor’s unique taxpayer reference (UTR), and
(ii) the total amount of payments which would be contract payments but for section 60(4) of the Act (contract payments: exceptions) made by the contractor to the sub-contractor during the tax month;
(b) if the sub-contractor is registered for payment under deduction—
(i) the sub-contractor’s unique taxpayer reference (UTR),
(ii) the total amount of contract payments made by the contractor to the sub-contractor during the tax month,
(iii) the total amount included in those payments which the contractor is satisfied represents the direct cost to any person other than the contractor of materials used or to be used in carrying out the construction contract to which the contract payment relates, 
(5) The return must include a declaration by the person making the return—
(a)that none of the contracts to which the return relates is a contract of employment;
(b)indicating whether he has complied with the requirements of regulation 6 (verification etc of registration status of sub-contractor) in the case of each person to whom a payment to which the return relates is made; and
(c)that the return contains all the information, particulars and supporting information required by this regulation to be included in the return, and such information, particulars and supporting information are complete and accurate to the best of the contractor’s knowledge and belief.
(12) Subject to paragraph (13), section 98A of TMA(1) (special penalties in the case of certain returns) applies to the requirements in—
(b)paragraph (3)(b),
(13) A penalty under section 98A of TMA in relation to a failure to make a return in accordance with paragraphs (1) or (10) arises for each month (or part of a month) during which the failure continues after the 19th day of the sixth month following the appointed day.
Verification etc of registration status of sub-contractor and nominee
6.—(1) A contractor must verify with the Commissioners for Her Majesty’s Revenue and Customs whether a person to whom he is proposing to make—
(a) a contract payment, 
(4) A contractor need not verify if—
(a) the person to whom he is proposing to make the payment has been included in a return under regulation 4 in the current or previous two tax years;
Payment, due date for payment of amounts deducted and receipts
7.—(1) A contractor must pay to the Commissioners for Her Majesty’s Revenue and Customs all amounts he was liable under section 61 of the Act to deduct on account of tax from contract payments made by him during that tax period—
(a)within 17 days after the end of the tax period, where payment is made by an approved method of electronic communications, or
(b)within 14 days after the end of the tax period , in any other case.
Submissions
10.	Mr Ward explained his understanding that prior to April 2007, when a company in the construction industry employed a sub-contractor they were required to obtain sight of the sub-contractor's tax certificate.  From this it could be established whether or not the sub-contractor should receive gross payments or have a percentage of their payments retained by the contractor and then paid to the Inland Revenue on the sub-contractor's behalf.  From April 2007 onwards this system was superseded.  Under the new system if a contractor employed a new sub-contractor he was required to phone a particular number and check the sub-contractor's status.  However, if the sub-contractor was already working for the contractor, his understanding was that the sub-contractor should have been paid on the same basis as pre April 2007.
11.	T & S Joiners were employed by Croftport Limited on March 2007 and, in accordance with the usual practice, Mr Ward had met a representative of T & S Joiners on site and had seen a tax certificate showing that T & S Joiners should be paid gross. T & S Joiners continued working for Croftport Ltd until the beginning of 2008 and throughout this time they were paid gross as Mr Ward had no reason to suspect that the tax status of T & S Joiners had changed.  It was only when Croftport Ltd received a letter from HMRC dated 14 August 2008 that Croftport Ltd became aware that they should have been paying T & S Joiners under deduction of tax. 
12.	Mr Ward submitted the following: firstly, that he had been shown no evidence that T & S Joiners had not accounted for the tax which ought to have been deducted; secondly, that he took it on good faith that the card shown by T & S Joiners under the old scheme was genuine; thirdly, he understood that the new verification arrangements only applied to new sub-contractors, not existing ones; fourthly, Croftport Limited took reasonable care to comply with the CIS regulations and the failure to make the correct deductions was due to an error made in good faith, and that they held a genuine belief that deductions were not due from the payments; fifthly, although Croftport Ltd paid T & S Joiners gross for about nine months, at no time did HMRC inform Croftport Ltd that they were acting incorrectly; and finally, Mr Ward suggested that the verification rule was designed to prevent tax evasion in the building industry, not as a tool to retrieve tax from a third party.
13.	In reply, Mr Kelly pointed out that Croftport Ltd had failed to deduct tax from a sub-contractor, without first obtaining HMRC approval not to do so.  He invited the Tribunal to find that HMRC had applied the law correctly in assessing the tax that Croftport Ltd should have deducted and that they had been negligent in not making the deduction.  Mr Kelly therefore invited the Tribunal to uphold the assessment and the penalty and dismiss the appeal.
Reasons
14.	It was accepted that Croftport Ltd had begun to employ T & S Joiners on or about 19 March 2007, prior to the new Regulations coming into effect.  Mr Ward claimed that he had seen a certificate evidencing that T & S Joiners had gross payment status.  In contrast, it was stated by Mr Kelly that T & S Joiners had never held a gross payment certificate.  One possible explanation was that the document seen by Mr Ward may not have been authentic.  
15.	Croftport Ltd had been in business as property developers for some years, employing a number of sub-contractors in relation to each venture, and on balance, the Tribunal accepts Mr Ward’s assurance that he saw evidence sufficient to establish in his own mind, that T & S Joiners had indeed gross payment status. 
16.	T & S Joiners commenced work for Croftport Ltd on or about 19 March 2007; and T & S Joiners were therefore existing sub-contractors of Croftport Ltd when the new Regulations came into effect on 6 April 2007.  However, T & S Joiners would not have received their first payment until the end of April 2007, significantly after the end of the tax year 2006/2007.  
17.	The terms of Regulation 6(4) of the Income Tax (CIS) Regulations 2005 make it clear that a contractor did not require to verify the status of a sub-contractor where the payee had been included in a return in the current or previous two years.  For the Regulation to have been effective in relation to T & S Joiners, Croftport Ltd would have had to make a payment to T & S Joiners prior to 6 April 2007.  No such payment was made.  Croftport Ltd accordingly failed to fulfil the requirement of Regulation 6(4) of the Income Tax (CIS) Regulations 2005 when they made a payment to T & S Joiners without first having communicated with HMRC to confirm the status of T & S Joiners.
18.	The question before the Tribunal was whether Croftport Ltd took reasonable care to comply with s 61 of the Finance Act 2004 and these Regulations, and that the failure to deduct the tax was due to an error made in good faith, or that Croftport Ltd held a genuine belief that s 61 of the Act did not apply to the payment.
19.	Taking the first part of this question, the Tribunal is satisfied that Mr Ward had followed through his usual procedure in verifying the tax status of T & S Joiners and that in doing so, he took reasonable care of what was expected of him under the provisions of s 61, even although he came out with an incorrect understanding of T & S Joiners’ status.
20.	There remains the question of whether Croftport Ltd acted in good faith in failing to verify T & S Joiners’ status, as was required of them under the provisions of Regulation 6 of the Income Tax (CIS) Regulations 2005.
21.	HMRC had carried out a lengthy information exercise in relation to the new Regulations. The Tribunal was only provided with a copy of one of the many published documents, namely a booklet CIS 340 which clearly set out where it was not necessary to verify the status of a sub-contractor who had been previously employed.  However HMRC also produced a News Release of 10 November 2006.  In the “Notes to editors” set out in the second page of that release, it was stated 
1. The campaign is due to run from 13 November to 16 December with advertisements in the national and trade press and on radio.
2. Subcontractors registered under the current Scheme hold a tax certificate or registration card, which must presented to contractors before any payments can be made.  These documents indicate whether a subcontractor should be paid gross, or under deduction.  For all payments, contractors must submit vouchers on a monthly basis to HM Revenue & Customs.  Contractors are also required to complete an end-of-year tax return.
3. From April most subcontractors will simply continue to be paid on the same basis as before (gross or under deduction).  However, under the new verification arrangements, whenever a contractor takes on a new subcontractor or one that has not worked for them in the current or previous two tax years, they will need to contact HMRC to find out how they should be paid.  HMRC will need details of the subcontractor to do this.  HMRC will advise whether the contractor should pay them in full or under deduction.  If a subcontractor is not registered with HMRC, the contractor will be told to make deductions at a higher rate.

22.	The statement “whenever a contractor takes on a new subcontractor or one that has not worked for them in the current or previous two tax years, they will need to contact HMRC to find out how they should be paid” implies that where a contractor takes on a sub-contractor who has worked for them in the current or previous two tax years, they would not need to contact HMRC.
23.	Mr Kelly was unable to say whether the material contained in the said News Release had been imported into other publications or indeed if the same wording had also appeared in other statements issued by HMRC.
24.	Reverting to the terms of the News Release, T & S Joiners had indeed been employed by Croftport Ltd in the previous year, and for the reasons set out above, Mr Ward, and therefore Croftport Ltd had reasonable grounds for believing that T & S Joiners had gross payment status.  The statement contained in the News Release gives credence to Mr Ward’s understanding that whereas a contractor was required, in relation to any new sub-contractor, to telephone HMRC to ascertain whether that that sub-contractor had gross payment status, this requirement did not apply to existing sub-contractors.
25.	With this background, the Tribunal finds that Croftport Ltd took reasonable care to comply with s 61 of the Finance Act 2004 and the Income Tax (CIS) Regulations 2005, and that their failure to deduct the tax was due to an error made in good faith.  The said sum of £17,593.40 is accordingly not recoverable from Croftport Ltd and the penalty determination to the extent of £1,759 is therefore not exigible.
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.

JOHN M BARTON, WS
TRIBUNAL JUDGE

RELEASE DATE: 28 JUNE 2011