[2010] UKFTT 391 (TC)
TC00673
Appeal number: TC/2010/04386
Income Tax: Construction Industry Scheme – appeal against removal of gross payment status– no reasonable excuse– Appeal dismissed.
FIRST-TIER TRIBUNAL
TAX
GLEN CONTRACT SERVICES LIMITEDAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (INCOME TAX) Respondents
TRIBUNAL:John M Barton, WS (Judge)
Eileen Sumpter (Member)
Sitting in public inGlasgow on Friday 16 July 2010
Derek J Smith, BA CA, Rennie Smith & Co, Chartered Accountants,for the Appellants
William Kelly, HMRC, for the Respondents
© CROWN COPYRIGHT 2010
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DECISION
1.In this appeal by Glen Contract Services Limited (“Glen”), a subcontractor within the Construction Industry Scheme, the Tribunal finds that that HM Revenue & Customs (“HMRC”) acted in accordance with the provisions of s66 of the Finance Act 2004 in cancelling Glen’s registration for gross payment status, and the appeal is accordingly refused.
2.On 3 March 2009 HMRC wrote to Glen detailing their compliance failure and advising that the company status would be changed from “gross” to “payment under deduction” with effect from 90 days from the date of the letter.
3.On 26 May 2009, Rennie Smith & Co wrote on behalf of Glen intimating an appeal against the said decision.
4.HMRC wrote to Glen on 1 March 2010 upholding the decision
5.On 10 March 2010, Rennie Smith & Co wrote to HMRC requesting review and giving further information for consideration.
6.HMRC replied on 13 April 2010, upholding the decision.
7.A formal Notice of Appeal was lodged on 12 May 2010.
8.The appeal was set down for hearing on 16 July 2010.Glen was represented by Mr Smith and he was accompanied by Mr and Mrs Kennedy, directors of Glen. HMRC was represented by Mr Kelly. There was no formal evidence at the hearing although both Mr and Mrs Kennedy did supply some background information in the course of Mr Smith’s submissions.
9.The productions before the Tribunal included the following –
Profit and Loss Account for two years to 30 April 2009.
Bank Statements.
Letter from Bank of Scotland confirmingoverdraft facility.
Print outs from Companies House.
Copy correspondence.
HMRC publications.
Material Facts
10.The material facts were not in dispute and are as follows –
11.Glen is a company engaged in commercial cleaning. A small proportion of the workload is work identified in s 74 of the Finance Act 2004 as coming within the definition of “construction operations”.
12. In 2008, HMRC took a decision to withdraw Glen’s gross payment status, but following representations, a fax was sent to Rennie Smith & Co on 2 June 2008 intimating that Glen’s gross payment status would remain. That communication concluded with the following “this Appeal has been upheld in the above company’s favour in this instance by concession. All future Appeals will be accepted only if the failure reasons fall under the grounds of ‘reasonable excuse’ as contained in Taxes Management Act 1970 s118(2)”.
13.Since 2008, Glen’s overdraft facility with the Bank of Scotland has been limited to £66,000, representing an actual limit of £60,000 with a 10% tolerance level beyond that “to allow occasional excesses pending receipt of confirmed inward payments”.
14. On 14 April 2009, HMRC carried out a scheduled review of Glen’s compliance history, covering the period from 22 February 2008 to 22 February 2009. This review disclosed twolate payments of CIS/PAYE, namely -
The payment due on 22 October 2008 was paid on 6 November 2008 (15 days late)
The payment due on 22 November 2008 was paid on 12 December 2008 (20 days late)
These failures resulted in HMRCs decision to remove Glen’sgross payment status.
15. A Statement of Account from the Bank of Scotland over the period from 21 to 29 October 2008 showed an overdraft of £61,979.36 reducing to £55,535.57, with an excess overdraft fee of £30 having been debited on 27 October 2008. A further Statementover the period from 20 to 25 November 2008 showed an overdraft of £58,134.98 reducing to £54,805.00 on 24 November, and increasing to £57,370.13 on the following day.
16. HMRC subsequently ran a “reason to expect” test which disclosed the following
The payment due on 22 May 2009 was paid on 29 May 2009.
The payment due on 22 June 2009 was paid on 3 July 2009.
The payment due on 22 July 2009 was paid on 8 August 2009.
The payment due on 22 August 2009 was paid on 9 September 2009.
The payment due on 22 September 2009 was paid on 2 October 2009.
The payment due on 22 December 2009 was paid on 31 December 2009.
The payment due on 22 January 2010 was paid on 29 January 2010.
The failure to pay the sums due on 22 July and 22 August extended to more than 14 days.
Legislation
17. Finance Act 2004 (“FA 2004”), s 66 and s 74, and Sched. 11 part 3.
Income Tax (Constuction Industry Scheme) Regulations 2005 (“CIS Regulations 2005”), reg. 32.
Taxes Management Act 1970 (“TMA 1970”), s 118.
Prior authorities
18. Reference was made to the following authorities:-
Shaw (HMIT) v Vicky Construction Ltd [2003] BTC 68
Ductaire Fabrications Ltd v HMRC Commissioners [2009] UKFTT 350 (TC)
Templeton HMIT v Transform Shop Office & Bar Fitters Ltd [2005] EWHC1558 (Ch)
Arnold (HMIT) v G-Con Ltd [2007] BTC 244
Bruns t/a TK Fabrications [2010] UKFTT 58 (TC)
Mutch v R & C Commissioners [2009] UKFTT 288 (TC)
Submissions
19. Mr Kelly pointed out that over the relevant period, Glen’s failure to pay CIS/PAYE had on two occasions exceeded the prescribed circumstances as set out in reg. 32 of the 2005 Regulations; and he submitted that HMRC had acted in accordance with s 66 of FA 2004 in deciding to withdraw Glen’s entitlement to gross payment status.
20. Mr Kellydid not accept that Glen’s cash-flow problems constituted a reasonable excuse as might bring the matter within the provisions of s 118 of TMA1970; and he referred to Glen’s poor compliance record and that in the immediately succeeding period, two payments of CIS/PAYE were again more than 14 days late.
21. Mr Smith explained that his clients’ principal concern was the statement in HMRC’s letter of 3 March 2009 that –
We will write to tell all the contractors that have previously paid you for work within the Construction Industry Scheme that all payments made after the period of 90 days from the date of this letter should be paid after a deduction has been made from that part of your payment that is for labour.
22. It was pointed out that although only a part of Glen’s contracts were within theconstruction industry, many of their employers engaged them for both “construction” and “non construction” work; and that Glen would be put as a disadvantage and would lose contracts as clients would not distinguish between “construction” and “non-construction” work.Reference was made to the decision in Shawv VickyConstruction Ltd. It was also submitted with reference to that case, that Glen would be deprived of its peaceful possession of a gross payment certificate.
23. Mr Smith also referred to the disproportionate effect of such withdrawal and he illustrated this by showing that in four of the cases referred to, the taxpayer companies had either gone into liquidation or been dissolved.
24. It was also claimed that Glen had “a reasonable excuse” at the relevant time and the Tribunal was referred to the cases of Bruns t/a TK Fabricators and Mutch v HMRC. Glen had cash flow problems around October and November 2008, and that if the CIS/PAYE cheques had been issued earlier, they would have “bounced”. Since then, the trading position had not improved and steps were now being taken to reduce overheads.
Reasons
- The preliminary question before the Tribunal is whether HMRC were correct to withdraw Glen’s gross payment certificate in March 2009. Section 66 of FA 2004 clearly sets out -
(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.
26. Looking to a notional application, Schedule 11 of FA 2004 sets out three separate tests. In this case, the relevant test was the Compliance Test
12(1) The company must, subject to sub-paragraphs (2) and (3), have complied with
(a) all obligations imposed on it in the qualifying periodby 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, its business.
27. Sub-paragraphs 2 and 3 of the above Schedule contain limited exceptions.
28. Sub- paragraph 2 is as follows –
12(2) A 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.
The relevant Regulation is Regulation 32 of the CIS Regulations 2005,which allows for some relaxation in relation to late PAYE payments but only to the extent that up to two late payments may be disregarded, provided that payment is made not later than 14 days after the due date..
29. Regulation 32 does not provide for any relaxation of the requirements where a PAYE payment is made more than 14 days after the due date. This is what occurred in the case of Glen.
30. HMRC’s decision is reinforced having regard to the previous period. It was apparent from their fax of 2 June 2008, that there had been a compliance failure for the previous period which as a concession, HMRC had disregarded, subject to the warning –
Please note a further automatic review will take place in approximately 12 months. It is important, for gross payment status to continue, that the company and all directors and/or shareholders must have complied with their tax obligations within the review period.
The Company was accordingly on notice that their gross payment status could be withdrawn if there was some future failure.
31. It is therefore clear that HMRC were acting in accordance with the legislation, when the decision was taken in March 2009 to withdraw Glen’s gross payment status.
32. In his submissions, Mr Smith brought in the questions of reasonableness, with particular reference to the possible consequences the Glen in the event of gross payment status being withdrawn, and that any such action would contravene Glen’s Convention rights.
33. The Tribunal acknowledges that the withdrawal of gross payment status can have an adverse effect on a company – in that it may convey to others that the company has failed in its tax obligations. The loss of status also affects a company’s cash flow and it is accepted that this in itself may be difficult to overcome, even to the extent of possible liquidation. However, these considerations have always been there with the Construction Industry Scheme, and the legislation promulgated by Parliament has endeavoured to achieve a balance between the interests of the contractor and the public interest. The legislation is clear and unambiguous and it is not open to this Tribunal to reach a decision which would be contrary to the same, however adverse it might appear to be to a party.
34. Mr Smith also directed the Tribunal to convention rights. These aspects were fullyconsidered in the case of Shaw v Vicky Construction Ltd,but in any event a First-tier tribunal does not have the jurisdiction to come to a decision which is contrary to the terms of United Kingdom legislation.
35. The further exemption to the compliance test is contained in paragraph 12(3) of Schedule 11-
12(3) A 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 company had a reasonable excuse for the failure to comply, and
(b) if the excuse ceased, it complied with the obligation or request without unreasonable delay after the excuse had ceased.
36. A letter from the Bank of Scotland was produced confirming that since 2008, the Bank of Scotland had not been prepared to pay transactions that could have taken Glen’s account overdrawn by more than £66,000. The bank statements disclosed an overdraft of £61,979.36 reducing to £55,535.57 over the period from 21 to 29 October 2008, and an overdraft of between £54,805.00 and £58,134.98over the period from 20 to 25 November 2008. It was indicated to the Tribunal that a timeous payment of CIS/PAYE in these months would have resulted in the cheques being “bounced”, but the Tribunal was not given evidence of the precise liability on these dates or the measures which were adopted by Glen to manage their payments. The Tribunal was therefore not persuaded that the late payment in October and November 2008 was the result of the overall management of the financial resources of the Company. It was also significant that when HMRC carried out its “reason to expect” test for the subsequent period, there was found to be late payment in eight months, and that on two of those occasions, the failure was of more than 14 days.
37. Mr Smith pointed to the cases of Bruns t/a TK Fabrications and Mutch v R & C Commissionerswhere the respective contractors had been successful in having their gross payment status restored. However the circumstances in each of these cases were exceptional and neither of these cases establishes a general principle that financial difficulty constitutes a reasonable excuse for a taxpayer’s failure to comply with his obligation to meet his tax obligations timeously. In the case of Bruns t/a TK Fabrication, the appeal principally succeeded because the only failure was outwith the qualifying period. In that decision, the Tribunal added that the taxpayer had a reasonable excuse under two separate heads, one of which related to the taxpayer’s cash flow: however over the relevant period, the taxpayer’s bank balance exceeded the tax liability. In Mutch, the taxpayer was in financial difficulty, but the circumstances were exceptional in that “…… the drop in building work in the area had been sudden andsevere. The taxpayer had built up his workforce and taken on commitments that were suitable for the heavy demands before mid-2007”.
The Tribunal (Sir Stephen Oliver QC) observed that
The reasonable competent businessman taken for comparison would have reacted in the same way both to the demand in 2007 and to the drop in work after that; he would not have had any better foresight than the taxpayer.
The reasonable competent businessman had to be taken to have exercised due diligence and a proper regard for his tax obligations. Unlike the taxpayer he might have shed his workforce earlier and so saved money and improved his cash flow. But that was to judge the position with too much hindsight. In the circumstances the taxpayer operated in the real world as it existed at the end of 2007. He dealt in a fair and business-like way with the demands on his available cash resources and came up to the required standards contemplated by the expression `reasonable excuse' in the context of the CIS.
36. In the case of Glen, this Tribunal does not find any exceptional circumstance such as existed in Mutch. The Tribunal was not given any background information in relation to the failure(s) over the preceding period, but there was no evidence that the directors of Glen had taken any material action in response to the warning contained in the communication of 2 June 2008. Indeed, it was apparent that Glen’s financial difficulties were ongoing resulting from their customers’ reluctance to settle their accounts timeously, rather than some unexpected and critical event.
38. It is with this background that the Tribunal finds that there was not a reasonable excuse for Glen’s failures to pay CIS/PAYE at the end of October and November 2009.
39. The Appeal is accordingly dismissed.
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: 19 August 2010
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