Appeal Number TRANS/09/502

[2009] UKFTT 283 (TC)

TC00227

Appeal number TRANS/09/502

Construction Industry Scheme—Cancellation of registration for gross payment (Finance Act 2004 s.66)—Whether “reasonable excuse for the failure to comply” (Finance Act 2004 Sch 11 para 4(4)(a); Taxes Management Act 1970 s.118(2))—Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

MR JOHN GROSVENORAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Income Tax) Respondents

TRIBUNAL: DR CHRISTOPHER STAKER (Judge)

Sitting in public in London on 16 April 2009

The Appellant in person

Mr C Shea, HMRC presenting officer, for the Respondents

© CROWN COPYRIGHT 2009

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DECISION

1. This is an appeal against adecision of the Respondent under s.66 of the Finance Act 2004to cancel the Appellant’s registration for gross paymentunder the Construction Industry Scheme (“CIS”).

The relevant legislation

1. The CIS, which became effective on 6 April 2007, is the subject of Chapter 3 of Part 3 (ss.57-77) of the Finance Act 2004, and the Income Tax (Construction Industry Scheme) Regulations 2005, SI 2005 No 2045 (the “Regulations”).
2. Section 63 of the Finance Act 2004 relevantly provides:

(1)If the Board of Inland Revenue are satisfied, on the application of an individual or a company, that the applicant has provided—

(a)such documents, records and information as may be required by or in accordance with regulations made by the Board, and

(b)such additional documents, records and information as may be required by the Inland Revenue in connection with the application,

the Board must register the individual or company under this section.

(2)If the Board are satisfied that the requirements of subsection (2), (3) or (4) of section 64 are met, the Board must register—

(a)the individual or company, or

(b)in a case falling within subsection (3) of that section, the individual or company as a partner in the firm in question,

for gross payment.

(3)In any other case, the Board must register the individual or company for payment under deduction.

1. Section 66 of the Finance Act 2004 relevantly provides:

(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)).

…

(5)On making a determination under this section cancelling a person's registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation.

(6)Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (1), the person must be registered for payment under deduction.

…

(8)A person whose registration for gross payment is cancelled under this section may not, within the period of one year after the cancellation takes effect (see subsections (2) and (4) and section 67(5)), apply for registration for gross payment.

(9)In this section “a prescribed period” means a period prescribed by regulations made by the Board.

1. The requirements for registration for gross payment are dealt with in s.64 of the Finance Act 2004, which relevantly provides:

(1)This section sets out the requirements (in addition to that in subsection (1) of section 63) for an applicant to be registered for gross payment.

(2)Where the application is for the registration for gross payment of an individual (otherwise than as a partner in a firm), he must satisfy the conditions in Part 1 of Schedule 11 to this Act.

…

1. Part 1 of Schedule 11 to that Act sets out three conditions which must all be satisfied for registration for gross payment of an individual under the CIS, known as the “business test” (paragraph 2 of that Schedule), the “turnover test” (paragraph 3 of that Schedule) and the “compliance test” (paragraph 4 of that Schedule). In particular, paragraph 4 (the “compliance test”) states:

(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.

…

(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.

…

(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).

1. For purposes of sub-paragraphs (1) and (7) of paragraph 4 of Schedule 11 above, “qualifying period” is defined in paragraph 14 of that Schedule as meaning the period of 12 months ending with the date of the application in question.
2. Section 67 of the Finance Act 2004 relevantly provides:

(1)A person aggrieved by—

(a)the refusal of an application for registration for gross payment, or

(b)the cancellation of his registration for gross payment,

may by notice appeal.

…

1. Regulation 32 of the Regulationssets out certain compliance failures that will be disregarded by virtue of paragraph 4(3) of Schedule 11 to the Finance Act 2004 above. These include failure to comply with an obligation to pay income tax, where payment is made not later than 28 days after the due date and the applicant has not otherwise failed to comply with an obligation within the previous 12 months, and failure to comply with an obligation to make a payment under the Taxes Acts or the Taxes Management Act 1970 (“TMA”) where the amount in question is under £100.
2. Section 118(2) of the TMA provides as follows:

(2)For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the tribunal or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.

The evidence and submissions of the parties

1. It was not in dispute between the parties that the Appellant made two late payments in respect of self-assessment liabilities. A first interim payment due on 31 January 2008 had not been paid in full until 4 April 2008 (64 days late) and a second interim payment due on 31 July 2008 had not been paid in full until 16 October 2008 (77 days late). It is also not in dispute that prior to the events material to the present appeal, the Appellant was registered for gross payment under the CIS.
2. The Appellant appeared in person. He produced a letter from his accountants dated 15 April 2008 in support of his appeal, and also gave oral evidence and made submissions. The Appellant’s account of the relevant facts is as follows.
3. The Appellant has a small glass and glazing business. Every year he has paid his tax on time, and he has experienced no problems in respect of his tax until last year. Towards the end of 2008 he was notified by certain contractors for whom he works that they had received an instruction from HMRC that they were no longer to pay him gross, but were to deduct 20% from his earnings. HMRC had not contacted the Appellant to inform him why this change had been made. Subsequently, the Appellant had contractors laughing at him and telling him that he must have been “naughty” with his tax.
4. According to the letter from the Appellant’s accountants, the Appellant telephoned the tax office, who told him to speak to his accountants, who were as much in the dark as he was. Determined to get to the bottom of the matter, the Appellant again telephoned HMRC and was told that he had, on occasion, been late paying his tax liabilities and that this was his punishment.
5. In his evidence at the hearing, the Appellant said that he obtained a copy of one of the letters sent by HMRC to the contractors. This letter was included in the Respondent’s bundle. The Appellant said that his accountants then wrote to HMRC to enquire what was happening, a copy of this letter dated 17 December 2008also being included in the Respondent’s bundle. The Appellant said that the letter dated 16 January 2009 from HMRC to the Appellant’s accountants was a response to this letter from his accountants.
6. The Appellant said that about a month after the first letter to the contractors, HMRC sent a subsequent letter to the contractors stating that the Appellant should again be paid gross.
7. The Appellant said that he has never seen the notice of withdrawal of his gross payment status. Although the 16 January 2009 letter from HMRC to the Appellant’s accountants states that a copy of the notice was enclosed with that letter, the Appellant said that his accountants never gave him a copy of the notice. Rather, he said that his accountants informed him that his gross payment status had been restored and that the appeal was proceeding.
8. As to the reasons for the late payments referred to in paragraph 11 above, the Appellant said that he was not sure what happened, but that at the time his bookwork was at the accountants, his girlfriend who helps with his paperwork was preoccupied with personal problems, and he was having cash flow problems.
9. In response to a question from Mr Shea, the Appellant acknowledged that he received other mail sent to him by HMRC.
10. The Appellant claims that many contractors do not want to be bothered with tax deductions and so choose sub-contractors who can be paid gross. The Appellant states that there is now a considerable risk that he will lose work and his livelihood will be put at risk. The Appellant claims that he has never been more than a few days late in paying his tax and that any lateness is not deliberate but dictated by cash flow.
11. On behalf of the Respondent, Mr Shea provided at the hearing a skeleton argument and a small bundle of documents, and also made oral submissions.
12. The Respondent’s bundle included a printout from the Respondent’s CIS database indicating that notice of withdrawal of the Appellant’s gross payment status was issued to the Appellant on7 October 2008. The Respondent’s bundle also included a copy of a letter to the Appellant’s accountants dated 16 January 2009 stating that that letter enclosed a copy of the withdrawal of gross status notification that was issued to the Appellant on 7 October 2008.
13. Mr Shea submitted that the Appellant failed the “compliance test” in Schedule 11 to the Finance Act 2004 in view of the late payments referred to in paragraph 11 above. He said that the late payments were within the “qualifying period” for purposes of Schedule 11. He argued that these late payments were more than 28 days late and were for more than £100, so that they could not be ignored under paragraph 4(3) of Schedule 11 and regulation 32 of the Regulations.
14. Mr Shea explained that the reason why HMRC had written to the contractors again stating that the Appellant should be paid gross is that withdrawal of gross payment status is only effective after an appeal has been determined. Once the Appellant appealed, contractors were therefore notified that the Appellant should again be paid gross, since the appeal had not yet been determined.
15. Mr Shea conceded that the notice of withdrawal of gross payment status needed to have been received by the Appellant in order to be effective. He said that if the notice had been lost in the mail it would not be effective, and that if the notice had been received by the Appellant’s accountants but not the Appellant himself, that would not be sufficient. However, Mr Shea submitted that the fact that the Respondent’s records indicate that the notice was sent gives rise to a presumption that it was sent, that there was no indication that it had gone astray, and that the Appellant had received other mail from HMRC.
16. Mr Shea further submitted that the Appellant did not have a “reasonable excuse” for purposes of paragraph 4(4)(a) of Schedule 11 to the Finance Act 2004 or s.118(2) of the TMA. He said that reasonable excuse is not defined in the legislation, but that the legislation makes no allowance for the consequences of a loss of gross payment status to be taken into consideration. On this point, he relied on Templeton (HMIT) v Transform Shop Office and Bar Fitters Ltd [2005] EWHC 1558 (Ch). Mr Shea added that a person being allowed gross payment status who has not strictly complied with their tax obligations would have an unfair competitive advantage over those who have.
17. On behalf of the Respondent, Mr Shea asked the Tribunal to find as a fact that the compliance test had not been met and that there is no reasonable excuse, and to dismiss the appeal.

Findings

1. There is no dispute between the parties that payments in respect of income tax liabilities were made late by the Appellant as described in paragraph 11 above. These failures to make payment on time do not fall within the exceptions in regulation 32 of the Regulations. These failures furthermore occurred within the 12 month period prior to 7 October 2008, when the Respondent’s decision to cancel the Appellant’s gross payment status is said to have been made. Applying the legislation referred to above to these facts, I find that it follows that if the Appellant had, on 7 October 2008 made an application for gross payment status, it would have been refused under s.64(2) and paragraph 4(1)(a) of Schedule 11 of the Finance Act 2004. It follows that on 7 October 2008, the Respondent was empowered under s.66(1)(a) of the Finance Act 2004 to cancel the Appellant’s gross payment status, subject to the issue of whether the Appellant had a “reasonable excuse” for the late payments referred to in paragraph 11 above, for purposes of paragraph 4(4)(a) of Schedule 11 to the Finance Act 2004 or s.118(2) of the TMA
2. The first issue in this appeal is whether the Appellant did in fact receive from the Respondent the notice of cancellation of his gross payment status said by the Respondent to have been issued on 7 October 2008. The Appellant claims that he did not. On behalf of the Respondent, Mr Shea conceded that the cancellation would not be effective if the Appellant did not in fact receive it. Mr Shea did not point me to any specific statutory provision to this effect, although I note that s.66(5) of the Finance Act 2004 states that “On making a determination under this section cancelling a person’s registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation”.
3. I have taken into account that the Respondent’s computer records indicate that the notice was sent to the Appellant, that the evidence is that the Appellant has received other mail from HMRC, and that there is no suggestion that any mail to the Appellant from HMRC was returned undelivered or that HMRC records contained an incorrect address for the Appellant. I find that these matters give rise to an inference that the notice of cancellation of gross payment status was sent by the Respondent to the Appellant and that it was delivered to the Appellant’s address.
4. Against this, I have taken into account that I do not have before me any copy of the notice dated 7 October 2008 which the Respondent claims was sent to the Appellant, nor is there before me any copy of the enclosure to the Respondent’s letter dated 16 January 2009 which was said to be a copy of this notice. I further take into account the Appellant’s evidence that he never received the notice, and the evidence that the Appellant’s accountants wrote to HMRC on 17 December 2008 stating that the Appellant had not been notified of the change of status.
5. I have to determine the question of whether the Appellant received the notice on a balance of probabilities, the burden of proof being on the Respondent. I take into account that it is in practice difficult to prove a negative, and that therefore the Appellant cannot be expected to produce any direct evidence in addition to his own evidence to show that he did not receive the notice. I also take into account that it would be possible for any appellant to claim that they did not receive a notice from HMRC, and that a mere assertion by an appellant to this effect therefore cannot of itself necessarily be considered sufficient to counter the inference referred to in paragraph 30 above. I find that it is necessary to have regard to all the evidence and circumstances as a whole.
6. I have also taken into account the possibility that the notice was delivered to the Appellant’s address, but that the Appellant did not notice its arrival or give it any attention. I find that in this circumstance, the notice would have been properly served on the Appellant and would be effective. In determining how reliably the Appellant could be certain that he did not receive the notice, I have taken into account that he was vague about the reasons for the late payments referred to in paragraph 11 above, and said that he was “not sure what happened”.
7. Considering all of the evidence as a whole, in the round, I am satisfied to the standard of a balance of probabilities at least, that the notice was delivered to the Appellant’s address, and that it is effective.
8. The next issue for determination is whether the Appellant has a reasonable excuse for the late payments referred to in paragraph 11 above.
9. I find that none of the reasons advanced by the Appellant, referred to in paragraph 18 above, constitute a reasonable excuse. I note that in any event the Appellant was effectively speculating as to the reasons for the late payments, since he ultimately stated that he was “not sure what happened”. I therefore find that the Appellant does not have a reasonable excuse for the late payments.
10. I further find that the consequences of cancellation of gross payment status is not relevant to the issue whether or not there is a reasonable excuse, and that the material before me discloses no other reasonable excuse for the late payments.
11. I thus find that the Appellant did not have a “reasonable excuse”, for purposes of paragraph 4(4)(a) of Schedule 11 to the Finance Act 2004 or s.118(2) of the TMA, for the late payments referred to in paragraph11 above.
12. I therefore dismiss the appeal.

Christopher Staker

TRIBUNAL JUDGE

RELEASE DATE:11May 2009

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