First-tier Tribunal (Tax)

[2009] UKFTT 380 (TC)

TC00315

              Appeal number TC/2009/11927

Construction Industry Scheme – Appeal against cancellation of registration for gross payment – ‘Compliance test’ –  Whether there was a reasonable excuse – Yes – Appeal Allowed – section 66 &  schedule 11 Finance Act 2004 – Regulation 32 Income Tax (Construction Industry Scheme) Regulations 2005

FIRST-TIER TRIBUNAL

TAX

                             CORMAC CONSTRUCTION LIMITED            Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                    REVENUE AND CUSTOMS (corporation tax) Respondents

                                                TRIBUNAL: John Brooks (Judge)

                                                                        George Miles (Member)

Sitting in public in Bristol on 20 October 2009

Nichola McCormack (the Appellant’s Company Secretary) for the Appellant

Colin Brown of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     At the conclusion of the hearing we orally gave our decision to allow this appeal. Following receipt of the decision notice, which included summary findings of fact and reasons, HM Revenue and Customs (“HMRC”) have made an application, in accordance with Rule 35(4) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, for full written findings of fact and reasons for the decision.

2.     This is an appeal by Cormac Construction Limited (“Cormac”) against the cancellation of its registration for gross payment status within the Construction Industry Scheme.

Law

3.     A company’s registration for gross payment may be cancelled by HMRC at any time under section 66(1)(a) of the Finance Act 2004 (the “Act”) if it appears that “if an application to register the person for gross payment status were to be made at that time” it would be refused.

4.     Section 63(2) of the Act provides that HMRC “must” register a company if satisfied that the requirements of section 64 of the Act are met. To meet these requirements, insofar as they are relevant to the present appeal, a company must satisfy the conditions set out in Part 3 of schedule 11 to the Act (see section 64(4)(a) of the Act).

5.     These conditions are the “business test”; the “turnover test”; and the “compliance test” set out in paragraphs 10, 11 and 12 of schedule 11 to the Act respectively.

6.     For the purposes of this appeal it is only necessary for us to consider the compliance test, which requires a company to comply with its obligations under the tax legislation, as HMRC accept that Cormac has satisfied the business and turnover tests.

7.     A company that has failed to comply with its tax obligations, for example by late payment of amounts due under the PAYE regulations, “is, in such circumstances as may be prescribed by the regulations, to be treated as satisfying” the test (see paragraph 12(2) of schedule 11 to the Act). 

8.     Regulation 32 of the Income Tax (Construction Industry Scheme) Regulations 2005 “prescribes” that a company that has made late payments of amounts liable to be deducted from subcontractors or under the PAYE regulations will be “treated as satisfying” the compliance test if it payment is made “not later than 14 days after the due date” and the company:

(a) has not otherwise failed to comply with this obligation within the previous 12 months, or

(b) has failed to comply with this obligation on not more than two occasions within the previous 12 months 

9.     A company will also be treated as having satisfied the test, in accordance with paragraphs 12(3) & (7) of schedule 11, if it can establish that it has a reasonable excuse for the failure to comply with its tax obligations, has complied with its obligations without unreasonable delay after the excuse ceased and can be expected to comply in respect of periods after the qualifying period which, in the present case, is the 12 months to 5 October 2008, the date of the review by HMRC of the Company’s gross payment status (see paragraph 14 of schedule 11).

Facts  

10.  Mrs McCormack, who is a mother of three young children (a son now aged 13 and ten year old twin girls) is in full time employment as a financial adviser for which she has to travel from her home in Hook to Swindon on a daily basis.

11.  As it is not her husband’s forte, Mrs McCormack took on the responsibility for all of the company’s “paperwork” to help him with Cormac, which is essentially “his business”, since it was established in 2006, fitting it in around her work and childcare arrangements, relying on her parents to help out where possible especially during school holidays (such as over Christmas 2007 and half term in February 2008) which is always a difficult period for her.

12.  Following a review of the period 6 September 2007 to 5 September 2008 HMRC wrote to Cormac advising that its gross payment status would be cancelled as a result of eight late payments under the PAYE regulations as shown below:

(1)  For the period to 5 September 2007 the sum of £3,472.75 due on 22 September 2007 was received by HMRC on 25 September 2007 (three days late);

(2)  For the period to 5 December 2007 the sum of £2,240.93 due on 22 December 2007 was received by HMRC on 25 December 2007 (three days late);

(3)  For the period to 5 January 2008 the sum of £1,744.46 due on 22 January 2008 was received by HMRC on 28 January 2008 (six days late);

(4)  For the period to 5 February 2008 the sum of £1,566.27 due on 22 February 2008 was received by HMRC on 29 February 2008 (seven days late);

(5)  For the period to 5 March 2008 the sum of £1,912.78 due on 22 March 2008 was received by HMRC on 28 March 2008 (six days late);

(6)  For the period to 5 May 2008 the sum of £1,248.70 due on 22 May 2008 was received by HMRC on 26 May 2008 (four days late);

(7)  For the period to 5 June 2008 the sum of £1,527.78 due on 22 June 2008 was received by HMRC on 28 June 2008 (six days late); and

(8)  For the period to 5 July 2008 the sum of £1,714.35 due on 22 July 2008 was received by HMRC on 27 July 2008 (five days late).

13.  Although it accepted these payments had been made late, Cormac appealed against the withdrawal of its gross payment status by way of a letter dated 5 December 2008. The letter was written by Mrs McCormack who “genuinely thought that payments were not due until the 28^th of the month”, asked HMRC to reconsider their decision and “keep our Company on gross payments.”

14.  In the letter of 29 June 2009 from Cormac to HMRC, again written by Mrs McCormack, she explained how one of her daughters had suffered a double fracture to her leg in a riding accident in May 2007 and had subsequently suffered serious illness requiring stays in hospital before being diagnosed with epilepsy requiring medication and close monitoring by the hospital.

15.  The letter also explains that “since this unintentional error [the late PAYE payments] was brought to light we have made all employers liabilities on time or early and will of course continue to do so in the future.”

16.  Replying to the letter of 29 June 2009 on 11 August 2009, Mr Colin Brown (who appeared before us for HMRC) accepted that, “in view of the information provided about your daughter I’m happy to ignore the last 3 late payments on the basis of “reasonable excuse”” but because of the five “other late payments before the accident” could not “agree to let the company keep its gross payment status” as a mistaken belief as to the time for payment of PAYE could not be a reasonable excuse.

17.  However, he was “happy to accept there is reason to expect things will be done in time in future.”

Discussion and Conclusion

18.  Although before us Mrs McCormack described the devastating effect that the removal of gross payment status would have on Cormac and her family it was agreed that, in view of Mr Brown’s position regarding the last three payments, the issue was whether there was a reasonable excuse for first five late payments under the PAYE regulations.

19.  As there is no statutory definition of ‘reasonable excuse’ Mr Brown referred us to Gladders v Prior (HM Inspector of Taxes) [2003] STC 245, in which the Special Commissioner (Dr John Avery Jones) had said, at [7]:

“a reasonable excuse for not filing returns or paying tax on time is something outside the person’s control that would prevent a reasonable man from complying such as illness. The Appellant’s political beliefs do not relate to the delay in filing his returns or paying his tax. I find that they do not amount to a reasonable excuse.”

20.  That case concerned the late filing penalties and surcharges on a taxpayer who was “non believer in taxation per se” because “it is directly opposed to an individual's freedom and has been used by successive Governments to suppress its populace and force tyranny upon it. Moreover it was unilaterally introduced (i.e. it was made law without prior consultation with the electors, or being part of any manifesto, nor has it been ever since) as a direct method of raising monies for the propagation of war.”

21.  In Rowland v HMRC [2006] STC (SCD) 536, the Special Commissioner (Adrian Shipwright), who had been referred to Gladders, said at [18] that the question of whether there was a reasonable excuse “is a matter to be considered in the light of all the circumstances of the particular case.”

22.  Having considered all the circumstances of the present case we agree with Mr Brown that the mistaken and unfounded belief that payment under the PAYE regulations was due on the 28^th as opposed to the 22^nd of the month cannot be reasonable excuse.

23.  However, having heard Mrs McCormack’s evidence regarding the difficulties she faced balancing childcare with full time work especially during school holidays we find that, as she was the person responsible for making the payments on behalf of the company, Cormac had a reasonable excuse for the late payments for the periods to 5 December 2007 and 5 February 2008.

24.  This leaves the payments for the periods to 5 September 2007, 5 January 2008 and 5 March which were all made late, albeit within 14 days of the due date, for which Cormac does not have a reasonable excuse.

25.  Under Regulation 32 a company is to be treated as satisfying the conditions of the compliance test if payment is made not later than 14 days of the due date and the company has “not failed to comply on more than two occasions in the previous 12 months.” It is understood that HMRC interpret this to mean that a company will be treated as having satisfied the conditions if during the 12 month review period there are no more than two prior late payments to the late item considered which, in effect, allows a maximum of three late payments in the review period.

26.  We agree with this interpretation. As such Cormac is to be treated as complying with its obligations and as having satisfied the compliance test.

27.   The appeal is therefore allowed.

28.  The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   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 Brooks

TRIBUNAL JUDGE

RELEASE DATE: 17 December 2009