First-tier Tribunal (Tax)

[2010] UKFTT 158 (TC)

TC 00463

 Appeal Number: TC/2009/13053

"Gross payment scheme for construction industry - decision to withdraw gross payment status from Appellant for failure of compliance condition - Appellant a partnership - partners defaulted in relation to self assessment obligations - Appellant suffered cash flow difficulties because of late payment by main customers over a number of years - pattern of paying self assessment by instalments - did this pattern of payment amount to an informal arrangement giving Appellant a reasonable excuse for FA 2004 purposes - in the circumstances yes - appeal allowed"

FIRST-TIER TRIBUNAL (TAX CHAMBER)

                                          BANNISTER COMBINED SERVICES                         Appellant

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Judith Powell (Judge)

                        Toby Simon (Member)

Sitting in public in London on 29 October 2009

Mr. Barnard for the Appellant

Mr. Shea for the Respondents

© CROWN COPYRIGHT 2010

DECISION

The appeal is allowed

Summary of the findings of fact and reasons for the decisions:-

1.   This Appeal is against the decision by HMRC to withdraw gross payment status from the Appellant.  The Appellant, Bannister Combined Services (“the business”) is a business carried on in partnership by Mr and Mrs Bannister.  

2.   The Appellant was represented by Mr Barnard, Barnard and Co., Accountants and we heard from Mr Bannister who was present at the hearing.  Mr O’Shea appeared for the Respondents.

3.   A decision in favour of the Appellants was announced on the day of the hearing and a Decision Notice was issued on the same day giving a summary of the findings of fact and reasons for the decision and the Respondents have asked for a full facts and findings which are set out below.

It is convenient first to set out a summary of the law.

The Law

4.   The taxation of payments by contractors to subcontractors in the construction industry is governed by legislation, at Section 57-68 Finance Act 2004, Schedules 11 and 12 Finance Act 2004 (FA 2004) and by regulations, The Income Tax (Construction Industry Scheme) Regulations 2005, SI.2005 No.2045 and is effective on or after 6 April 2007.

5.   Under Section 61 FA 2004 any payment by a contractor to a subcontractor must be made under deduction of tax at the appropriate rate.  The deduction is made from the payment excluding any amount directly relating to the cost of materials.

6.   Under Section 63(1) FA 2004, the Board must, on application, if it is satisfied that the correct information has been provided, register the subcontractor.

7.   Where an application under Section 63 (2) FA 2004 is made for registration of gross payment, and the Board are satisfied that the correct information has been provided and the requirements as set out in Section 64 FA 2004 are satisfied, then the applicant will be registered for gross payment.   Section 64(3) Finance Act 2004 sets out the particular conditions to be satisfied where a partnership applies for registration.   The applicant must (as an individual) satisfy the conditions in Part 1 of Schedule 11 FA 2004 and the firm itself must satisfy the conditions in Part 2 of that Schedule 

8.   Part 2 of Schedule 11, FA 2004 sets out the three statutory tests which the Firm must satisfy being:

·       Paragraph 6 - the business test

·       Paragraph 7 - the turnover test

·       Paragraph 8 - the compliance test

9.   Paragraph 8 (1), Schedule 11, FA 2004 requires that each of the persons who are partners at the time of the application must have complied with:

·       All obligations imposed on them in the qualifying period by or under the Tax Acts or the Taxes Management Act 1970, and

·       All requests made in the qualifying period to supply all accounts of, or other information about, its business.

For the purposes of Schedule 11 paragraph 14 provides the definition of “the qualifying period” which means the period of 12 months ending with the date of the application in question

10.   Paragraph 8(2), Schedule 11 FA 2004 provides that a person who has failed to comply with their obligations can be treated as satisfying the conditions as regards those obligations where the failure is of a kind prescribed by regulations.

11.    The regulations are at Part 6, Statutory Instrument 2005 No. 2045, which sets out the conditions to be satisfied for Gross Payment.  At table 3 within Regulation 32, the obligations are set out in Column 1.  Column 2 of the table set out the prescribed circumstances where a person can be treated as satisfying the conditions of the obligations within the compliance test.

12.    Paragraph 8 (3), Schedule 11 FA 2004 provides that where a partner has failed to comply with such an obligation or request referred to in Subsection (1) the firm is to be treated as satisfying the condition if the Board of Inland Revenue are of the opinion that the person had a reasonable excuse for the failure to comply and if the excuse ceased he complied with the obligation without unreasonable delay once the excuse had ceased.

13.    Section 118 (2) Taxes Management Act 1970 provides that 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 allowed or where a person  had reasonable excuse he did it without unreasonable delay after the excuse had ceased.

14.    Paragraph 8 (4), Schedule 11 FA 2004 provides that 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 all such obligations and requests within Paragraphs 8(1) Schedule 11 FA 2004.

15.    Section 66 (2) FA 2004 provides that where a determination is made the persons registration for gross payment is cancelled from the end of the prescribed period after making the determination.

16.    Section 66 (5) FA 2004 provides that a notice cancelling a persons registration is issued without delay to the person stating the reasons for the cancellation.

17.    Regulation 26 SI 2005 No 2045 provides that the prescribed period is 90 days from the date of the notice in section 66 (5) FA 2004. 

18.    Under Section 67 (1) (b) FA 2004 a person may appeal against the cancellation of the registration for gross payment. 

19.    Section 67 (2) and (3) FA 2004 provides that he appeal must be by notice to the board within 30 days of the cancellation and stating the reasons for believing the registration for gross payment should not have been cancelled.

20.    Section 67 (5) FA 2004 provides where a person appeals against the cancellation of his registration for gross payment the cancellation does not take effect until the later of the abandonment of the appeal, the determination of the appeal by the Commissioners or the appropriate court.

21.    Section 66 (8) FA 2004 provides that a person whose registration is cancelled may not, within a period of one year after the cancellation takes effect, apply for registration for gross payment.

22.    Where a person’s registration for gross payment is cancelled he is registered for payment under deduction.

23.    Section 62 Finance Act 2004 provides for the treatment of sums deducted.

24.    Sums deducted from a subcontractor that is not a company are treated as being income tax paid in respect of the subcontractor’s relevant profits.   Any excess sums deducted will be repaid. 

The Facts

25.    The following facts were agreed.  The qualifying period is the 12 months to 17 January 2009.  The test was performed on 22 January 2009 and the notice of withdrawal was issued to Mr Bannister on 28 January 2009.     The requirements of the turnover and business tests were met in the qualifying period.    In relation to the compliance test both Mr Bannister and Mrs Bannister made late payments of self assessment liabilities in relation to the amounts due from them on 31 January 2008 and, in the case of Mr Bannister, in relation to a surcharge due on 14 April 2008.  The partners each failed to pay income tax on their share of partnership profit on the due date of 31 January 2008.  Mrs Bannister failed to pay in full until 10 March 2008 and Mr Bannister failed to pay in full until 20 May 2008.   The amount due from Mrs Bannister which she failed to pay on time was £4626.76 (first payment on account of 2007/08) which was paid in three amounts between 21 February and 10 March 2008.  The amounts due from Mr Bannister and which he failed to pay on time were £6048.56 (balancing payment for 2006/07) and £8574.93 (payment on account for 2007/08) both due on 31 January 2008 and a first surcharge for 2006/07 (£102.42) due on 13 April 2008.  His liabilities were all paid in seven amounts between 6 February 2008 and 20 May 2008.

26.    The Business was established in 1982.  It has always enjoyed the benefit of gross payment status.  The details of this scheme have not always been the same but the essential characteristics of the scheme have always been similar.  

27.    Ninety per cent of the work of the Business comes from local authorities, primarily from Essex CC and Thurrock UA who did not pay on time.    At least until June 2008, payments were made to the Business between 30 and 90 days late.  

28.    The Business accounted for its PAYE, National Insurance and VAT payments on time.   Although the Business turns over some £1 million each year the work flows are particularly high in July to December each year and the delay in receiving payments for the work done has resulted in very uneven cash receipts that were difficult to forecast.  The situation has now improved markedly and the Business is receiving payment within 14 days.

29.    In previous years there had been similar failures by both Mr and Mrs Bannister to pay their self assessment liabilities on time.   They had cash flow difficulties caused by the irregular receipts in the business.  On each occasion that there was likely to be a delay Mr Barnard spoke to the Inspector and warned him that payment might be delayed.   We accept his statement that the Inspector did not express undue concern when told that there would be a delay but that payments would be complete at least before the next payment was due (so that payments due on 31 January would be made by the next 31 July at the latest and payments due on 31 July would be made by the following 31 January).   This arrangement was never formally recorded in writing but was adopted for several years.    Certainly the pattern of payments described to us for discharging the tax liabilities due on 31 January 2007 and on 31 July 2007 all conformed to what was described as the informal arrangement.    Both partners became liable for interest and at least one surcharges as a result of this but we accept that they believed this to be a consequence of late payment rather than because the Inspector was unhappy with the method of payment which was adopted.    We did not have the opportunity of hearing from Mrs Bannister but accept that neither Mr Barnard nor Mr Bannister anticipated that making the payments late in this way would jeopardise the gross payment scheme.  

The Issue

30.    The Issue is whether the appellant’s gross payment status should be withdrawn because of the failure by both Mr and Mrs Bannister to comply with their self assessment liabilities in the qualifying period.   

The submissions

31.    The Appellants say that the reason for the tax payments being late is the late payments made to them by the local authorities for whom they do 90% of their work and that now this problem has been resolved they will make future payments on time.  They also say that they thought the payment method they had adopted was acceptable to the Inspector and that withdrawal of the gross payment status would cause a serious adverse effect on their business.  They regard all these factors as giving them a reasonable excuse for late payment and that now their customers have started paying within a reasonable period they will make future payments on time.     They say that cash received was used to meet tax liabilities in relation to PAYE, NIC and VAT all of which were paid on time as well as meeting expenses.    They ask the tribunal to find they both had a reasonable excuse for their failure to comply strictly with their self assessment payment obligations and allow their appeal.  

32.    The Respondents say that although reasonable excuse is not defined in the legislation they have issued guidance on what its officers can accept as reasonable excuse, that the schedule of payments received by the firm in January 2008 were sufficient to cover the tax liabilities falling due at the end of that month and that the accounts for the relevant period were those ending 31 August 2006 which gave the partners sufficient time for provision to be made for the tax liabilities resulting from those profits and they say that the drawings shown on the accounts (£45,510) demonstrate there was sufficient cash out of which a reserve could have been made and that accounts for the following period also show cash drawings of £57,802 and a provision could have been made out of that.   They also say that Mrs Bannister has another source of income out of which payment could have been made.    They say the failure to pay their personal self assessment liabilities are due to poor management which is not an excuse and similarly it is not an excuse that they were not aware of the consequences of paying late nor that they had complied with their other tax obligations.   They say that there was no formal agreement with the Inspector to pay the tax late or by instalments and the fact that he seemed to agree with the payment method they had adopted was not a reasonable excuse; that failure to instigate collection arrangements should not be regarded as acceptance of the payment method and that the surcharge imposed on Mr Bannister should have alerted him to the fact that there was no formal arrangement to pay over time. They ask us to dismiss the appeal.

Our decision and the reasons

33.    We allowed the appeal for the following reasons. In doing so we noted that we should pay regard to, but are not bound by, the Respondents guidance on the operation of the relevant tests.

34.    We considered the cash flow for the business and the drawings by the partners.  None of the information showed when the partners drew the amounts in question and we do not know for what the drawings were used.  Plainly there was sufficient cash withdrawn to meet the self assessment liabilities but we accept there was a genuine cash flow difficulty when the self assessment liabilities fell due and that these cash flow problems had existed for years.    We accept that the payments Mr and Mrs Bannister made showed a pattern of behaviour consistent with an effort to meet their tax liabilities personally as and when cash was received which could be used for the purpose.   We did not have sufficient evidence to conclude that cash flow problems on their own were sufficient to amount to a reasonable excuse, but we do accept there were cash flow problems, that they had occurred over a number of years , that they were largely due to the irregular payments received from their clients (which we note was in breach of the public sector’s obligation to pay invoices within the then 30 day time limit) and that this was exacerbated by the fact that their work flow was also irregular.  We do accept what the Respondents said about the irrelevance of the Appellant’s compliance with other tax liabilities.    What we found to be a reasonable excuse is that they both thought that they had found a method of dealing with their particular cash flow difficulties that was acceptable to their local Inspector and had followed this method for some years.  We considered Mr O’Shea’s arguments that a failure to instigate collection proceedings should not have been taken as acceptance and that the surcharge should certainly have alerted Mr Bannister to the fact he did not have an arrangement.   It may be that failure to instigate collection proceedings is not evidence of an agreement but it is certainly not evidence there was no informal agreement.   The surcharge was not imposed until April 2008 after the default in question so even if that should have alerted him to the problem this came too late to prevent him paying after the 31 January 2008 due date and in any case he told us that he expected to receive interest and penalty notices as a consequence of paying late.    This may be naive but it is not contradictory of an honestly held belief that they had a workable arrangement for the payment of their self assessment liabilities until they had the cash available to pay them and in the circumstances we found that this honestly held belief encouraged by a pattern of behaviour over a number of years which they believed had the agreement of their local Inspector (albeit behaviour which attracted interest and, possibly, penalties although we were not told whether penalties were imposed in previous years) is a reasonable excuse in the context of paragraph 8(3)  Schedule 11 FA 2004 and accordingly we allowed this appeal. 

TC/2009/13053

JUDITH POWELL

TRIBUNAL JUDGE
Release Date: 12 April /04/2010