[2010] UKFTT 347 (TC)

TC00629

Appeal number: TC/2010/00906

 

Construction Industry Scheme -- appeal against removal of gross payment status -- whether "reasonable excuse" within paragraph 12 (3) Schedule 11 Finance Act 2004 — whether defaults to be disregarded under Regulation 32 The Income Tax (Construction Industry Scheme) Regulations 2005 -- whether Appellant failed "reason to expect" test in paragraph 12 (7) Schedule 11 Finance Act 2004 -- appeal dismissed.

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

K1 CONSTRUCTION LIMITED Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

 

TRIBUNAL: GUY BRANNAN

JOHN CLARK (TRIBUNAL JUDGES) 

Sitting in public at Holborn Bars, 138-142  Holborn, London EC1 2NQ on 15 April 2010

 

 

Kevin Foroshani and Julie Scurr for the Appellant

 

Bruce Robinson, Appeals and Reviews Unit, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

 

1.       The Appellant ("K1") submitted its notice of appeal on 24 December 2009 in respect of a decision of HM Revenue and Customs ("HMRC") dated 5 October 2009 withdrawing gross payment status within the Construction Industry Scheme (" the Scheme ") pursuant to ss 57-68 of the Finance Act 2004. Since the decision of 5 October 2009 was wrongly addressed, HMRC did not oppose the grant by the Tribunal of permission to give notice of appeal after the relevant time under s 49 Taxes Management Act 1970 and accordingly, as a preliminary matter, the Tribunal gave its permission.

The Construction Industry Scheme and relevant legislation

2.       The substantive appeal concerns the withdrawal of gross payment status under the Scheme. The Scheme was originally introduced in 1975 to counteract perceived evasion of tax by self-employed workers in the building industry. Under the Scheme a person making payments to a subcontractor is obliged to withhold income tax from the payment. The Scheme has been revised on several occasions and the relevant provisions are now contained in the Finance Act 2004 and regulations enacted thereunder. These provisions came into effect on 6 April 2007. In short, the requirement to withhold tax is removed if the subcontractor is registered for gross payment with HMRC.

3.       The relevant statutory provisions are summarised below.

4.       Section 66 Finance Act 2004 permits HMRC to cancel a person's registration for gross payment. Section 66 provides, so far as is relevant to this appeal:

(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)).

(3)    ….

(4)     ….

(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.

(7)    ….

(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.

5.       It will therefore be seen that s 66(1)(a) allows HMRC to cancel gross payment status if an application for gross payment status would have been refused at that time.

6.       Section 64 Finance Act 2004 sets out the requirements that have to be met by an applicant seeking registration gross payment. Section 64 (4) provides that where a company applies the registration gross payment its must satisfy the conditions in Part 3 of Schedule 11 of Finance Act 2004. Part 3 of Schedule 11 provides for three tests which the subcontractor must satisfy, as follows:

-- paragraph 10: "the business test"

-- paragraph 11: "the turnover test"

-- paragraph 12: "the compliance test"

It was common ground that the "business test" and the "turnover test" are satisfied in this case. This appeal therefore concerns paragraph 12, ie whether the "compliance test" is satisfied.

7.       The relevant provisions of paragraph 12 of Schedule 11 are as follows:

(1)     The company must, subject to sub-paragraphs (2) and (3), have complied with—

(a)     all obligations imposed on it 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, its business.

(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.

(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.

(4)   ….  

(5)   …. 

(6)   …. 

(7)     There must be reason to expect that the company will, in respect of periods after the qualifying period, comply with—

(a)     all such obligations as are referred to in paragraphs 10 and 11 and sub-paragraphs (1) to (6), and

(b)     such requests as are referred to in sub-paragraph (1).

(8)     Subject to sub-paragraphs (2) and (3), a company is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraphs (1) to (6) if there has been a contravention of a requirement as to—

(a)     the time at which, or

(b)     the period within which,

the obligation or request was to be complied with.

8.       It will be noted that paragraph 12(2) allows certain defaults to be ignored as specified in regulations. The regulations referred to in paragraph 12 (2) above are contained in the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045). Regulation 32 sets out certain circumstances where a company can be treated as satisfying the obligations set out in the compliance test. Regulation 32 provides as follows:

(1)     The obligations and requests prescribed for the purposes of paragraphs 4(3), 8(2) and 12(2) of Schedule 11 to the Act are given in column 1 of Table 3.

(2)     The circumstances prescribed in which the applicant or company is to be treated as satisfying the conditions in paragraphs 4(1), 8(1) or 12(1) of Schedule 11 to the Act as regards each of the prescribed obligations are given in column 2 of Table 3.

	Table 3
	1 Prescribed obligations	2 Prescribed circumstances
	Obligation to submit monthly contractor return within the required period.	(1) Return is submitted not later than 28 days after the due date, and (2) the applicant or 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.
	Obligation to pay—	(1) Payment is made not later than 14 days after the due date, and
	(a) the amount liable to be deducted under section 61 of the Act from payments made during that tax period, or	(2) the applicant or company—
	(b) tax liable to be deducted under the PAYE Regulations.	(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.
	Obligation to pay income tax.	(1) Payment is made not later than 28 days after the due date, and
		(2) the applicant has not otherwise failed to comply with this obligation within the previous 12 months.
	Obligation to submit a return under regulation 73, 74 and 85 of the PAYE Regulations (annual returns) within the required period.	Return is submitted after the due date.
	Obligation to pay corporation tax for which the applicant or company is liable.	(1) Payment is made not later than 28 days after the due date, and (2) any shortfall in that payment has incurred an interest charge but no penalty.
	Obligation to submit a self-assessment return within the required period.	Return is submitted after the due date.
	Obligations and requests referred to in paragraphs 4(1), 8(1) and 12(1) of Schedule 11 to the Act.	The failure to comply occurred before the appointed day and was within section 562(10),564(4) or 565(4) of ICTA (conditions to be satisfied: minor and technical failures).
	Obligation to make a payment under the Tax Acts or Taxes Management Act 1970.	Late or non-payment of an amount under £100.

9.        The final exception in Table 3 was added by Regulation 2 of the Income Tax (Construction Industry Scheme) (Amendment No 2) Regulations SI 2008/1282 with effect from 3 June 2008.

10.    Paragraph 14 Schedule 11 Finance Act 2004 defines the "qualifying period" as a period of 12 months ending with the date of the application in question.

11.    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 so within such further time, if any, as allowed or where a person had reasonable excuse he did it without unreasonable delay after the excuse has ceased.

12.    Section 59D Taxes Management Act 1970 provides that Corporation tax for an accounting period is due and payable on the day following the expiry of nine months from the end of that period.

13.    Schedule 18 Finance Act 1998 contains provisions for making corporation tax returns and penalties for failure to do so.

14.    Regulation 69 Income Tax (Pay As You Earn) Regulations 2003 specifies the dates by which employer tax debts are payable. Regulation 85 of the same regulations requires employers to make returns on Forms P11D before 7 July following the end of the tax year.

15.    Section 67 Finance Act 2004 provides an appeal mechanism in respect of the cancellation of gross payment status. Section 67 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 ….

(2)     The notice must be given to the Board of Inland Revenue within 30 days after the refusal or cancellation.

(3)     The notice must state the person's reasons for believing that—

(a)     the application should not have been refused, or

(b)     his registration for gross payment should not have been cancelled.

(4)     The jurisdiction of the tribunal on such an appeal that is notified to the tribunal shall include jurisdiction to review any relevant decision taken by the Board of Inland Revenue in the exercise of their functions under section 63, 64, 65 or 66.

(5)     Where a person appeals against the cancellation of his registration for gross payment by virtue of a determination under section 66(1), the cancellation of his registration does not take effect until whichever is the latest of the following—

(a)     the abandonment of the appeal,

(b)     the determination of the appeal by the tribunal, or

(c)     the determination of the appeal by the Upper Tribunal or a court.

 

The Facts

16.    A bundle of documents was admitted in evidence. In addition, Mr Foroshani and Ms Scurr gave evidence. The Tribunal found the following facts.

17.    K1 is a contractor in the construction industry based in Chiswick, London. It acts as the principal contractor on construction projects for the national pension funds. It is registered for gross payment under the Scheme.

18.    Since it was common ground that the business test and the turnover test contained in paragraphs 10 and 11 respectively of Part 3 of Schedule 11 Finance Act 2004 were satisfied,  the only test in issue which K1 needed to satisfy was the compliance test contained in paragraph 12 Part 3 of Schedule 11 Finance Act 2004. It was also common ground that the qualifying period for the purpose of the compliance test was the 12 months to 26 March 2009. The test was carried out on 31 March 2009. The notice notifying K1 of its failures was issued on 23 April 2009.

19.    As regards the compliance test, we found that K1’s corporation tax return for the accounting period ended 30 September 2007 was due on 30 September 2008 but was not received until 23 July 2009. K1 did not dispute this failure.

20.    Corporation tax payable for the accounting period ending 30 September 2007 was due on 30 September 2008 (pursuant to Section 59D Taxes Management Act 1970) but was outstanding on 26 March 2009 and was only paid on 10 July 2009. K1 admitted this failure.

21.    On 25 June 2008 a tax related penalty (£3800) was issued for the failure by K1 to submit its corporation tax return for the accounting period ended 30 September 2006. The penalty was due on 25 July 2008. The penalty was outstanding on 26 March 2009. On 2 October 2008 the penalty was increased (£3800) and this additional penalty was due on 1 November 2008. The additional penalty was still outstanding on 26 March 2009. After submission of K1’s corporation tax return, the penalty was reduced to £48.74. On 22 October 2008 a fixed penalty (£500) was issued in respect of K1's failure to submit its corporation tax return for the accounting period ended 30 September 2007. On 19 January 2009 a fixed penalty of £500 in respect of K1's failure to submit its corporation tax return for the accounting period ended 30 September 2007. K1 did not dispute the details of these penalties.

22.    It was accepted that a number of employer PAYE tax debts were paid late. The details were as follows:

 

Due Date Date Paid Amount (£) No. of Days Late

19/04/08 26/04/08 1,389.99 7

19/04/08 14/08/08 37,231.41 117

19/05/08 23/08/08 854.95 96

19/06/08 23/08/08 2,217.74 65

19/07/08 23/08/08 7,122.53 35

19/08/08 23/08/08 7,431.18 4

There was some debate about these payments (particularly in respect of the payments due on 19/07/08 and 19/08/08) as to whether there had been some misallocation on the part of HMRC in respect of tax payments made by K1. In the event, we do not consider it necessary to reach a conclusion on those two payments since we understood that K1 accepted the other payments were late as stated in the above table.

23.    Form P11D, required to be returned pursuant to Regulation 85 Income Tax (Pay As You Earn) Regulations 2003 before 7 July following the end of an income tax year, was returned late in respect of the income tax year ended 5 April 2008. Form P11D was due by 7 July 2008 but was not received until 24 July 2009. K1 did not dispute its failure to make the return by the relevant date.

Analysis

Paragraph 32 Disregard Test

24.    In considering whether the compliance test is satisfied certain minor failures can be disregarded in accordance with Paragraph 32 Part 6 Schedule 11 Income Tax (Construction Industry Scheme) Regulations 2005.

25.    The corporation tax return for the year ended 30 September 2007 was submitted late on 23 July 2009; in other words the return was submitted after the end of the qualifying period (ie 26 March 2009). Table 3 of paragraph 32, in column 1 "Prescribed obligations", refers to: "Obligation to submit a self-assessment return within the required period." In column 2 "Prescribed circumstances" refers to: "Return is submitted after the due date." HMRC consider that they cannot overlook a late self-assessment return under paragraph 32 if it was due in the qualifying period but was not submitted before the end of the qualifying period. Therefore, they say that if the return had been submitted before 26 March 2009 the fact that it was late could have been disregarded under paragraph 32 but because it was submitted on 23 July 2009 the late submission cannot be disregarded. On balance, we consider that this interpretation is correct, although the point is not without difficulty.

26.    Paragraph 12 (1) provides that the company must have complied with "(a) all obligations imposed on it in the qualifying period by or under the Tax Acts...." However, the disregard regulations in paragraph 32, enacted pursuant to paragraph 12 (2) constitute an exception to paragraph 12 (1) and do not refer to the qualifying period. However, we think it is reasonably clear that the scheme of the legislation is for the compliance test to be tested at a point in time ending at the end of the qualifying period (ie 26 March 2009) for the preceding 12 month period and that it is the rectification of defaults in that period that is relevant. For completeness, we should add that the reference in Table 3 to the "relevant period" refers, in our view, to the period of time in which the corporation tax self-assessment return must be filed in accordance with paragraph 14 (1) Schedule 18 Finance Act 1998 and does not refer to the "qualifying period."

27.    Payment of corporation tax due for the accounting period 30 September 2007 was due on 30 June 2008 pursuant to section 59D Taxes Management Act 1970. The amount due was outstanding on 26 March 2009. £7570.26 was paid on 10 July 2009, leaving an outstanding balance of £80.52. Table 3 of paragraph 32 requires that the obligation to pay corporation tax is satisfied no later than 28 days after the due date. Accordingly, the late payment of corporation tax could not be disregarded.

28.    As regards the two fixed penalties of £500 in respect of the failure to submit a corporation tax return for the accounting period ended 30 September 2007, none of the provisions of Table 3 in paragraph 32 permits these penalties to be disregarded.

29.    Table 3 permits employer payments (e.g. PAYE) which have been made late to be disregarded provided the payment is made not later than 14 days after the due date and there has been no failure to comply with this obligation on more than two occasions in the previous 12 months. However, as described in paragraph 22, even disregarding the final two payments which were disputed, there were a number of other late payments which could not be disregarded under paragraph 32.

30.    We have referred in paragraph 23 above to the failure to submit Form P11D. This was outstanding during the qualifying period and was submitted after 26 March 2009. A similar point of interpretation arises in relation to the submission of Form P11D as with the submission of the corporation tax return for the year ended 30 September 2007, since the wording of the provisions in Table 3 of paragraph 32 is almost identical. Our conclusion is the same, namely that the late submission of Form P11D cannot be disregarded under paragraph 32.

Reasonable excuse

31.    We considered whether K1 could be said to have had a reasonable excuse for its failure to comply with its compliance obligations above within the meaning of paragraph 12(3)  Schedule 11 Finance Act 2004. K1 argued that it was now up to date with its tax payments and returns. It further argued that the loss of its gross payment status under the Scheme would have a severe adverse impact on its business. It also argued that some of the compliance failures listed in paragraphs 19-23 above occurred prior to a hearing before the General Commissioners in December 2008.

32.    The expression "reasonable excuse" is not defined in the legislation, but can be taken to mean something which was outside the taxpayer's control and which could not be reasonably anticipated or avoided. It seems to us that none of the reasons put forward by K1 amounts to a reasonable excuse. We accept Mr Foroshani’s evidence that the loss of gross payment status would have a severe adverse impact on K1’s business. However, we are bound by direct authority that this Tribunal cannot take account of proportionality in terms of the consequences of loss of gross payment status when compared with the gravity of the compliance failures referred to above. In particular, we refer to the observations of this Tribunal in Enderby Properties Limited v HM Revenue and Customs [2010] UKFTT 85(TC):

The Appellants are pleading that the loss of their status might put the company out of business.  However, our understanding of the law is that we have no discretion to take such a factor into account.  The High Court has ruled in a decision, which is binding upon us, that neither HMRC nor we the Tribunal can consider proportionality: Barnsley v Hilton Main Construction [2005] EWHC 1355 (CH).  In that case, the judge considered the Human Rights Act and concluded that it did not require the UK courts to read in a test of proportionality in the gross payments status rules.   The Court also thought that in any event, the Rules were not disproportionate as there was (then) the “minor and technical” exemption (replaced by the “ reasonable excuse ” exemption, which must be even more likely to be seen as proportionate) and because in the last resort the tax payer could also seek to recover gross payment status 12 months after it was removed if it could demonstrate compliance.

33.    Accordingly, we concluded that K1 did not have a reasonable excuse for the purposes of paragraph 12 (3).

"Reason to expect" test

34.     HMRC also submitted that K1 failed the "reason to expect" test in paragraph 12 (7) Part 3 Schedule 11 Finance Act 2004.

35.    HMRC contended, and K1 admitted, that the corporation tax return for the accounting period ended the 30 September 2008 was still outstanding. We concluded that K1 failed the "reason to expect" test. HMRC submitted that K1 had a history of late submission of its corporation tax returns and late payment of its tax liabilities.

36.    We considered, considering the evidence detailed above, that HMRC had reason to expect that K1, in respect of periods after the qualifying period, would not fully comply with all such obligations and requests imposed on it.

Decision

37.    For the reasons given above, we concluded that the compliance failures of K1 could not be disregarded under paragraph 32 Schedule 11 Finance Act 2004, that there was no reasonable excuse for the failures and that the "reason to expect" test was also failed. Accordingly, K1's appeal is dismissed.

38.    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.

 

 

 

GUY BRANNAN

JOHN CLARK

 

TRIBUNAL JUDGES

 

 

RELEASE DATE: 23 July 2010