[2010] UKFTT 549 (TC)

TC00802

 

 

Appeal number: TC/2010/05353

 

Construction Industry Scheme – withdrawal of gross payment status – Section 66 Finance Act 2004 – whether reasonable excuse – allocation by HMRC of tax payments

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

TERENCE BASYE Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

 

TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE) RICHARD THOMAS (TRIBUNAL MEMBER)

 

Sitting in public at Holborn Bars, London EC1 on 1 October 2010

 

 

Alex Byrne for the Appellant

 

Hugh O'Leary for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.       This is an appeal against the withdrawal of gross payment status by HMRC under the Construction Industry Scheme ("CIS") pursuant to their powers contained in section 66 Finance Act 2004.

The facts

2.       The evidence in this case was contained in the bundle of documents produced by HMRC and in unsworn statements made by the Appellant at the hearing. In addition, at the hearing, HMRC produced a self-assessment statement in respect of the Appellant.

3.       The following facts were not in dispute.

4.       The Appellant is a self-employed building contractor who was registered under the CIS. The Appellant has been registered under the new CIS since it came into force on 6 April 2007. The Appellant was certified for gross under the previous CIS since 24 June 1999.

5.       On 26 August 2009 a Tax Treatment Qualification Test ("TTQT") was performed to see whether the Appellant continue to satisfy the requirements of the CIS.

6.       The qualifying period for the TTQT was 21 August 2008 to 21 August 2009.

7.       The TTQT identified certain alleged compliance failures by the Appellant in the qualifying period.

8.       The alleged compliance failure which was so identified involved of the first self-assessment payment on account for the year ended 5 April 2009. The amount of tax involved was £3,736.34 which was due on 31 January 2009. HMRC's records show that this amount was paid as to £263.66 on 24 January 2009 and as to £3,472.68 on 17 July 2009. This second payment was, according to HMRC's records, 167 days late. There is a dispute as to whether this payment was indeed late, but the foregoing states that position as shown in HMRC's records.

9.       The Appellant had made a payment on account of the self-assessment liability for the tax year ended 5 April 2008 of £4,001 29 July 2008. The Appellant made a further payment of £3,736.34 on 24 January 2009. As noted in paragraph 7 above, HMRC applied £263.66 of the payment made on 24 January 2009 against the Appellant's liability in respect of his first self-assessment payment on account for the year ended 5 April 2009, but the balance of the payment was applied against his balancing payment due to the tax year ended 5 April 2008 of £3,472.68.

10.    HMRC notified the Appellant of the alleged compliance failure and of the withdrawal of gross payment status on 27 August 2009.

11.    The Appellant, through his representative Mr Alex Byrne, appealed to this Tribunal on 18 June 2010.

The legislation

12.    The CIS has been revised on several occasions and the relevant provisions are now contained in the Finance Act 2004 and regulations made 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.

13.    The relevant statutory provisions are summarised below.

14.    Section 63 Finance Act 2004 deals with the provisions relating to registration of subcontractors. Section 63 provides as follows:

“(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.”

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

(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.

16.    It will therefore be seen that section 66(1)(a) allows HMRC to cancel gross payment status if an application for gross payment status would have been refused at that time. We discuss later in this decision whether this provision confers on HMRC discretion to cancel gross payment status.

17.    Section 64 Finance Act 2004 sets out the requirements that have to be met by an applicant seeking registration for gross payment. Section 64(4) provides that where an individual applies for gross payment registration, it must satisfy the conditions in Part 1 of Schedule 11 of Finance Act 2004. Part 1 of Schedule 11 provides for three tests which the subcontractor must satisfy, as follows:

-- paragraph 2: "the business test"

-- paragraph 3: "the turnover test"

-- paragraph 4: "the compliance test"

It was common ground that the "business test" and the "turnover test" were satisfied in this case. However, HMRC considered that the “compliance test” in paragraph 4, while satisfied on initial registration, was not satisfied at the date of a subsequent review.

18.    The relevant provisions of Part 1 of Schedule 11 are as follows:

 

1(1)     In the case of an application for an individual to be registered for gross payment, the following conditions must be satisfied by the individual.

The compliance test

 

4(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).

(8)     Subject to sub-paragraphs (3) and (4), a person 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 (5) 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.

 

 

19.    It will be noted that paragraph 4(3) allows certain defaults to be ignored as specified in regulations. The regulations referred to in paragraph 4(3) above are contained in the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045). Regulation 32 (Table 3) of these Regulations states that a failure to pay income tax by the due date is ignored for the purposes of the compliance test, providing payment is made within 28 days. Only one such disregard is allowed in a twelve month period. 

20.    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.

21.    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..

22.    Section 67 Finance Act 2004 provides an appeal mechanism in respect of the cancellation of gross payment status and describes the jurisdiction of the Tribunal in subsection (4). 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.

Submissions by HMRC

23.    Mr O'Leary, representing HMRC, made the initial submissions at the invitation of Mr Byrne, representing the Appellant.

24.    Mr O'Leary referred to the TTQT which was performed on an annual basis. He accepted that the "business" and "turnover" tests contained in paragraphs 2 and 3 of Schedule 11 of the Finance Act 2004 had been satisfied. He submitted, however, that the compliance test in paragraph 4 had not been satisfied for the qualifying period.

25.    Mr O'Leary also stated that a further failure during the qualifying period had subsequently been identified. This alleged failure was not, however, contained in the notice issued to the Appellant on 27 August 2009. Mr O'Leary accepted that this further alleged failure should not be taken into account for the purposes of this appeal. Section 66(6) requires that HMRC, on cancelling a person's registration for gross payment, must without delay given the person notice stating the reasons for the cancellation. Since the second alleged failure was not mentioned in the notice, it would follow that, if HMRC sought to rely on this other alleged failure, the notice would not have been properly given under section 66(6). Therefore, we have taken into account in reaching our decision only the alleged failure referred to in the notice issued on 27 August 2009 ie that referred to in paragraph 8 above.

26.    Regulation 32 did not permit, in Mr O'Leary's submission, the failure identified in the TTQT to be disregarded. Regulation 32 only permitted a late payment of a self-assessment tax liability to be disregarded if it was made not later than 28 days after the due date. In HMRC's submission the liability was only paid in full 167 days after the due date. Accordingly, Mr O'Leary submitted that the Appellant had failed the compliance test and that HMRC was entitled to withdraw his gross payment registration under section 66 Finance Act 2004.

27.    Turning to the grounds of appeal contained in the Appellant's Notice of Appeal, Mr O'Leary referred to the statement that the Appellant was unaware until March 2009 that he had anything to pay. In a letter dated 10 May 2010 the Appellant's representative claimed that the Appellant did not make a payment of his self-assessment tax because he was told by HMRC in a phone call towards the end of January 2009 that he was in credit on his Statement on Account and that there was no tax to pay at the end of January. In addition, Mr O'Leary referred to the statement in the Notice of Appeal that the Appellant's accountant:

"... asked HMRC to postpone payt on 8.4.09. HMRC took 7 mnths to reply and on 26.10.09 stated payment could not be postponed whereupon Mr Basye promptly made the payt."

28.    Mr O'Leary noted that it was the duty of the Appellant to ensure that taxes which he was obliged to pay were received by HMRC by the due date. In this case the self-assessment return for the year ended 5 April 2008 was submitted online on 31 December 2008 and showed a balancing payment liability due of £7,472.68. The tax liability for the year ended 5 April 2008 was due on 31 January 2009. Based on the self-assessment figure for the year ended 5 April 2008, Mr O'Leary submitted that the Appellant would have known that a payment of half this amount, viz £3,736.34 was due on 31 January 2009 as a payment on account for the year ended 5 April 2009.

29.    Mr O'Leary referred to a letter dated 8 April 2009 from the Appellant's accountant, Mr Brian Lonis, which requested that the balancing payment of £7,472.68 in respect of the tax year ended 5 April 2008 should be postponed on the basis that the profits for the year were considerably reduced, stating that an amended return for that year would follow. Mr O'Leary noted that the amended return was not, in fact, submitted until 2 June 2010. Mr O'Leary further noted that the Appellant did not make an application to reduce payments on account for the tax year ended 5 April 2009 until 22 October 2009.

30.    There was some debate about the timing of the letter of 8 April 2009 from Mr Lonis request postponement of the balancing payment in respect of the tax year ended 5 April 2008. Mr O'Leary stated that according to HMRC's records the letter of 8 April 2009 was received on 23 September 2009 which was attached to a letter dated 15 September 2009 from Mr Lonis appealing against the decision to withdraw gross payment status from the Appellant.

31.    Mr O'Leary stated that HMRC had no record of any telephone contact from the Appellant in January 2009 in respect of the tax year ended 5 April 2008 or 2009. Such telephone contacts were usually recorded on self-assessment notes in respect of the relevant taxpayer (who would be asked to supply has tax reference or National Insurance number). Mr O'Leary referred to the notes contained in the Bundle relating to the Appellant and these notes made no reference to any telephone conversation with the Appellant in January 2009. Mr O'Leary again referred to HMRC's self-assessment notes in respect of the Appellant. These recorded a conversation on 9 September 2009 which referred to a call from the Appellant's agent stating that a request for postponement had been sent in May and July. This contact was, in Mr O'Leary's submission, the first contact made by the Appellant's representatives in respect of the postponement.

32.    Therefore, Mr O'Leary submitted that the Appellant's explanations as to why the self-assessment payment on account liability for the year ending 5 April 2009 was paid late did not constitute a reasonable excuse for the purposes of paragraph 4(4) Schedule 11 Finance Act 2004.

Submissions by the Appellant

33.    Mr Byrne submitted that the Appellant had a reasonable excuse within the meaning of paragraph 4(4) Schedule 11.

34.    He explained that Mr Lonis prepared the Appellant's tax returns.

35.    Mr Byrne said that in January 2009 the Appellant received a statement of account from HMRC. The Appellant had made a payment of the £3,736.34 on 21 January 2009 which appeared on HMRC's records as having been received on 24 January 2009. At the time he believed that this was all he had to pay. Mr Lonis prepared the Appellant's tax returns online and the Appellant did not have access to HMRC's website to check his statement of account. Mr Byrne said that the Appellant had not received a statement of tax due for the year ended 5 April 2008.

36.    According to Mr Byrne, it was only in March 2009 that the Appellant received a statement telling him that further tax was due. This came as a complete surprise to him. The Appellant then met his accountant to discuss whether further tax was indeed due. Mr Byrne said that the return that had been filed online for the year ended 5 April 2008 had only been a provisional return pending finalisation of the accounts for that year. Mr Lonis considered that was due and on 8 April 2009 applied for postponement of the tax. Mr Byrne explained that the Appellant's profits for 2008, and consequently his tax bill, were expected to be less than the corresponding figures for 2007. His business had reduced dramatically because of the recession and because, aged 71, the Appellant was unable to work as hard as he had in the past.

37.    Mr Byrne said that Mr Lonis could get no response from HMRC in respect of his application made on 8 April 2009 to postpone the tax for the year ended 5 April 2008. He stated that despite several phone calls no reply was received.

38.    Mr Byrne disagreed with HMRC's contention that the letter dated 8 April 2009 containing the application for postponement had only been received in September 2009. Mr Byrne referred to a letter from HMRC dated 26 October 2009 which contained the following paragraph:

"You attached a copy of a postponement application for 2007 – 08 made on 8 April 2009 which has not been processed. The reason for this is because there are no circumstances in which postponement can be made after the return filing date for that year has been reached."

39.    Mr Byrne argued that this paragraph suggested that the reason for the delay had not been because the original application for postponement had not been received until September 2009 but simply because of the reason given in HMRC's letter. There was no reference in the letter to the letter from Mr Lonis of 8 April 2009 being received late.

40.    Mr Byrne accepted, however, that Mr Lonis had made a mistake in his letter of 8 April 2009. Instead of applying for postponement of tax in respect of the year ended 5 April 2008, he should have applied for postponement of tax for the year ended 5 April 2009 -- a confusion on his part.

41.    Mr Byrne accepted that in the Appellant's self-assessment notes the only telephone call recorded in respect of the application for postponement was a telephone call on 9 July 2009, but noted his belief that not all telephone calls may have been recorded.

42.    Mr Byrne submitted that the Appellant had never received a statement in respect of the year ended 5 April 2008. The statement that he received in January 2009 was confusing and difficult to read. It appeared to show that the Appellant was in credit.

Evidence of the Appellant and the self-assessment statement

43.    The Appellant gave unsworn evidence.

44.    He stated that he thought that he was in credit with HMRC in January 2009 in consequence of the statement he had received. No copy of the statement had been kept and the latest version of that statement that could be obtained was one dated 2 March 2009. That statement, read as follows:

 

"31/01/2009  Balancing payment due for year 07/08  7472.68 31/12/2008

From payment £4000.00 made 29 JUL08 4000.00 CR 29/07/2008

From payment £3736.34 made 24 JAN09  3472.68 CR  26/01/2009

Total credits 7472.68 CR

Balance 00.00 "

 

45.    The Appellant said that as a result of the statement he thought he would be in credit. He said he had made a payment of £3,736.34 in January 2009 and another payment of the same amount in July 2009. He made those payments after conferring with Mr Lonis.

46.    In response to a question from Mr O'Leary, the Appellant confirmed that he had received the statement from HMRC in 2009.

47.    Mr O'Leary confirmed that the Appellant would have been sent a statement in this form except that Mr O'Leary believes that the statement would have contained further entries for 31 January 2009. Mr O'Leary produced a self-assessment statement for the Appellant which was identical in all material respects to the statement described in paragraph 43 above except that there were further entries as follows:

Date Transactions Amount Created

31/01/2009 1^st payment on account due for year 08/09 3736.34 31/12/2008

From payment £3736.34 made 24 JAN 09 263.66 CR 26/01/2009 

Plus interest up to 02 MAR 09 9.99 02/03/2009

3482.66

48.    This, according to Mr O'Leary, would have shown that the Appellant owed £3482.66.

Our decision

49.    It is very difficult to be sure exactly what statement the Appellant saw in January 2009. However, by filing a tax return in respect of the year ended 5 April 2008 on 31 December 2008 the Appellant's accountants would have been aware of the amount of the balancing payment required for that year. In addition, filing that return would have triggered a liability to make a payment on account for the year ending 5 April 2009 on 31 January 2009. Somewhere between his accountant and the Appellant a misunderstanding seems to have arisen which led to the Appellant failing to make the necessary payment on account or least resulting in a failure to pay an amount sufficient to cover both the balancing payment for the year ended 5 April 2008 and the first payment on account for the year ending 5 April 2009. This misunderstanding was compounded by the accountant mistakenly making an application to postpone payment of tax for the year ended 5 April 2008 instead of making an application to postpone payment of tax for the year ended 5 April 2009.

50.    There is no statutory definition of what constitutes a reasonable excuse for the purposes of paragraph 4(4) Schedule 11 Finance Act 2004. HMRC regard a reasonable excuse as some exceptional circumstance outside the taxpayer's control which was not reasonably avoidable. Although we would not regard HMRC's interpretation as a comprehensive definition of what constitutes a reasonable excuse, it nonetheless serves as a useful working definition.

51.    We have considered whether the Appellant was misled by HMRC, in a telephone conversation alleged to have taken place at some time in January 2009, into believing that there was no outstanding balancing payment to be made in respect of the year ended 5 April 2008. We do not consider that the Appellant has provided sufficient evidence that the conversation took place in order to discharge the burden of proof lies upon him. Accordingly, we find that the Appellant was not misled by HMRC.

52.    It is plain that when making a payment £3,736.34 on 24 January 2009 the Appellant thought he was paying the first instalment of his payment on account for the year ending 5 April 2009. However, since £3,472.68 still owed in respect of the year ended 5 April 2008, HMRC allocated the payment on 24 January 2009 to the amount still outstanding in respect of the year ended 5 April 2008. This had the consequence that the Appellant was treated as having not fully paid the payment on account for the year ending 5 April 2009. In our view, HMRC cannot be criticised for this method of allocation of tax payments received from the Appellant. As Mr O'Leary confirmed, HMRC would normally allocate a payment of tax to the oldest arrears in order to prevent interest running. This seems a perfectly reasonable method of allocation. We are not aware of any rule which would require HMRC to allocate the payment in any other way. In any event, HMRC's method of allocation results in no real prejudice to the Appellant. If the HMRC had allocated the payment made on 24 January 2009 to the first instalment of the payment on account for the year ending 5 April 2009, that would have had the inevitable result that the balancing payment for the year ended 5 April 2008 would have been left unpaid and it would have been that default which would have been recorded in the notice withdrawing gross payment status issued under section 66(5) Finance Act 2004.

53.    Whilst we accept that the Appellant made an entirely genuine mistake, this does not in our view constitute a reasonable excuse within the meaning of paragraph 4(4) Schedule 11.

Discretion of HMRC

54.    As we pointed out at the hearing, the question whether HMRC have a discretion under section 66 (1) Finance Act 2004 whether to cancel a person's registration for gross payment is currently awaiting further argument in the adjourned appeal of Scofield v The Commissioners for HM Revenue and Customs [2010] UKFTT 377 (TC).

55.    This appeal involves a 71-year-old contractor who had been registered under the CIS for many years. In our view, the Appellant made a genuine mistake (which he sought to rectify once he became aware of the mistake) albeit one which did not amount to a reasonable excuse for the purposes of paragraph 4(4) Schedule 11. If HMRC do have a discretion under section 66 it is possible that the existence of such a discretion would be relevant in a case such as this. In our view, therefore, the correct course of action is for this appeal to be adjourned on this point until the outcome of the Scofield appeal (or any other appeal where the issue of discretion is fully argued and considered).

Conclusion

56.    We have decided that no reasonable excuse existed for the failure of the compliance test. We have further decided to adjourn this appeal on the question whether HMRC have a discretion to cancel a person's registration for gross payment under section 66 Finance Act 2004 until that issue is determined in Scofield or any other case where the question whether HMRC have a discretion whether to withdraw gross payment status under section 66 Finance Act 2004. We further direct that the 56 day time limit for an appeal against this decision under Rule  39 (2) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 shall only run from the date on which the Tribunal sends to the parties full written reasons for its decision in respect of this adjourned appeal dealing with the discretion issue described above.

57.    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 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

 

TRIBUNAL JUDGE

RELEASE DATE: 4^th November 2010