Mr Alan Kincaid t/a A K Construction v Revenue & Customs [2011] UKFTT 225 (TC) (06 April 2011)
[2011] UKFTT 225 (TC)
TC01090
Appeal number
TC/2010/07557
CONSTRUCTION
INDUSTRY SCHEME – Withdrawal of gross payment status – Appellant did not meet
the compliance test – whether Appellant had a reasonable excuse for his failure
– Yes – ‘reason to expect’ test failed – No - Appeal allowed
FIRST-TIER TRIBUNAL
TAX
MR
ALAN KINCAID T/A A K CONSTRUCTION Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: JOHN WALTERS QC (TRIBUNAL JUDGE)
IAN
MENZIES-CONACHER FCA CTA (FELLOW)
Sitting in public at St
Katherine’s House. St Katherine’s Street, Northampton NN1 2LX on 21 March 2011
There was no appearance by or
on behalf of the Appellant
Paul Reeve of HM Revenue and
Customs appeared for the Respondents
© CROWN COPYRIGHT
2011
Issues
1. The
Tribunal received a letter from the Appellant’s accountant (Thomas, Wood &
Co) advising that they would not be attending the hearing of the appeal, on
grounds of cost, but asking that their written submissions be taken into
account by the Tribunal. We decided to continue with the hearing in the absence
of the Appellant or his representative as, in accordance with Rule 33 of the
Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, it was clear
that condition (a) of the Rule was satisfied (prior notification of the
hearing) and we considered that it was in the interests of justice to proceed,
so that condition (b) of the Rule was also satisfied.
2. The
Appellant appealed against HMRC’s notice dated 29 March 2010 (which was confirmed following an internal review in a letter dated 25 August 2010), withdrawing gross payment status from the Appellant, within the Construction Industry Scheme
(CIS). This was a determination cancelling the Appellant’s registration for
gross payment pursuant to section 66(1) Finance Act 2004 (“FA 2004”).
3. HMRC
withdrew gross payment status from the Appellant because he failed to meet the
compliance test, one of the three statutory tests a sub-contractor must satisfy
for registration for gross payment status (see: paragraphs 1 to 4, Schedule 11,
FA 2004).
4. The
letter of 25 August 2010 set out HMRC’s reasons. These were the Appellant’s
failure to comply with his obligations imposed in the qualifying period by or
under the Tax Acts or the Taxes Management Act 1970 (compare paragraph 4(1)(a),
Schedule 11, FA 2004). The qualifying period in the Appellant’s case was the 12
months to 19 March 2010. His specific failures during that period were that
(1)
The 1st self-assessment surcharge payment for year ended 5
April 2008 of ₤1,236.71 due on 6 May 2009 was not paid in full until 23
March 2010 (322 days late); and
(2)
The 2nd self-assessment surcharge payment for year ended 5 April 2008 of ₤1,236.71 due on 15 September 2009 was not paid in full until 23 March 2010 (189 days late).
5. Certain
compliance failures can be disregarded under the legislation. In this respect a
late payment of income tax can be ignored if it is made not later than 28 days
after the due date and the taxpayer has not failed to comply with this
obligation within the previous 12 months. This specific disregard did not apply
to the Appellant because his payments were more than 28 days late.
6. HMRC
submitted that no ‘reasonable excuse’ had been provided by the Appellant as to
why the tax obligations (viz: the payments of the self-assessment
surcharge payments) were not met on the due dates.
7. In
addition HMRC also contended at the hearing that the Appellant failed the
separate requirement of the compliance test (see: paragraph 4(7), Schedule 11,
FA 2004) that there must be reason to expect that the same requirements would
be complied with in respect of periods after the qualifying period (i.e.
post 19 March 2010) in that an amount of £24,734.25 due on 31 January 2009 was
paid late, as follows:
|
Amount Paid
|
Date Paid
|
Days Late
|
|
13,559.14
|
25 November 2009
|
298
|
|
2,000.00
|
19 December 2009
|
322
|
|
2,000.00
|
27 January 2010
|
361
|
|
4,224.17
|
31 January 2010
|
365
|
|
2000.00
|
24 February 2010
|
389
|
|
950.94
|
23 March 2010
|
416
|
|
24,734.25
|
|
|
8. The
issue before the Tribunal was therefore whether the Appellant had failed the
compliance test; either by failure to make the surcharge payments in question
on time without a ‘reasonable excuse’ or because there were reasons to expect
that there would be failures to comply in subsequent periods.
9. In
relation to the dispute concerning whether the Appellant had a reasonable
excuse for his failure to make the two surcharge payments on time, a letter
written by his accountants of 28 June 2010 stated that these payments had been
due at a time when the Appellant was suffering severe cash flow problems
arising from 20% CIS tax being deducted from payments made to him whilst having
to continue to make payments to HMRC of amounts deducted from payments to his
own subcontractors. (As a self employed individual the Appellant had no right
of offset.) This cash flow situation was worsened by a doubling in turnover of
the Appellant’s business between 2008 and 2009.
10. The Appellant
had been subject to a previous notice of withdrawal of gross payment status
arising from a test of a qualifying period of 12 months to 11 April 2008. This
had also been the subject of an appeal to the Tribunal but that case was
finally withdrawn by HMRC before a hearing and in a letter of 24 December 2009 HMRC had advised the Appellant that his status would remain as gross.
11. The Appellant
had entered into a time to pay arrangement with HMRC on 23 November 2009, pursuant to which his self-assessment tax would be paid in the instalments
indicated in the table at paragraph 7 above
The Law
12. The law
regarding the Construction Industry Scheme is contained in sections 57-68 of
and schedules 11 and 12 to FA 2004, and the Income Tax (Construction Industry
Scheme) Regulations 2005. Section 64 of the FA 2004 provides the requirements
for registration for gross payment. Section 64(2) obliges the Applicant to
comply with the three statutory tests set out in part 1 of schedule 11 to FA
2004. ‘Qualifying period’ is defined in paragraph 14 of Schedule 11 to FA 2004
and section 66 FA 2004 deals with the cancellation of registration for gross
payment.
13. Paragraph 4(1), schedule 11 to FA 2004 specifies the
criteria for the compliance test.
“The
applicant must, subject to sub-paragraphs (3) and (4), have complied with –
(a)
all obligations imposed on him in the qualifying period...by or under the Tax
Acts or the Taxes Management Act 1970, 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.
14. Paragraph 4(4), schedule 11 to FA 2004 deals with the
issue of reasonable excuse, providing that:
“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.
13. Paragraph 4(7),
schedule 11 to FA 2004 provides that:
“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)
14. Section 66(1) FA
2004 provides that:
“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 had 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.
15. Section 67(5) FA
2004 provides that:
“Where
a person appeals against the cancellation of his registration for gross payment
by virtue of a determination under s 66(1), the cancellation of the
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.
Discussion
‘Reasonable Excuse’
16. The Appellant
did not dispute that the two surcharge payments had been made late and
therefore (as the obligations to make the surcharge payments were obligations
imposed on him in the qualifying period – the year ended 19 March 2010 – under
the Taxes Acts or the Taxes Management Act 1970) we find that he did not meet
the compliance test for the grant of a gross payment certificate in relation to
his business as a sole trader as at 19 March 2010 – and if an application to
register the Appellant for gross payment had been made on 19 March 2010, the
Board would have refused so to register him (in terms of section 66(1)(a) FA
2004). This finding is, of course, subject to the Appellant being able to show
a reasonable excuse for the non-compliance.
17. HMRC’s position
was that a cash flow problem can only be accepted as a reasonable excuse where
it arises from an unforeseeable or inescapable event – something more than the
normal hazards of being in business. An insufficiency of funds itself was not
a reasonable excuse – though no authority was given for this proposition. HMRC
contended that the reasonable excuse offered in this case, which they saw as
simply the Appellant having difficulties with his customers, amounted to no
more than such a normal hazard of being in business. It was neither unforeseeable
nor inescapable.
18. The term reasonable
excuse is not defined by statute – rather it “is a matter to be considered in
the light of all the circumstances of the particular case” (see Rowland v
HMRC [2006] STC (SCD) 536 at [18]). The Tribunal assesses whether the
Appellant had a reasonable excuse from the perspective of a prudent business
person exercising reasonable foresight and due diligence with a proper regard
for the fact that the tax would become payable on particular dates.
19. In this case
HMRC accepted that the amount of £4,224.17 shown in the table at 7 above
represented deductions of CIS tax which had been overpaid in 2008/09 and, on 31
January 2010, set off against the balancing payment of self-assessment tax due
for 2007/08 on 31 January 2009. This supported the explanation of the
difficulties put forward by the Appellant (see: paragraph 9 above). This amount
of £4,224.17 significantly exceeded the £2,473.42 due in respect of the two
late paid surcharges. The Appellant had done all that he could to avoid this
problem by his appeal against the earlier notice of withdrawal of gross payment
status arising from a test of a qualifying period to 16 April 2008 – see: paragraph 10 above – but this was not resolved, by confirmation of his gross status, until
towards the end of the qualifying period now in question. In any event, the
Appellant’s gross payment status should not have been withdrawn following his
appeal against the earlier notice of withdrawal – see: section 67(5) FA 2004.
These circumstances left the Appellant for most of the period under review (the
year ended 19 March 2010) in the almost impossible trading position of
receiving income net of CIS deductions but having to make payments gross. For
this reason, the Tribunal considers that the Appellant does have a reasonable
excuse for making the two surcharge payments as late as 23 March 2010.
‘Reason to expect’
20. HMRC relied upon
the table shown at 7 above to demonstrate that the amount of £24,734.25 due on
31 January 2009 was not paid on the due date and therefore there was no reason
to expect that the Appellant would, in respect of periods after the qualifying
period, comply with his tax obligations (see: paragraph 4(7), Schedule 11, FA
2004).
21. They
acknowledged that a time to pay agreement was made between HMRC and the
Appellant on 23 November 2009. However they say that the failure to pay the
2007/08 balancing payment on time is not a failure that can be overlooked
because, to achieve this result, any arrangement must have been put into place before
the tax became due, and that this did not happen in this case. The time to pay
arrangement was not entered into until 296 days after the tax became due.
22. HMRC therefore
contends that the Appellant’s failure to pay on time (or agree an instalment
arrangements prior to the tax becoming due) in the post qualifying period means
that the reason to expect test has been failed.
23. We saw no
representations from the Appellant on this point, possibly because this
argument was not advanced by HMRC in their letters to the Appellant’s
accountants but only appeared in their skeleton argument for this hearing.
24. We found some
difficulties with HMRC’s contention, due to the wording of the legislation
(whilst qualifying period is defined ‘periods’ are not), and HMRC were unable
to refer us to any previous decisions in support of their position on this
point.
25. We concluded
that the context of this test meant that it was necessary to determine a point
of time from which to judge future expectations as to compliance or non-compliance.
The Tribunal considered that, having first applied the tests to the qualifying
period in question – the year ended 19 March 2010 – the only possible time to
judge future expectations as to compliance was the time of the determination to
cancel the registration for gross payment, i.e. 19 March 2010. Whilst there
had been failure to comply with tax obligations after 19 March 2010, there had
also been reasonable excuses for these failures. Such reasonable excuses had
been (a) in respect of the payment of the final instalment of the balancing
payment of self-assessment tax due for 2007/08 on 31 January 2009 – the payment
of £950.94 shown in the table in paragraph 7 above, which was made on 23 March
2010 – the fact that a time to pay agreement covering that payment had been
reached beforehand, on 23 November 2009, and (b) in respect of the late making
of surcharge payments, also on 23 March 2010, the incorrect withdrawal of gross
payment status on the earlier appeal being made – see: paragraph 19 above. It
followed that in our view gross payment status should not be revoked on the
basis of the failures to comply with tax obligations after 19 March 2010. The
purpose of the additional (reason to expect) test was to provide an override in
cases where there was a reasonable excuse for the withdrawal of gross payment
status by reference to what had happened in the qualifying period, but
nonetheless there was doubt as to continuing compliance and that therefore
gross status should be revoked notwithstanding the reasonable excuse.
26. If we were
alternatively to assess this point by reference to 29 March 2010 (when the
decision letter to revoke gross status was issued), the position at that date
was that the full amount shown as due (as per the table at paragraph 7 above)
had been paid – on 23 March 2010, the same day as the two surcharge liabilities
were also settled.
27. Furthermore we
considered that the existence of the time to pay agreement entered into on 23
November 2009 was relevant to determining the behaviour of the Appellant.
Firstly because it indicated that he was acting to address his problems and had
approached HMRC to make this arrangement. Secondly HMRC confirmed that the
subsequent monthly payments of £2,000 were made pursuant to this agreement. On
this basis we concluded that the evidence presented showed that at the relevant
time, described broadly as the second half of March 2010, the Appellant was
behaving responsibly in relation to his tax affairs and it was not therefore
reasonable for HMRC to conclude at that time that there were reasons to expect
that there would be future compliance failures.
Decision
28. For the reasons
given above:
(a) The Tribunal finds that
the Appellant did have a reasonable excuse within the meaning of paragraph
4(4), Schedule 11, FA 2004 for failing the compliance test in relation to the
requirements of paragraph 4(1), Schedule 11, FA 2004 as at 19 March 2010; and
(b) The Tribunal also finds
in relation to the determination of 19 March 2010 cancelling the Appellant’s
registration for gross payment that there was no reason to expect
post-qualifying period non-compliance by the Appellant within paragraph 4(7),
Schedule 11, FA 2004 and that therefore the Appellant did not fail the
compliance test for this reason.
29. The Tribunal therefore allows the appeal.
30. 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.
JOHN WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 6 April 2011
4
