Cardiff Lift Company v Revenue & Customs [2011] UKFTT 628 (TC) (23 September 2011)
[2011] UKFTT 628 (TC)
TC01470
Appeal number: TC/2010/5898
Construction
Industry Scheme. Compliance failures: held no reasonable excuse. Did HMRC have
a discretion under section 66FA 1994: John Scofield TC 1068 applied. HMRC’s
decision void. Appeal allowed
FIRST-TIER TRIBUNAL
TAX
CARDIFF
LIFT COMPANY Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
CHARLES HELLIER (TRIBUNAL JUDGE)
RICHARD
CORKE
Sitting in public in Cardiff on 10 January 2011
David Patterson, partner in
the Appellant firm, and Hugh Morgan for the Appellant
Dave Lewis for the Respondents
© CROWN COPYRIGHT
2010
DECISION
Introduction
1. The
Cardiff Lift Company, a partnership between Ms H Davies, Mrs G Patterson and Mr
Patterson, appeals against HMRC’s decision to cancel its gross payment status
under the Construction Industry Scheme (CIS).
2. HMRC say
that they may cancel gross payment registration if the partnership or the partners
do not comply with their obligation under the Taxes Acts. They point to
failures of each of the parties and of the partnership to do so within the
twelve month preceding their decision to cancel.
3. As will be
seen the legislation provides that if a person has a reasonable excuse for a
failure it is to be disregarded. The first question we addressed was therefore
whether there were reasonable excuses for these failures.
4. A question
arises as to whether HMRC have a discretion to cancel regulations or whether
they are required do so if the taxpayer does not comply with his obligations.
This issue was fully argued before a differently constructed tribunal in the
case of John Scofield TC/2010/4709 TC 1068. The tribunal delayed its decision
in this case to await the decision of the tribunal in that case, and after its
publication sought representations from the parties in connection with the
issues it raised. In the second part of this decision we consider the question
of HMRC’s discretion to cancel registration.
The statutory Provisions
5. Chapter 3,
part 3 Finance Act 2004 contains the provisions for the Construction Industry
scheme. Under the scheme certain payments to subcontractors must be made under
deduction of tax unless the subcontractor is registered for gross payment.
Section 63(1) provides that the Board must register a person for gross payment
if it is satisfied that certain conditions are met.
6. Among
those conditions are those in Part 2 of Schedule 11 to that Act which includes
the requirement that each of the partners in the partnership have “complied, so
far as any charge to income tax or corporation tax is concerned as falls to be
computed by reference to the profits or gains of the firm’s business, with all
obligations…under the Tax Acts or the Taxes Management Act 1970” within the
preceding 12 months. A further condition is imposed in the case of a
partnership by s64(3) and Part I of the Schedule that the individual partners
must comply with their obligations under those Acts.
7. These
strict requirements are mitigated somewhat by provision in the Income Tax
(Construction Industry Scheme) Regulation 2005 (the “CIS Regulation”) which
permit some failures to be ignored, and by paras 2(4) and 8(3) which require
the disregard of a failure if the person who failed had a reasonable excuse for
the failure.
8. Section 66
provides that the Board “may at any time make a determination cancelling a
person’s registration if it appears to them that” if an application to register
had been made at that time the Board would refuse to register that person.
9. Section 67
FA2004 permits an appeal to this tribunal against the cancellation of
regulation, and in subsection (4), provides that the jurisdiction of the
tribunal on such an appeal shall include jurisdiction to review any relevant
discussion of the Board under section 66.
10. The Taxes Act imposes
requirements for individuals to make payments of and on account of their own
tax liabilities and for employers to account for PAYE and NI on amounts paid to
employees by certain dates.
11. The Evidence and the Facts
12. We had a bundle of copy
correspondence between HMRC and the Appellant before us and heard oral evidence
from Mr Patterson and Mr Morgan. Mr Lewis also gave his account of the
practice of HMRC. We find the following facts.
13. The firm conducts the
business of the manufacture, installation and maintenance of lifts. It started
business in 1986 manufacturing and installing lifts on a small scale, but in
about 2008 moved into larger projects. The firm found that cash flowed from
the larger projects more slowly since the majority of the payment for the work
done was made after the (longer) job was finished.
14. Some of the firm’s
counterparties deduct tax from payments to it in error. In the year to August
2009 some £17,700 had been erroneously deducted.
15. The firm’s customers also
made retentions at the end of contracts. The total amount due and retained at
any time has risen from about £100,000 in 2006 to £130,000 in 2009. Customers
also pay late. Thus in April 2010 some £100K was due and awaited from
customers.
16. These issues have meant that
the partnership found cash flow difficult, but it had had these problems for
many years although they became worse in the period after 2008.
17. The firm had, at the
beginning of 2009, an overdraft facility of £425,000 which in April 2009 was
increased to £500,000. The facility is secured against Mr Patterson’s home and
cash deposits by the other partners.
18. The firm is an employer and
liable to account each month for PAYE and NI in respect of payments made to its
employees. These payments are due, when electronic payment’s made, on the 22nd
of the month following that of payment to the employee. (see Reg 69 PAYE
Regulation SI2003/2682). Payments were made late:-
|
Latest Due Date
|
Paid
|
Days Late
|
|
22 August 2009
|
16 September 2009
|
25
|
|
22 July 2009
|
18 August 2009
|
27
|
|
22 June 2009
|
17 July 2009
|
25
|
|
22 May 2009
|
18 June 2009
|
27
|
|
22 April 2009
|
30 July 2009
|
38
|
|
22 March 2009
|
10 April 2009
|
19
|
|
22 February 2009
|
12 March 2009
|
18
|
|
22 January 2009
|
12 February 2009
|
20
|
19. In earlier periods HMRC had
sent an officer to the Appellant’s offices to pick up a cheque for the PAYE and
NI. The officer was not always the same and generally turned up between 22nd
and 30th of the month. The Appellant was happy to take advantage of
the extra ten days or so for making payment which this system effectively
allowed. We accept however that it was only because the payment was late that
the officer called: sending an officer improved the Treasury’s cash flow. The
officers, however, had busy rounds and did not communicate much with the
Appellant. It was unlikely that they either complained that payment was late
or expressly indicated that it was acceptable to HMRC for payment regularly to
be made in this manner.
20. The Appellant ensured it
paid its employees on time.
21. An analysis of the firm’s
bank account for the period October 2008 to September 2009 showed, for each
date on which PAYE and NI became due (if paid by cheque) whether there were
funds available to meet such payment. For all payments save that due on 19
April 2009 this analysis showed that payment would have resulted in the balance
on the account, after adjusting for uncleared items, exceeding the overdraft
limit, and for all periods save about five, that immediate payment would have
caused the account to become overdrawn above the overdraft limit.
22. The analysis however did
show that the payment due on 19 April could have been made without causing the
limit to be breached.
23. We were told that the
partners had also been late in paying their personal income tax liabilities.
There was evidence that some or all of the delays had been allowed by HMRC
either before or after the tax became due. We have not found it necessary to
make express findings on these matters for the reason which appears below
(“Discusson”).
24. During 2009 the partner who
ran the day to day aspects of the business went through an acrimonious divorce
which reduced his attention to the business. There had also been illness in
the accounts department during 2009.
Discussion: reasonable excuse
25. One compliance failure by a
person in the 12 months prior to any particular date will mean that HMRC could
refuse to register that person for gross payment on that date. That is because
s63(3) provides that the Board must register a person for payment under
deduction only if the conditions for gross payment registration is s63(2) are
met.
26. Thus, if among the delayed
payments due in 2009 there was one which was not reasonably excused or required
to be ignored by the CIS Regulations, the Board would by virtue of section
66(1) be entitled to cancel that person’s registration.
27. It seems to us that the
failure to pay the PAYE and NI due on (19 or) 22 April 2009 was such a
failure. There is no dispute that it was a failure, and it does not fall
within the exculpation afforded by Regulation 32 of the CIS Regulations. The
only question is whether there was a reasonable excuse for that failure. For
the reasons set out below we conclude that there was not.
28. First, the Appellants had
sufficient funds to make payment. Making that payment would not have caused
the firm to exceed its overdraft limit. Thus the difficulties the firm had in
relation to cash flow were not an excuse (and thus could not be a reasonable
excuse) for this failure.
29. Second, it seems to us that
even if the cashflow difficulties we have related above made prompt payment
difficult, they were difficulties which the business had had for some time and
which it could reasonably be expected to have addressed by 2009. A sudden
difficulty may constitute a reasonable excuse but when problems are inherent in
the nature of the business it generally becomes reasonable to expect the
business to find ways of dealing with them.
30. We considered whether HMRC’s
practice (in 2008) of sending an officer round to collect a cheque for PAYE was
such that it might either (a) be treated as HMRC allowing late payment – so
that potentially section 118(2) TMA would operate to treat the late payment so
allowed as not being late, or (b) as giving rise to such a fair expectation in
that the mind of the firm that HMRC did not mind that the payments were late
that such expectation would constitute a reasonable excuse. We were not
persuaded that either escape was available. There was nothing to indicate that
by, on, or in, the personal collection of late payments, HMRC were allowing
delay, nor did we see this mechanism as nodding or winking at a failure –
rather it underlined the failure.
31. We have mentioned that there
was illness in the accounts department in 2009. However, there was no evidence
before us as to when that illness was, what it was, or how it affected this
payment. There was insufficient evidence to conclude that it offered a
reasonable excuse.
32. Nor did we feel able to
conclude that the strains of a divorce on the main partner afforded an excuse
for the delay in the payment. PAYE payments were fairly consistently late and
the delay spoke more of the regular conscious seizing of a cash flow advantage
rather than the disorganisation occasioned by lack of attention.
33. We therefore find that there
was no reasonable excuse for this default. As a result HMRC were entitled to
decide to cancel gross payment status.
A Discretion
(a) a discretion
34. Section 67 provides for
appeals against both the refusal of an application for gross payment
registration and against the cancellation of such registration.
35. The provisions for the grant
of registration in section 63 differ from those for cancellation in section 66
in one important respect. Section 63 says that if the Board are satisfied that
the conditions in section 64 are met “the Board must register” the
person for gross payment. Section 66, by contrast, says that if it appears to
the Board that one of the conditions in section 66(1) is satisfied then the
Board “may” make a determination cancelling such registration.
36. The contrast between “may”
and “must” suggests that the Act gives a discretion to the Board as to whether
or not to cancel registration if the conditions are met. In John Scofield TC
1068 the tribunal held that section 66 did indeed confer a discretion. We
agree.
37. Mr Lewis suggested that
“may” in section 66 referred to the possibility that the taxpayer had a
reasonable excuse. We do not agree. Whether or not there is a reasonable excuse
affects whether the compliance condition is satisfied. If there is a reasonable
excuse there is no compliance failure and HMRC cannot cancel registration. If
there is no reasonable excuse there is a compliance failure and HMRC “may”
cancel registration.
(b) Jurisdiction
38. If HMRC have failed to
exercise a discretion, the question arises as to whether or not the tribunal
has jurisdiction to do anything about it.
39. Section 67(4) provides that
the jurisdiction of the tribunal hearing the appeal shall “include jurisdiction
to review” any decision of the Board in the exercise of their functions under
section 63 to 66. The word “include” suggests that the tribunal’s function may
not be limited to such a review.
40. In Hudson v JDC services
Ltd [2004] STC 834, Lightman J considered the jurisdiction given to the
Special Commissioners by section 561(9) TA 1988 in relation to the refusal by
the Inland revenue of a certificate for gross payment under the predecessor of
the current CIS regime. That regime provided:
(1)
in section 561(2) that the Board “shall” issue a certificate to a person
if specified conditions (similar but not identical to those in section 63) were
satisfied;
(2)
in section 561(8) that the Board “may at any time cancel a
certificate” if it appeared to them that certain conditions (again similar but
not identical to those in section 66 ) were satisfied; and
(3)
in section 561(9) that a person could appeal against the refusal of a
certificate or its cancellation and that on such an appeal the jurisdiction of
the Special or General Commissioners “ shall include jurisdiction to review any
relevant decision taken by the Board in the exercise of their functions under
[that] section”.
Thus the differences between the mandatory requirement to
grant a certificate and the discretionary power to cancel it if conditions were
satisfied existed in the previous legislation and parallel the “must” and “may”
in the current legislation; and the words describing the tribunal’s
jurisdiction are for all relevant intents and purposes identical.
41. Lightman J held that the
legislative history and the statutory context indicated that full appellate
jurisdiction was conferred on the tribunal entitling it to substitute its own
judgement for that of the Board. The legislative history showed that in 1975
the tribunal was restricted to reviewing the exercise of the Board’s function
but had been excluded from considering the question of whether or not the
conditions had been fulfilled. This restriction was lifted in 1980. Lightman J
said:
“In my judgement it is
unlikely that the [1980] amendment was merely intended to vest in the
[tribunal] a power of supervision…equivalent to that exercisable by the Court
on judicial review…”
42. In relation to the statutory
context he said that it supported the conferment on the tribunal of full
appellate jurisdiction for the following reasons:
“(a) the statutory context is
a subsection conferring full appellate jurisdiction on the commissioners which
is to “include” jurisdiction to review a decision on entitlement to a CIS
certificate;
“(b) the decision of the
Revenue under appeal does not involve the exercise of discretion. Statutory
rules regulate how the power to grant CIS certificates is to be exercised. What
is required of the Revenue is to apply the statutory criterion. There is no reason
why the commissioners should not on appeal undertake the same exercise;
“(c) the decision of the
Revenue, an administrative body, to refuse the grant has far reaching
implications for the applicant;
“(d) the conclusion which I
have reached accords with that of Goulding J in Lothbury Investment Corp Ltd
v IRCI [1979] STC 772. [1981] Ch 47.”
43. We note that in reason (b)
Lightman J appears to disregard the discretionary provision in section 561(8)
which said that the board “may” cancel a certificate. But in the case before
him the issue related to section 561(2), the grant of a certificate, and there
was no discretion afforded under that subsection.
44. It seems to us that it is
clear that in relation to the question of whether or not the conditions for
registration in section 63, or for cancellation in section 66 are met, the
tribunal has a full appellate jurisdiction.
45. In relation to an appeal
against a refusal to register the tribunal must consider the evidence and
determine whether those conditions are met. That exercise will determine the
matter. There is no further question to be asked. If the tribunal decides that
the conditions are met, the person must be registered.
46. In relation to an appeal in
relation to the cancellation of a certificate there remains the question of the
exercise of the Board’s discretion under section 66. The questions which arise
in relation to our jurisdiction are (a) whether the tribunal has the power to
consider the exercise of that discretion, (b) if it has such a power whether it
is entitled to substitute its judgment as to the proper exercise of that power
for that of the Board, or whether it is merely required to determine, in a
manner similar to that on a judicial review, whether the discretion has been
“reasonably” exercised or exercised at all, and (c) if it has that power and
decides that the discretion has not been so exercised (or exercised at all)
whether it must remit the decision to be made again by the Board, or must
simply allow the appeal.
47. It seems to us that the answer
to the first question is that the tribunal has the power to consider the
exercise of the discretion. The words of section 67(4) are clear: the
tribunal’s jurisdiction includes a power to review any relevant decision of the
Board in the exercise of its functions under section 66. One of those functions
is deciding to cancel a certificate. The tribunal can therefore review that
decision.
48. The answer to the second
question is less clear, but it seems to us that our jurisdiction in this
respect is limited to upholding or striking down the decision. That is for the
following reasons:
(1)
Lightman J says, in relation to the legislative history that it was
unlikely that the [1980] amendment was “merely” intended to provide for a Wednesbury
type judicial review. But the extension of the jurisdiction effectively to
consider the question as to whether or not the conditions were fulfilled leaves
the possibility that a review jurisdiction was at least retained in relation to
the exercise of any discretion;
(2)
Lightman J’s discussion in subpara (b) of his reasons reveals that his
decision as to full appellate jurisdiction was in the context of the operation
of the statute where there was no discretion. It is clear that he regarded the
presence of any statutory discretion as being at least potentially indicative
of a limited jurisdiction, and also clear that his decision as to full
jurisdiction does not determine the tribunal’s jurisdiction in an appeal
against the cancellation of a certificate (or thus of registration);
(3)
Although, as Lightman J notes at [20] a “review” jurisdiction may
encompass a full appellate jurisdiction, the use of the phrase “include
jurisdiction to review” indicates to us that a review should be something in
addition to a full appellate consideration of the operation of the relevant
conditions. Indeed Lightman J recognises this possibility in his reason (a);
(4)
Where a discretion is conferred by statute there is some recognition
that there may be policies developed by the body to which the power is given
which may influence the exercise of that power. A body given a power may
rightly take into consideration the need to act fairly as regards a wide body
of taxpayers. The development of such policies would be precluded if the
tribunal had the jurisdiction to substitute its own. The issues in relation to
CIS certificate are ones in which it would be reasonable to suppose that such
policies could be applied.
49. So far as the third issue is
concerned it seems to us that the proper outcome of an appeal is that it should
be allowed or dismissed, and that an express power would be needed for the
tribunal to remit a decision to be remade (a power along the lines of that in
section 16(4) FA 1994 for example). We conclude that if we were to determine
that the discretion had not been properly exercised then we should allow the
appeal.
(c) Was there an exercise of a discretion in this case?
50. Mr Lewis told us that the
Board did not give any separate consideration to the question of whether, if
the conditions for deregistration were satisfied, it should proceed to
deregister a person. If the conditions were satisfied deregistration followed
automatically. We concluded that such had been the case in the Appellant’s
circumstances.
51. After we sought the parties
representations in relation to the John Scofield decision, HMRC wrote to
explain that they had now amended their procedures, but offered no new evidence
in relation to this case.
52. It seems to us that there
was no proper exercise of the power given to the Board by section 66. Where a
power is given a decision on whether or not to exercise it must be taken on the
facts of the case. This the Board did not do.
53. Whilst we find that HMRC
were entitled to decide to withdraw gross payment status we find that this
decision to do so was void.
Conclusion
54. We allow the appeal.
55. 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.
CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 23 SEPTEMBER 2011
