The Construction Industry Scheme

“(1)     Subject to sub-paragraphs (2) and (3), each of the persons who are partners at the time of the application must have complied, so far as any such 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—  

“(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.”

“Compliance test

Exceptions from compliance obligations

32—

(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

Background

(1)        Self-assessment second payment on account due on 31 July 2010 was not paid in full on time.

(2)        Self-assessment first payment on account due on 31 January 2011 was not paid in full on time.

(3)        Self-assessment balancing charge due on 31 January 2011 was not paid in full on time.

(4)        PAYE payment due for the tax month ended 5 May 2010 was not paid in full on time.

(5)        PAYE payment due for the tax month ended 5 June 2010 was not paid in full on time.

(6)        PAYE payment due for the tax month ended 5 July 2010 was not paid in full on time.

(7)        PAYE payment due for the tax month ended 5 August 2010 was not paid in full on time.

(8)        PAYE payment due for the tax month ended 5 September 2010 was not paid in full on time.

(9)        PAYE payment due for the tax month ended 5 October 2010 was not paid in full on time.

(10)     PAYE payment due for the tax month ended 5 November 2010 was not paid in full on time.

(11)     PAYE payment due for the tax month ended 5 February 2011 was not paid in full on time.

(12)     PAYE payment due for the tax month ended 5 March 2011 was not paid in full on time.

Submissions

(1)        The construction industry was badly affected by the current economic recession.  The Firm had a single main customer (“the Customer”) who had continued to award contracts to the Firm but had taken longer to pay for work performed.  Payment had slipped from one week to two, then eventually to eight weeks – the Customer had “moved the goal posts”.  That meant the Firm had to fund eight weeks’ labour costs from its own resources. A new temporary overdraft facility had been granted by the Firm’s bank and had been used in full.  In May 2010 the partners had put £20,000 additional capital into the business, which had entailed remortgaging their homes (against the wishes of their respective wives).  The PAYE liabilities for December 2010 and January 2011 had been paid on time because the wage bills for those months had been low – December had severe weather and then there was the Christmas and New Year shutdown – and payments were being received from the Customer in respect of work done eight weeks earlier, hence the bank balance was healthier.  The cashflow position deteriorated again after February 2011.

(2)        In July 2010 Mr Etherson had realised the Firm had insufficient funds to meet that month’s PAYE liability, and had personally visited HMRC’s office in Coventry to discuss the position.  As he had no appointment he was dealt with by an internal telephone call from a booth in the foyer; he was told a first late payment of PAYE attracted no penalty but further defaults would carry penalties.  No advice had been given about time-to-pay arrangements.  The PAYE had been paid in full, a few days late.  The monthly returns had been filed on time throughout.  The Firm appreciated that there may be penalties and interest on late payments.  There was the same funds problem the following month so Mr Etherson again visited HMRC and was told that PAYE penalties would escalate from 1% to 4% depending on the number of late payments.  The PAYE was paid in full 14 days late.  The funds problems continued but no further visits were made to HMRC because the advice already received had been clear and consistent.  At no time was the possibility of cancellation of gross payment status mentioned by HMRC; there had been no warning letter from HMRC intimating this might happen.  The Firm had not appreciated the potentially serious consequences of late payment on its gross payment status and, if it had been made aware, may have been able to avoid or mitigate the late payments.  Since being made aware of the true position by HMRC all PAYE liabilities had been paid on time. 

(3)        The Firm had done everything expected of a reasonable person; the partners had put in substantial additional capital; HMRC had been kept informed of the position and advice sought; all the liabilities had been met in full; the maximum delay had been 19 days.  The consequences of cancellation of gross payment status would be very serious; work and workers would have to be laid off; twenty years’ of hard work could be destroyed; new contractors had been won but required possession of a gross payment certificate; the Firm would be unable to take on apprentices. 

(1)        The number of late payments demonstrated a serious failure of the compliance test.  The Firm and all three partners had made late payments in the period under review.

(2)        HMRC had properly considered whether the explanations put forward to them could constitute a reasonable excuse for any of the late payments.  HMRC considered that only unexpected or unusual events would qualify.  The Firm had continued to accept work from the Customer despite the increased delays in payment of invoices; the impact on cashflow was not unexpected and should have been understood. 

(3)        Although the statutory regime was strict, it was important that it be applied evenly for all sub-contractors.  There was no obligation on HMRC to issue warning letters.  A comprehensive information pack would have been provided to the firm when it was first registered under the CIS.  No record of the conversation at the Coventry tax office was available and it may be that the officer was not even aware that the Firm was within the CIS. 

Consideration and conclusions

(1)        Nine late payments of PAYE liabilities – The Tribunal considered that, on balance, the Firm had a reasonable excuse (within the meaning of para 8(3) sch 11) for these late payments taking together (a) the unilateral extension of payment terms imposed by the Customer, and (b) the apparent failure by HMRC’s telephone adviser to advise on the possible availability of a time-to-pay arrangement.

(2)        Late payment by all three partners of the July 2010 income tax instalment - The Tribunal considered that, on balance, the partners had a reasonable excuse (within the statutory meaning) for these late payments considering the unilateral extension of payment terms imposed by the Customer.

(3)        Late payment by all three partners of the January 2011 income tax instalments - The Tribunal considered that by this time the exceptional impact of the change of terms by the Customer had been replaced by a more general cashflow problem for the partners.  The Firm had managed to pay its PAYE liabilities on time for a couple of months.  While those difficulties were understandable and unfortunate, they could not constitute a reasonable excuse (within the statutory meaning) for these late payments.  Regulation 32 permitted the “forgiveness” of a single failure but only if the lateness of the payment did not exceed 28 days.  Here at least one of the partners (certainly Mr Sargent and perhaps also Mr Etherson) had exceeded that latitude in late payment.

PETER KEMPSTER

TRIBUNAL JUDGE

RELEASE DATE: 22 August 2012