Appeal Number: TC/2010/04709

2010] UKFTT 377 (TC)

TC00659

Appeal number: TC/2010/04709

Construction industry scheme -- withdrawal of gross payment status -- whether reasonable excuse -- held no -- whether HMRC have discretion to withdraw gross payment status - jurisdiction of Tribunal to review HMRC decision -- direction for appeal to be relisted for further argument

FIRST-TIER TRIBUNAL

TAX

JOHN SCOFIELDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE) ANNE REDSTON (TRIBUNAL MEMBER)

Sitting in public at Field House, 15 BreamsBuildings, London EC4A 1DZ on 14 July 2010

Mr Bright for the Appellant

Chris Shea, Appeals and Reviews Unit, HM Revenue and Customs, for the Respondents

DECISION

1.This is an appeal against the withdrawal of gross payment status in respect of the Construction Industry Scheme ("CIS").

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 63Finance 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.”

5.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

(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.

6.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. We discuss later in this decision whether this provision confers on HMRC a discretion to cancel gross payment status.

7.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 anindividual 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.

8.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 theTaxes 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.

9.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 2045). Paragraph 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.

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 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 tribunalon 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

The facts

13.The evidence in this case consisted of a bundle of relevant documents produced by HMRC, the Appellant’s bank statements which were produced on behalf of the Appellant in the course of the hearing at the request of the Tribunal and records in respect of the HMRC helpline produced by HMRC.

14.The Appellant is a self-employed contractor in the construction industry and was registered under the CIS in 2008.

15.On 25 January 2010 HMRC performed a compliance test for the purposes of paragraph 4 Schedule 11 Finance Act 2004. The qualifying period for the test was the 12 months to 20 January 2010. On 29 January 2010 HMRC wrote to the Appellant notifying him that his gross payment status was being withdrawn as a result of various compliance failures. That letter identified 10 different compliance failures which were itemised by HMRC's computerised records.

16.In subsequent correspondence HMRC accepted that eight of these alleged compliance failures in respect of PAYE were in fact problems relating to the allocation of those payments by HMRC and were not in fact compliance failures. HMRC also accepted as regards one other compliance failures that the Appellant had a "reasonable excuse" for that failure and, accordingly, it could be disregarded. That left one outstanding compliance failure which HMRC considers sufficient for the withdrawal of gross payment status.

17.The compliance failure in question was the Appellant's income tax self-assessment second payment on account of £10,094.65 which was due on 31st of July 2009 but was not paid until 4 September 2009.

18.It was common ground that the payment was made after the due date and could not be disregarded under theIncome Tax (Construction Industry Scheme) Regulations 2005 (SI 2045), being made 8 days outside the statutory disregard set by those regulations.

19.The Tribunal thus considered whether the Appellant had a reasonable excuse (within the meaning of paragraph 4(4) Schedule 11 Finance Act 2004) for this compliance failure.

20.The Appellant's grounds for appeal stated that the cancellation of his gross payment status would mean him “losing his contracts and leading to all his subcontractors losing their jobs as well”. We make no finding of fact in this respect, but we are aware that loss of gross payment status can have a severe adverse effect on a subcontractor.

Was there a reasonable excuse?

21.Mr Bright for the Appellant argued that the Appellant had had cash flow difficulties and was not able to make the relevant payment on the due date of 31 July 2009. However, an examination of the Appellant's bank statements (one of which was included in the HMRC bundle and others which were produced at the hearing) showed that, although the Appellant had a credit balance of only £5340.80 on 31 July 2009, a deposit of £51,272.75 on 3 August and subsequent deposits meant that at all times after 3 August the Appellant's bank account was in credit by more than the £10,094.65 tax due.

22.Given this evidence, we found that cash flow difficulties could not be a reasonable excuse for the Appellant's failure. Paragraph 4 (4) (b) Schedule 11 Finance Act 2004 provides:

“(b) if the excuse ceased, he complied with the obligation or request without unreasonable delay after the excuse had ceased.”

23.We decided that the Appellant could easily have paid the outstanding tax at any time after the 3 August 2009 until the actual date of payment on 4 September 2009 but has simply failed to do so. That failure, in our view, constituted an unreasonable delay with the result that, whatever the underlying reasons for the original insufficiency of funds on 31 July 2009, the Appellant could not be said to have a reasonable excuse for his failure to comply.

24.In addition, Mr Bright argued that the Appellant's work schedule took him outside London in the relevant period and that he was unable to get to his bank. Since the Appellant banked with Barclays Bank we did not accept that he was unable to call into a branch of that bank to arrange payment of the outstanding tax. In any event, a number of debits on the Appellant's bank statements indicated that he was either in central London or in the London area during August 2009. Accordingly, we did not accept Mr Bright's argument that the Appellant's work schedule prevented him from paying the tax due on 31 July 2009.

25.Finally, Mr Bright also said that he had contacted HMRC helpline on 16 July 2009 requesting a "time to pay" arrangement under the Business Payment Support Service announced in the Pre-Budget Report 2008. Mr Bright said that he had spoken to a member of the helpline staff who had promised to call back but had failed to do so. However, an examination of HMRC's telephone records indicates that no "time to pay" arrangement was established. Moreover, internal e-mails produced by HMRC showed that it was standard practice of the helpline staff to request callers to call back and that they did not have the facility to make outgoing calls. It was therefore highly unlikely that a member of the helpline staff would have agreed to call either Mr Bright or the Appellant back. Accordingly, we do not think that Mr Bright's conversations with the helpline staff can be regarded as a reasonable excuse.

26.For these reasons we concluded that the Appellant did not have a reasonable excuse within the meaning of paragraph 4(4) Schedule 11 Finance Act 2004.

Discretion of HMRC

27.In the course of the hearing we observed to Mr Shea for HMRC that s. 66(1) Finance Act 2004 appeared to give HMRC a discretion whether to cancel the Appellant's registration for gross payment and that on the basis of the documents before us it was not apparent that HMRC had exercised a discretion.

Considerations as to the law

28.Section 66 (1) provides:

"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…."

29.It seemed to us that the words "may at any time make a determination" may allow HMRC to exercise a discretion as to whether the registration for gross payment should be cancelled. We also noted the contrast between the words of s.66 and the provisions of Schedule 11 Part 1 which apply on first registration. When an individual applies for gross registration, Schedule 11 Part 1 states that he “must” satisfy certain tests, and s 63(2) states that if he does so, HMRC “must’ register him for gross payment. The same wording appears in respect of the applicantat s.64.

30.The legislation thus suggests that there may be a discretion as to whether gross payment status is cancelled, while it is clear that there is no discretion as to initial registration.

31.Section 66(1)(a) goes on to say that gross payment status can only be cancelled if it appears to HMRC that the individual would fail one of the three tests, were he to apply again. It seemed to us that if HMRC were only able to consider the strict requirements necessary for an individual’s first gross payment registration, any discretion indicated by the word “may” would be meaningless, and that may, indeed, be correct: i.e., there is no discretion.

32.In the alternative, s.66(1)(a) could be read as a pre-condition: in other words as stating that HMRC are precluded from cancelling gross payment status unless it appeared to them that the individual would have failed to satisfy one or more of the tests, and that it is only once this condition had been satisfied, that HMRC have discretion as to whether or not to cancel his registration for gross payment.

33.We also considered if HMRC’s evaluation of whether the individual had a reasonable excuse for his compliance failure amounted to the exercise of discretion. The ‘reasonable excuse’ provisions are contained within Schedule 11 Part 1 para 4. and, as set out above, they apply where:

“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—

3 (a)the applicant or company had a reasonable excuse for the failure to comply…”

34.The reasonable excuse provisions thus appear on their face to be part and parcel of assessing whether or not there has been a compliance failure, in other words, whether s. 66(1)(a) has been satisfied, but this may well be an area for further argument.

35.If there is a discretion, and the evaluation of reasonable excuse is either not part of its exercise, or not sufficient on its own, then in exercising that discretion HMRC would have to take into account factors other than the strict requirements necessary for registration for gross payment, even taking into account reasonable excuse.

Application to this case

36.From the papers before us, it appeared that HMRC had exercised no discretion beyond considering whether the compliance failures identified by its computerised records and set out in its letter to the Appellant of 29 January 2010 were indeed correctly recorded as failures and whether there was a reasonable excuse within the meaning of paragraph 4 (4) Schedule 11 Finance Act 2004. In effect, HMRC’s consideration of the Appellant's position was limited to whether the compliance test (including the reasonable excuse test) was satisfied.