Munns v Revenue & Customs [2009] UKFTT 290 (TC)

FTT-Tax
Munns v Revenue & Customs
[2009] UKFTT 290 (TC) · 2009-09-15
[1]Mr Munns appeals against the decision of HMRC made after an internal review and notified to him on 10 February 2009 to withdraw his gross payment status for the construction industry scheme.[2]HMRC periodically check compliance by taxpayers registered for gross payments. They run the check looking at compliance in the twelve months prior to the test to decide whether the taxpayer is eligible for registration at that time – it is as if the taxpayer is having to make a fresh application and HMRC deciding afresh whether to register him.[3]Under the new rules introduced in 2007 HMRC ran their first compliance check on Mr Munns on 3 February 2008 and he passed this. They ran a second test on 8 January 2009 covering the 12 month period to 3 January 2009 and they considered that he had failed – that is if he had made an application at that time to be registered for gross payment status they would have refused him.[4]They wrote to inform him of this on 18 January 2009. Mr Munns notified HMRC of his wish to appeal against this by letter on 26 January 2009. The decision was confirmed after review (as set out above) and then appealed. Law[5]The current construction industry scheme (“CIS”) came into force on 6 April 2007. It is contained in the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005 SI no 2045 (“the Regulations”).[6]HMRC’s decision to de-register the Appellant from gross payment status was taken under s66(1)(a) Finance Act 2004. This 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,”
[7]In other words, HMRC considered that had the Appellant not been registered but applying for registration, they would not have registered him. So to determine whether this is correct, the Tribunal needs to look at the test for registration for gross payments.[8]This is contained in Schedule 11 of the Finance Act 2004. There are three tests and all must be passed: the business test, the turnover test and the compliance test. HMRC accepted that the Appellant met the business and turnover tests and they are not relevant to this appeal. They deregistered him because they considered he failed the compliance test.[9]The compliance is set out in paragraph 4 of Schedule 11. This provides that:
“(1) the applicant must, subject to sub-paragraphs (3) & (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,… (b) ….”
[10]Paragraph 14 gives the qualifying period as “the period of 12 months ending with the date of the application in question”. In this case there was a deemed application on 3 January 2009 which was the date that HMRC ran the test.[11]Going back to the compliance test, paragraph 4(3), to which sub-paragraph (1) above is expressed to be subject, brings certain tolerances into the rules:
“An applicant…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.”
[12]The effect of sub-paragraph (3) is that failures to comply with tax obligations within the permitted tolerances will not amount to breaches of the compliance test. The tolerances are set out in the Regulations. The Regulations are the Income Tax (CIS) Regulations 2005 SI No 2045 at Regulation 32. This provides the following relaxation in so far as relevant:
“32 (2) The circumstances prescribed in which the applicant…is to be treated as satisfying the conditions in paragraphs 4(1) …of Schedule 11 to the Act as regards each of the prescribed obligations are given in column 2 of Table 3. Table 3 Obligation to submit monthly contractor return within the required period (1) Return is submitted not later than 28 days after the due date, and (2) The applicant… (a) has not otherwise failed to comply with this obligation within the previous 12 months or (b) has failed to comply with this obligation on not more than two occasions within the previous 12 months Obligation to pay income tax (1) Payment is made not later than 28 days after the due date, and (2) The applicant has not otherwise failed to comply with this obligation within the previous 12 months.”
[13]Going back to sub-paragraph (4) of paragraph 4 of Schedule 11 to the Finance Act 2004, this provides:
“An applicant…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 the Inland Revenue are of the opinion that – (a) the applicant …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.”
[14]The effect of this is that a failure to comply with tax obligations outside the tolerances permitted by the Regulations will not lead to the application for registration being refused (or, as in this case, the gross payment status registration being removed) if the taxpayer can demonstrate a reasonable excuse.[15]In this case HMRC were not satisfied that the Appellant had a reasonable excuse. His appeal is under s67 Finance Act 2004, which provides that:
“(4) the jurisdiction of the commissioners on such an appeal 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.”
[16]Therefore we have jurisdiction to decide whether or not the Appellant failed the compliance test including whether or not he had a reasonable excuse for paying tax late. We therefore move on to consider the facts in this case. Facts[17]The decision to remove the Appellant’s gross payment status taken by HMRC was based on two types of non-compliance: late CIS (construction industry scheme) returns and late payments of income tax.[18]The facts were not in dispute and we find them to be as follows.[19]Mr Munns works in the construction industry as a dust and fume extraction engineer. He made monthly CIS returns as he was required to do by law.[20]Four returns in the twelve month period were late. This was not disputed. They were: CIS Return due CIS Return submitted Days late 19 April 2008 23 April 2008 4 19 May 2008 4 June 2008 16 19 June 2008 4 July 2008 16 19 August 2008 21 August 2008 2[21]None of these returns were particularly late and all would have been individually within the tolerances allowed for in the regulations as set out above.[22]Mr Munns’ evidence at the hearing was that two of these returns were indeed sent late due to pressure of work leading to him overlooking them. However, the other 2 returns were not sent late: his evidence was that they were lost in the post. Mr Munns did admit that HMRC imposed penalties for these late returns and he paid the penalties rather than dispute his liability. He said this was because, although he was quite certain that the returns were not posted late, he had no proof of posting and took the view that he would just pay the penalties.[23]Mr Healey for HMRC at the hearing accepted Mr Munns’ evidence that two of these returns were not late and we also accept this evidence.[24]However, HMRC’s decision to remove gross payment status was also based on Mr Munns’ failure to pay income tax on time.[25]Mr Munns’ balancing payment of £9004.82 for tax year 2006/07 was due on 31 January 2008. It was fully paid off on 8 April 2008. His first payment on account for 2007/08 of £6637.91 was due on the same day and fully paid by 24 July 2008. His second payment on account for 2007/2008 of £6637.91 was due on 31 July 2008 and not paid in full until after 11 December 2008. The exact date of the final payment was not given at the hearing. HMRC’s evidence in the form of the statements of account showed that at 11 December some £439 was outstanding at that date.[26]Mr Munns accepted at the hearing HMRC’s evidence of his late payments of income tax, as we did.[27]None of his late payments of income tax were within the tolerances allowed for by the regulations set out above. Those regulations allow for one late payment of not more than 28 days in any 12 months period. In Mr Munns’ case, the payment for 06/07 was just over two months late, his two payments on account for 07/08 were each over 5 months late.[28]Mr Munns’ evidence was that he had been in business 20 years and had gross payment status for 20 years. He accepted his obligation to pay tax. Where he could not afford to pay on the due date, he paid what he could when he could.[29]Indeed HMRC produced Mr Munns’ statement of account and this showed that Mr Munns had been paying off his tax debts during the months they were outstanding as follows: Date Payment made 18 February 2008 £6000 17 March 2008 £1000 8 April 2008 £3000 30 April 2008 £1000 20 May 2008 £1000 18 June 2008 £1000 11 July 2008 £1000 24 July 2008 £2030 1 October 2008 £2200 10 October 2008 £2000 23 October 2008 £500 30 October 2008 £1000 7 November 2008 £500[30]Note: These amounts still left Mr Munns with £439 to pay on 11 December 2008 because he had been incurring interest on his late payments and some of the above payments had been applied against the interest.[31]Mr Munns’ evidence, which we accept, was that the cause of his inability to pay the tax in full on the due dates was cashflow problems brought on by late payments by his customers. He said that in some cases his customers were taking 120 days to pay, and that over the last few years customers were taking even longer to pay than before. His was a small business that lived “hand to mouth” and did not have capital resources out of which to pay the tax. He was bound to pay his own contractors and suppliers first before tax if he wished to stay in business. He had also had a bad debt of £6321 in January 2009 due to one customer going into liquidation at that time.[32]He went on to say that he would have to cease trading if he lost his gross payment status. He had some 34 customers and they would cease to use his services if he lost his status.[33]He also gave evidence, which we accept, that he had taken steps to ensure that his CIS returns would not be late in future: he now employs someone to key in his CIS returns and submit them online. He got his income tax liabilities up to date in January 2009 and is now paying by monthly direct debit. He also thought that his good record for 20 years should be taken into account by the Tribunal. Decision[34]As HMRC accepted Mr Munns’ evidence, as we did, that two of the four CIS returns which HMRC had considered to be late, were in fact posted on time, this left only two late CIS returns to be considered. This means that only two of Mr Munns’ CIS returns were late. As all of the returns were received within 28 days this means that, as Mr Healey accepted at the hearing, Mr Munns did not fail the compliance test on his CIS returns. The Regulations allow 2 late payments if neither are more than 28 days late.[35]However, Mr Munns failed the compliance test on his income tax payments. These failures were not within the tolerances as explained above as they were all more than 28 days late. The only thing left for the Tribunal to consider is whether the Appellant had a reasonable excuse for these payments being late.[36]It is the Tribunal’s view that cashflow problems do not by themselves amount to a reasonable excuse. It is the duty of a taxpayer to pay tax when due. However, the reasons behind the lack of funds can in some cases amount to a reasonable excuse. The Tribunal would consider something out of the ordinary which a reasonable businessman could not anticipate potentially to be a reasonable excuse.[37]A businessman has to run his business in such a way that barring unexpected eventualities he can pay his tax. In this case the Appellant’s cashflow problems were a long term problem: they were not sudden and unexpected. The taxpayer’s own evidence was that customers had always paid late and were getting later. It was not something which could not be planned for. We therefore do not find the late payments by customers to be a reasonable excuse.[38]The bad debt of January 2009 of just over £6,000 occurred too late to be the cause of the late payments which started a year earlier and amounted to over £20,000 of tax paid late. Although an unexpected bad debt might amount to a reasonable excuse, we considered that it did not do so in this case.[39]The Appellant also said that he had not realised that he should have discussed his inability to pay with HMRC and obtained a payment plan. But we consider that a reasonable businessman should have made contact with HMRC knowing that he was not meeting his tax obligations. We did not consider his failure to do this to be a reasonable excuse.[40]We accept the Appellant’s evidence that: · loss of gross payment status is likely to seriously affect his ability to stay in business; · that he had a good compliance record in the past; and · that he has sorted things out for the future and is no longer behind with tax payments.[41]However, none of these factors can amount to a reasonable excuse in the sense that none of them caused the late payments and therefore cannot be an excuse for them. Although he did not say so in so many words, what we took him to mean was that in the light of these three factors, it was disproportionate of HMRC to remove his gross payment status.[42]Our understanding of the law is that we have no discretion to take these factors into account and that the High Court has ruled, in a decision which is binding on us, that neither HMRC nor we can consider proportionality: Barnes v Hilton Main Construction [2005] EWHC 1355 (Ch) .[43]We therefore uphold HMRC’s decision to remove the Appellant’s gross payment status and dismiss the appeal.[44]The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. 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. TRIBUNAL JUDGE RELEASE DATE: 15 September 2009

Cited in 1 later judgment