“ The company must, subject to sub-paragraphs (2) and (3), have complied with – (a) all obligations imposed on it in the qualifying period...by or under the Tax Acts or theTaxes Management Act 1970 , and (b) all requests made in the qualifying period to supply to the Inland Revenue accounts of, or other information about, its business. ” 6. For these purposes the qualifying period is defined by paragraph 14 as “ the period of 12 months ending with the date of the application in question ”
“(2) A 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. (3) A 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 company had a reasonable excuse for the failure to comply, and b) if the excuse ceased, it complied with the obligation or request without unreasonable delay after the excuse had ceased. ” 8. At the time of the decision to cancel the appellant’s registration the regulations for the purposes of paragraph 12(2)(b) were theIncome Tax (Construction Industry Scheme) Regulations 2005 (SI2005/2045) . Reg 32 sets out the prescribed obligations which include the obligation to pay tax deducted under PAYE. The prescribed circumstances in which a breach may still be treated as satisfying the compliance test are, for present purposes: “ ( 1) Payment is made not later than 14 days after the due date, and (2) the applicant or company— (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. ”
“ There must be reason to expect that the company will, in respect of periods after the qualifying period, comply with – a) all such obligations as are referred to in paragraphs (10) and (11) and sub-paragraphs (1) to (6), and b) such requests as are referred to in sub-paragraph (1) ” 10. Section 66(1) FA 2004 makes provision for HMRC to cancel a persons registration for gross payments: “ 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. ” 11. The provisions introduced by FA 2004 with effect from6 April 2007 replaced a similar scheme under theIncome and Corporation Taxes Act 1988 . The previous scheme required a contractor to hold a certificate issued by the Inland Revenue before the contractor could receive gross payments. There were similar obligations and compliance tests before a contractor could receive a gross payment certificate, together with a system whereby the Inland Revenue could refuse to renew a certificate if the holder failed the compliance tests. Section 565(3) ICTA 1988 provided that: “ A company which has failed to comply with such an obligation … shall nevertheless be treated as satisfying this condition … if the Board are of the opinion that the failure is minor and technical … ” 12. The previous regime was considered by Ferris J in Shaw v Vicky Construction[2002] STC 1544 . That case was concerned with a refusal by the Inland Revenue to issue a certificate and whether the refusal was a disproportionate interference with the taxpayer’s right to peaceful enjoyment of a possession. In substance the original appeal to the General Commissioners by Vicky Construction was against the opinion of the Board that the non-compliance was not minor and technical. The case proceeded on the basis that the General Commissioners were entitled to substitute their own view for that of the Board of Inland Revenue. Ferris J raised an issue as to the nature of the jurisdiction of the General Commissioners hearing the appeal but for procedural reasons he expressed no view on the matter. 13. Ferris J held that the General Commissioners in that case had erred in law in finding that the non-compliance was minor and technical as that term is properly construed according to conventional principles of construction. He also found that there was no need to read the provisions in a modified sense in order to avoid an infringement of convention rights. The scheme of the Act was not a disproportionate interference with the right to peaceful enjoyment of a possession. 14. Under section 561 ICTA 1988 the Board was not exercising any discretion in deciding whether to grant a certificate. If the Board was satisfied that the conditions for the issue of a certificate were satisfied they were bound to issue a certificate. If the conditions were not satisfied they had no power to issue a certificate. 15. It is now well established in the First-tier Tribunal that in cancelling a registration pursuant to the power in section 66 FA 2004 , HMRC are exercising a discretion – see Scofield v HMRC[2011] UKFTT 199 (TC) which has been applied on a number of occasions since. Mr Birtles did not invite us to depart from that approach. 16. There is a significant issue between the parties as to the extent to which we can take into account the financial effect on the appellant of cancelling its registration for gross payment. We consider this issue below when giving reasons for our decision on this appeal. Jurisdiction of the Tribunal 17. In Hudson v JDC Services Limited[2004] STC 834 Lightman J referred to the decision of Ferris J in Vicky Construction , and in particular that the nature of the jurisdiction of the old General Commissioners on such appeals had been left open. That case also concerned an appeal against refusal to issue a certificate. Having considered the context of the provisions in ICTA 1988 he held that the General Commissioners had a full appellate jurisdiction and were free to substitute their own decision for that of the Board. Part of his reasoning for doing so was that the decision under appeal, the granting of a certificate, did not involve any exercise of discretion by the Inland Revenue. 18. Whether the statutory context in FA 2004 gives rise to the same result has been considered by the First-tier Tribunal on a number of occasions. In Piers Consulting Limited v HMRC[2011] UKFTT 613 (TC) and Cardiff Lift Company v HMRC[2011] UKFTT 628 (TC) the Tribunal held that it did not have jurisdiction to substitute its own decision for that of HMRC. Effectively the Tribunal has a supervisory jurisdiction which is what might be expected in a case where HMRC are exercising discretion, in this case discretion to cancel a registration. In each of those cases the appeal was allowed, but the Tribunal did not substitute its own decision. 19. In Scofield v HMRC , referred to above, HMRC accepted and the Tribunal found that it had a full appellate jurisdiction and could substitute its own view for that of HMRC. The point however does not appear to have been argued and we prefer the view in Piers Consulting and Cardiff Lift Company for the reasons given in those decisions that we have a supervisory jurisdiction. 20. The test of reasonableness in a supervisory jurisdiction involves consideration of whether HMRC have taken into account some irrelevant matter, have disregarded something to which they should have given weight or have reached a decision which no reasonable decision maker could have reached. If the decision maker has not taken into account material facts which he or she should have taken into account then the decision will not be reasonable for these purposes. 21. In John Dee v CCE[1995] STC 941 the Court of Appeal considered the jurisdiction of the VAT Tribunal in security appeals. Both parties in that case accepted that the tribunal had a supervisory jurisdiction rather than a full appellate jurisdiction. However if it was shown that the Commissioners had failed to take into account relevant material a tribunal could nevertheless dismiss an appeal if a decision taking into account that material would inevitably have been the same. Findings of Fact 22. The appellant carries on business, as its name implies, as water well engineers. It drills boreholes and wells for water companies, commercial and agricultural businesses and the domestic market. It operates on a UK wide basis with 25 employees. It is very much in the nature of a family business started by Philip Whitter in 1972 and was later incorporated in the 1980’s. 23. Prior to incorporation, and at all material times since, Mr Whitter and the appellant have used the services of Wilds Chartered Accountants. Their services have included operating the appellant’s payroll system. 24. The business has grown steadily and presently has about 25 employees, including a number of family members on the administration side. Sally Whitter, who gave evidence, is a daughter of Philip Whitter. She is the company secretary and has worked for the appellant for more than 20 years. Her sister Lucy is responsible amongst other things for making payments authorised by the directors. In the three years to 2011 the business had a turnover of approximately£4.4 million making a net profit over the same period of about£180,000 . Approximately£1.9 million of that turnover derived from contracts with United Utilities. Other major well known customers accounted for a further£900,000 . 25. Employees of the appellant are paid weekly. Each Monday time sheets are collected and sent to Wilds who prepare pay slips and payments are made by BACS transfer on the Wednesday. On or shortly after the 5 th of each month Wilds send details to the appellant of amounts due to be paid to HMRC in relation to PAYE and national insurance contributions. Historically payments have been made to HMRC either by BACS transfer or by cheque. Often payments have been late. This is because of the procedure operated for paying suppliers rather than any particular cashflow shortage. Having said that Ms Whitter accepted that cashflow was a struggle in 2008 and 2009 and they had to prioritise suppliers. The officers of the appellant would look at the cashflow at the end of each month before deciding which suppliers should be paid. Payments to HMRC in respect of PAYE were dealt with as part of the same system. 26. It was inevitable that the system would cause payments to HMRC which fell due either on the 19 th or 22 nd of each month to be made late. That had been the position for many years and HMRC had never chased payment or indeed expressed any concern that PAYE payments were late. There are various other family business interests including a leisure park business which has 5 employees and which complies with its PAYE obligations. Historically it has had its own systems which work well and have not been changed. Unfortunately those systems were not introduced into the appellant’s business. 27. The appellant’s registration for gross payments as with other registered taxpayers was subject to ongoing review by HMRC to ensure compliance with the conditions described above. We understand that such reviews were generally carried out by computer on an annual basis. In August 2008 a review was performed and the results were satisfactory. On29 July 2009 a review was performed and the appellant failed. Although we had no direct evidence as to the reason for this failure we infer and find as a fact that it was because of late payment of PAYE. The failure led to cancellation of the appellant’s registration by letter dated6 August 2009 . 28. Wilds responded to HMRC on behalf of the appellant by letter dated2 October 2009 . They appealed the decision in a letter written by Janice Hyde of Wilds stating as follows: “ Whilst we can agree that our client has been late in making payments the company has never failed to make such payments and to penalise this business in a stringent manner is we fear only going to lead to significant operational issues when tendering for longer contracts and hence jeopardising the livelihoods of the sub-contractors the company engages. … We have drawn our client’s failings to their attention and the company has guaranteed that they will address this issue and that all future payments will be made on time. If they are unable to fulfil their obligations they will contact the Business Payment Support Team immediately… ” 29. Janice Hyde was an accountant responsible for the appellant’s tax returns. She was not very senior and whilst Ms Whitter knew her she had never had a meeting with her. She acted as an assistant to Ken Nash who was a more senior accountant. 30. Ms Whitter gave evidence that when the HMRC letter dated6 August 2009 was received she would have rung the tax department of Wilds and probably spoke to Ken Nash. We accept that evidence. She also stated that she never realised the seriousness of the position and no steps were taken to improve compliance at that time. Ms Whitter’s recollection of her discussions following this letter was vague. We find as a fact that Mr Nash did make her aware of the matters referred to in Janice Hyde’s letter dated2 October 2009 . In particular that the appellant was not complying with its PAYE obligations and that future payments must be made on time. Whilst we accept that Ms Whitter did not realise the seriousness of the matter, we consider that she ought to have done. It was unreasonable not to have taken steps to improve compliance in 2009. 31. On12 November 2009 HMRC wrote to Wilds to say that their appeal had been upheld. At the same time however HMRC made clear that the company had responsibility to make payments on time whilst recognising that it had taken steps to improve compliance. The letter stated that the rules would in future be applied strictly and that there was no scope to allow for “minor and technical” failures. The letter identified the “reasonable excuse” provisions and the possibility of seeking a time to pay arrangement which if granted would not affect registration. 32. It is likely and we find as a fact that Mr Nash would have discussed the contents of this letter with Ms Whitter. 33. On29 June 2010 there was another annual review which the appellant failed due to late payment of PAYE. The appellant’s registration was again cancelled. Wilds appealed by letter dated8 July 2010 stating as follows: “ This business has been grown meticulously by the Whitter family to a position where it can now confidently apply for tenders from United Utilities and indeed have just obtained two very large contracts with them. The withdrawal of the gross paying certificate will quite obviously put those contracts in jeopardy as United Utilities will not deal with companies who do not have a gross paying certificate…The withdrawal of the certificate will therefore severely hinder the company who have managed to survive over a very difficult last eighteen months to two years. … our clients have on their part agreed that all future PAYE will be paid on time. ” 34. References to a certificate are clearly intended to be references to registration for gross payment. Ms Whitter was not copied in with this letter nor shown a copy in draft prior to it being sent. However Ms Whitter did fairly accept that Mr Nash would have discussed the position with her. We find that he did so, and in particular the appellant agreed to make future PAYE payments on time. Again, however the appellant failed to take any steps to improve compliance at this stage. 35. There was some confusion on the part of HMRC whether this appeal had been lodged in time. It clearly was in time. By letter dated20 August 2010 HMRC replied apologising for their earlier confusion and stated: “ On this occasion I am prepared to overlook these failures, your appeal is upheld and the company will retain gross payment status. ” 36. Again the letter included a warning about future compliance, and also about the PAYE penalty regime that had been introduced in tax year 2010-11. At this stage we note that there was no evidence before us as to whether penalties pursuant to Sch 56 FA 2009 were ever assessed on the appellant. Nor was it suggested that in the exercise of its discretion HMRC ought to have considered that the imposition of a penalty was a more appropriate sanction than cancellation of the appellant’s registration. 37. On30 May 2011 there was another annual review which the appellant again failed due to late payment of PAYE. On this occasion, prior to cancellation of the registration, HMRC wrote to the appellant identifying the defaults and giving the appellant an opportunity to advise whether it had entered into a formal time to pay arrangement or to produce evidence in support of a reasonable excuse. 38. We find as a fact that the following late payments of PAYE had been made: Due Date Date Paid Period Late22 Aug 2010 1 Oct 2010 40 days22 Sept 2010 6 Oct 2010 14 days22 Oct 2010 29 Oct 2010 7 days22 Nov 2010 26 Nov 2010 4 days22 Jan 2011 28 Jan 2011 6 days22 Feb 2011 After20 June 2011 At least 118 days22 Mar 2011 31 Mar 2011 9 days 39. The reason the date of payment for the sum due on22 February 2011 cannot be identified is that Ms Whitter, in her reply dated14 July 2011 , stated that the appellant had omitted to make the February payment but that it had now caught up. The point was not addressed directly in evidence by either party but we infer that the February payment was made some time after the HMRC letter on20 June 2011 but before Ms Whitter’s reply dated14 July 2011 . In any event the extent to which that payment was late does not in itself have any impact on our decision. 40. In her reply Ms Whitter apologised for the late payments which she said were due to “administrative oversights”
“ Whilst admitting to these oversights, which we will endeavour to prevent in future, we would point out that losing our gross status would prevent us tendering for contract work and thus cause the company to cease trading. I am sure you will agree that removing gross status will cause great hardship which is disproportionate to the level of the oversights discussed above. ” 41. We do not accept that the PAYE non-compliance in late 2010 and 2011 can fairly be described as an “administrative oversight”
“ The Appellants are pleading that the loss of their status might put the company out of business. However, our understanding of the law is that we have no discretion to take such a factor into account. The High Court has ruled in a decision, which is binding upon us, that neither HMRC nor we the Tribunal can consider proportionality: Barnsley v Hilton Main Construction[2005] EWHC 1355 (CH) . In that case, the judge considered the Human Rights Act and concluded that it did not require the UK courts to read in a test of proportionality in the gross payments status rules. ” 64. For the reasons given above we do not consider that the statement of law set out in Enderbey Properties Limited is correct. The effect on a business of losing its registration for gross payment will often be a factor to be taken into account. The weight to be attached to that factor is a separate matter. Previous tribunal decisions illustrate the tension apparent in the existence of discretion as to cancellation if such a factor cannot be placed in the balance. They have canvassed the possibility of resolving that tension by treating it as a factor which can be taken into account in determining whether there is a reasonable excuse for non-compliance with a condition. See for example Bruns t/a TK Fabrications v HMRC[2010] UKFTT 58 (TC) at [32] and S Morris Groundwork Ltd v HMRC[2010] UKFTT 585 (TC) . In our view that is not the correct approach. 65. We now turn to the particular facts of the present appeal. The appellant did not dispute that there was a compliance failure, although Mr Whalley did contend that the review officer had wrongly considered matters outside the relevant period. 66. It is necessary for us to consider whether there was a failure to comply with PAYE obligations in the “qualifying period”