Eurotec Services and Eurotec Services (GB) LLP
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 July 2010 |
| Neutral Citation | [2010] UKFTT 321 (TC) |
| Date | 08 July 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 321 (TC)
David S Porter (Judge) (Chairman), Shameem Akhtar (Member)
Alistair Kendrick of Mazars Chartered Accountants for the Appellant
Timothy Fieldsend instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
Construction industry scheme - partnership changed to limited liability partnership - LLP took on a further partner and changed its year end- appellant relied on accountant to finalise the accounts and advise amount of tax due - accountant failed to appeal removal of gross payment status - further accountants instructed for LLP - LLP suffered a substantial bad debt when MFI went into receivership - appellant alleged reasonable excuse for failure to pay income tax and penalties giving rise to non-compliance - appeal dismissed - no reasonable excuse
The tribunal upheld a decision of HMRC to remove the gross payment status of a limited liability partnership (LLP) since the fact that the taxpayer's business might close as a result of the loss of such status was not a factor to be taken into account in deciding whether the taxpayer had a reasonable excuse for failure to comply with its statutory obligations.
D and M started trading in partnership in 1993. D held the necessary construction industry certificate. The partnership was changed to a limited liability partnership (LLP) in 2006. Unfortunately its accountants failed to realise that in terminating the partnership they would need to apply for a construction industry scheme (CIS) certificate for the new limited partnership and so they did not do so. On the creation of the LLP, the year end for the original partnership was changed to bring it in line with another trading business owned by D and M. That meant that for the tax year 2007-08, the reporting period was 16 months. During April 2008, a third partner was added and the partnership shares changed. The addition of a new partner added further complexities to the preparation of the accounts. The LLP traded with a substantial number of public companies, one of which was MFI. In September 2008 MFI, which accounted for 1.2-1.5m of the LLP's business turnover of 6m at that time, went into administration. The collapse of MFI caused a bad debt of 300,000. All those circumstances led to the late filing of returns and a late filing penalty of 100 for the submission of late personal 2007-8 tax returns by the partners.
HMRC subsequently removed the taxpayer's gross payment status under the CIS Scheme on the ground that the taxpayer had failed to comply with all the obligations imposed upon them in the qualifying period under the Tax Acts or TMA 1970 for the purposes of FA 2004, Finance Act 2004 part 1 schedule 11 subsec-or-para 4Sch. 11, Part 1, para. 4. The taxpayer appealed, contending that the partners had a reasonable excuse for all the failures and resolved them without reasonable delay once they had been identified. The taxpayer produced evidence from the partners' customers that they would cease to trade with the taxpayer if the partners lost their gross payment entitlement. The taxpayer further argued that, prior to 2007 it was normal Revenue practice to defer the issue of a certificate (equivalent to gross status) until all the tax affairs were up to date. It was not their policy to withdraw the certificate during its life. In addition there had been significant complaints from across the construction industry as the change in Revenue approach had not been significantly broadcast.
Whether the taxpayer had a reasonable excuse for failing to comply with its obligations pursuant to FA 2004, Sch. 11, Part 1, para. 4(4); and whether there was a reason to expect that the taxpayer and its partners would comply with the obligations in respect of the periods after the qualifying period (para. 4(7), 8(4)).
The First-tier Tribunal (David S Porter (Judge) and Shameem Akhtar) (dismissing the appeal) said that the tribunals had held that there was a reasonable excuse if a substantial amount of business was lost through no fault of the management. Whilst the loss of the MFI business in this case must have been problematical, it was difficult to accept that it amounted to a reasonable excuse for the partners not to comply with their tax liabilities. The tribunal had been shown neither management nor statutory accounts for the period in question to indicate what effect the loss of MFI business had had on the taxpayer.
The new regulations had been introduced in April 2007. As a result there was now very little opportunity to find in favour of a taxpayer under the new compliance test because of the strict exceptions and in the present case the partners were non-compliant within the terms of the regulations. Paragraph 4(4) allowed an overarching exemption if a taxpayer could show that he had a reasonable excuse and that he remedied the position as soon as the reasonable excuse finished. The partners here alleged that the MFI liquidation and the recession had caused them serious cash flow problems, to the extent that they were unable to pay their tax liability. In fact the MFI liquidation was resolved by the bank providing suitable finance. Having considered the details of bank statements submitted by the taxpayer for the relevant period, the tribunal did not accept that the partners had a reasonable excuse, based on the lack of funds, for their failure to pay their tax liabilities on time (Mutch [2009] UKFTT 288 (TC); [2009] TC 00232; and Prior Roofing Ltd [2009] UKFTT 302 (TC); [2009] TC 00246 distinguished).
The partners had also alleged that their difficulties arose because of the formation of the LLP, the introduction of a new partner and the change of the year end. They said that their situation was caused by the accountants' inability to assess their tax liability on time. However, both D and M had indicated that they had been in business for some time. They must, therefore, have known that they needed to pay their tax at the end of January. They should have enquired of their accountant as to the amounts due. At best they could have paid the amount that they had paid the previous year. They chose to pay nothing. The partners had relied on the accountant to deal with their normal tax returns and the accounts for the new business. Those were not so exceptional that the partners could not make enquiry of their accountant as to what their liabilities were likely to be even if the exact figures were not known (Research & Development Partnership Ltd [2009] UKFTT 328 (TC); [2010] TC 00271 distinguished).
The decisions in Barnes (HMIT) v Hilton Main ConstructionTAX[2005] BTC 568 and Arnold v G-Con LtdTAX[2007] BTC 244 made it clear that if a company might have to close, with the consequential loss of jobs, it was not a matter which could be taken into account. That was neither disproportionate nor contrary to the scheme. The gross payment status was an exemption to the usual rule for the collection of tax, and the regulations required that companies wishing to take advantage of the scheme had to comply with those provisions. There were many sub-contactors who managed to comply with the regulations and it would make a nonsense of the scheme if sub-contractors could avoid their responsibilities simply because they might go out of business.
1. Eurotec Services transferred its business to Eurotec Services (GB) LLP and the two appeals have been amalgamated. It was agreed that the appeal on behalf of Eurotec Services would be adjourned pending the outcome of the present appeal relating to Eurotec Services (GB) LLP (Eurotec).Both appeal relate to the loss of the gross payment status for Mr Dempsey under the Construction Industry Scheme:
(2) a cancellation of the status whilst a partner of Eurotec Services, and
(3) a refusal of an application whilst a partner of Eurotec
which decisions were issued on the 27 August 2009 and 1 December 2009 respectively.
This appeal relates to the second appeal mentioned above. Mr Dempsey says that the Eurotec's failure to comply with the necessary legislation arose from its reliance on its accountant, who failed to advice them with regard to their tax affairs generally, and advised that they should appeal HMRC's refusal to register Eurotec under the Construction Industry Scheme. In addition Eurotec suffered a substantial bad debt which, coupled with the slow down of the business during the "credit crunch", gave rise to the parties non-compliance. He also indicated that the loss of the gross payment status would lead to the business closing down. The Respondents (HMRC) say that the partners have made late payments of either self-assessment tax and/or penalties due under the Taxes Acts during the qualifying period and do not have a reasonable excuse for their non-compliance.
2. Mr Alistair Kendrick appeared for Eurotec and called Mark Dominic Dempsey, John Morrison Robert Millar, Richard James Hall and David William Nichols as witnesses, who gave evidence on oath. He also produced a bundle of documents for the tribunal. Mr Timothy Fieldsend appeared for HMRC and produced a further bundle of documents.
3. We were referred to the following cases:
MutchTA...
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