J P Whitter (Waterwell Engineers) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 October 2012 |
| Neutral Citation | [2012] UKFTT 639 (TC) |
| Date | 18 October 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 639 (TC)
Judge Jonathan Cannan, Mr Peter Whitehead
Mr Ian Whalley, Solicitor appeared for the Appellant
Mr Ian Birtles of HMRC appeared for the Respondents
Income tax - construction industry scheme - cancellation of gross payment status - FA 2004, Finance Act 2004 section 66s. 66 - HMRC discretion - whether properly exercised - failure to take into account effect of cancellation on appellant - Barnes (HMIT) v Hilton Main Construction[2005] BTC 568 considered and distinguished - appeal allowed
The First-tier Tribunal decided that the issue of proportionality was a relevant factor in HMRC's exercise of their discretion to cancel a taxpayer company's registration for gross payment under Finance Act 2004 ("FA 2004"), Finance Act 2004 section 66 subsec-or-para 1s. 66(1). HMRC's reliance on Barnes (HMIT) v Hilton Main ConstructionTAX[2005] BTC 568 ("Barnes") was misplaced since that case was not concerned with the cancellation of a certificate under FA 2004, Finance Act 2004 section 66 subsec-or-para 1s. 66(1), but with the non-renewal of a certificate under the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 565s. 565. Thus, as HMRC failed to consider a relevant factor, i.e. the financial effect of the cancellation on the taxpayer business, their decision was wrong in law and susceptible to review by the Tribunal.
The taxpayer appealed against HMRC's decision cancelling its registration for gross payments due to its late payment of pay as you earn ("PAYE") contributions.
The taxpayer carried on business as water well engineers. Every fifth day of each month, the taxpayer's accountants sent details of amounts due to be paid to HMRC in relation to PAYE and National Insurance contributions. Often payments had been late because of the procedure operated for paying suppliers. The taxpayer's cashflow was a struggle in 2008 and 2009 and it had to prioritise suppliers. Its officer 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.
In 2009 and 2010, HMRC reviewed the taxpayer's registration for gross payments to ensure compliance with its PAYE obligations. The taxpayer failed in both instances which led to cancellations of its registration. It appealed both cancellations and contended that it would jeopardise its business and guaranteed that all future PAYE payments would be made on time. HMRC upheld the appeals but made clear that the taxpayer had the responsibility to make payments on time and that the rules would be applied strictly in the future.
In 2011, the taxpayer again failed HMRC's annual review due to the late payment of PAYE. HMRC stated that they were unable to accept the taxpayer's explanation for compliance failures. As that was the taxpayer's third failed review, they cancelled its registration. The taxpayer appealed the cancellation and contended that the compliance failures were of a trivial nature and, therefore, disproportionate to the effect of the cancellation. HMRC refused the appeal on the basis that the taxpayer had no reasonable excuse for the failures. The taxpayer asked for a statutory review of the decision, but HMRC upheld the cancellation. HMRC, relying on Barnes, stated that they were not required to consider the issue of proportionality.
The taxpayer submitted that HMRC's decision was flawed and unreasonable because they failed to take into account the financial effect of the cancellation to its business. Major customers would be likely to withdraw work from it if it lost its gross payment status registration.
HMRC submitted that the financial effect of the cancellation to the taxpayer was not a factor that could or should be taken into account. The taxpayer was aware of the need for compliance and of the risk that it could lose its gross payment status. It knew the consequences and yet it did not improve its compliance systems. On two occasions, the registration was cancelled but was reinstated partly on the strength of an undertaking to improve compliance in the future. On each occasion, the undertaking was broken so that on the third occasion, it was not unreasonable for HMRC to cancel the registration.
Whether HMRC were correct in cancelling the taxpayer's gross payment status without taking into account the financial effect of the cancellation on the taxpayer.
Held, allowing the taxpayer's appeal:
In Barnes, the courts were not concerned with the cancellation of a certificate but with the non-renewal of a certificate under ICTA 1988, Income and Corporation Taxes Act 1988 section 565s. 565. The taxpayer in that case had an annual certificate which had expired and which the Inland Revenue refused to renew on the grounds of non-compliance. It was held in that case that the test of proportionality applied by the commissioners was not the test provided for in the legislation, i.e. whether the failure was minor and technical. Here, the Tribunal held that the provisions for cancellation of an existing registration under FA 2004 were quite different from the provisions for the grant of a certificate under ICTA 1988. In particular, HMRC had discretion as to cancellation even where there was a breach of the compliance test for which there was no reasonable excuse. It was the existence of such discretion which gave a peg on which to hang arguments that the effect on the taxpayer of cancellation was a relevant factor. Indeed, reasonableness, including proportionality type arguments, might be expected to be at the very heart of such discretion.
FA 2004, Finance Act 2004 section 66 subsec-or-para 1s. 66(1) gives HMRC discretion to cancel registration for gross payment where the trader, if he or she had been applying for registration at that time, would have been refused registration. In exercising such discretion, HMRC have a wide margin of appreciation. The Tribunal will intervene only if they have failed to take into account a relevant factor, have taken into account irrelevant factors or have reached a wholly unreasonable decision. Here, HMRC misunderstood the basis upon which they should exercise discretion in cancelling a registration. Therefore, their reliance on Barnes as authority for the proposition that they could not take into account matters of proportionality and reasonableness was misplaced.
The Tribunal found that the decision to cancel the taxpayer registration was made without taking into account the financial effect on the taxpayer. Thus, it held that HMRC failed to take into account a relevant factor. The decision was wrong in law and susceptible to review by this Tribunal. The Tribunal did not have power, pursuant to its supervisory jurisdiction, to substitute its own view based on the facts found and all relevant factors. However, it allowed the appeal since it was not satisfied that HMRC would inevitably have come to the same decision if they had taken into account the effect on the business. It could be likely that HMRC would reach the same decision, but on authority of C & E Commrs v John Dee LtdVAT[1995] BVC 361, it was not sufficient for the Tribunal to dismiss the appeal.
1.The appellant challenges a decision of HMRC to cancel its registration for gross payments for the purposes of the construction industry scheme. The appeal was originally heard on 11 April 2012 and a decision dismissing the appeal was released on 20 April 2012. Following that hearing the appellant appointed a new representative and made an application to set aside the decision. That application was granted and the appeal was re-listed to be heard on 9 August 2012. The hearing before us was a fresh hearing and we have had no regard to the findings and reasons given in the original decision.
2.We heard evidence from Ms Sally Whitter on behalf of the appellant. We also had documentary evidence before us in the form of correspondence between the appellant's representative and various officers of HMRC. We make our findings of fact based on this evidence, although it is fair to say that there was little dispute as to the underlying facts. The real issue between the parties is the inferences we can draw from those facts and the extent to which they are relevant in considering the decision to cancel the registration.
3.The decision under appeal is a decision dated 3 August 2011 cancelling the appellant's registration for gross payments. It was confirmed by HMRC following a statutory review dated 12 December 2011. Before dealing with the facts surrounding the decision, we set out the relevant statutory provisions in relation to the construction industry scheme.
4.The law regarding the construction industry scheme is contained in Finance Act 2004 section 57sections 57-77 Finance Act 2004, Finance Act 2004 schedule 11 schedule 12Schedules 11 and 12 of that Act and the Income Tax (Construction Industry Scheme) Regulations 2005. Finance Act 2004 section 64Section 64 of the FA 2004 sets out the requirements for registration for gross payment. In particular Finance Act 2004 section 64 subsec-or-para 4section 64(4) provides that where a company is applying for registration it must comply with the three statutory tests set out in Finance Act 2004 part 3 schedule 11Part 3 of Schedule 11. These are generally described as the business test, the turnover test and the compliance test. Paragraph 12 deals with the compliance test:
5.Paragraph 12(1) specifies the criteria for the compliance test:
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 the Taxes 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...
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