Save content
Have you found this content useful? Use the button above to save it to your profile.

Tribunal: Compliance trumps survival

by
14th Sep 2015
Save content
Have you found this content useful? Use the button above to save it to your profile.

Submitting tax forms and paying tax by the due date is important, but should minor non-compliance failures mean a construction company is forced out of business, asks Howard Royse.

That is the implication of a recent upper tribunal case in which the judge ruled that tax compliance is more important than the business itself. 

The company concerned was JP Whitter (Waterwell Engineers) Ltd, which operated as a contractor under the construction industry scheme (CIS) and was registered for gross payment status. The company had met all of its tax obligations, but due to a number of administrative oversights it paid PAYE late on seven occasions in 2010/11; those delays ranging from 6 to 40 days.

As those late payments were outside the permitted tolerance levels HMRC issued a notice informing the company of its decision to cancel its gross payment status. The company appealed against this decision to the first-tier tax tribunal, explaining that the loss of that gross payment status would mean that its main clients would no longer work with them. This would lose the company most of its business and put at risk the jobs of 25 employees.

The first–tier tribunal agreed with the company, stating that HMRC should have taken into account the commercial effect on the company in making the decision to cancel gross payment status, so that status was retained. This decision was in line with S Morris Groundwork Ltd v HMRC and T Bruns v HMRC, in which the judges accepted that the consequences that flow from the withdrawal of gross payment status operate as a reasonable excuse for the taxpayer. However, both of those cases were heard at the First-tier Tribunal, which means they don’t form a binding precedent that other cases should follow.

HMRC was not happy with the victory of JP Whitter Ltd at the lower tribunal so it appealed and won at the upper tribunal. That court ruled that the financial consequences of the loss of gross payment status were irrelevant to future tax compliance and not a factor to be considered by HMRC. The company’s gross payment status has now been cancelled.

The JP Whitter Ltd decision will now form a binding precedent on other courts, unless it is overturned at the appeal court or higher. HMRC are considering appeals to other cases influenced by the earlier Whitter decision.

Royse commented: “This contradicts the stated aims of the consultation undertaken in 2014: Improving the operation of the Construction Industry Scheme (CIS) – whose purpose was to explore ways to make the CIS easier and simpler to operate for construction firms.”

In the response to that consultation HMRC said it was puzzled why large numbers of contractors did not apply for gross status. Royse says the Whitter decision shows why: “HMRC are more interested in tax compliance than helping businesses. In the Whitter case no tax was lost to HM Treasury, but the tax compliance rules appear to be of vital importance. Once again construction is treated differently to all other industries.”

Howard Royse is the ICAEW representative for CIS and author of Construction Industry Scheme – Guidance and Commentary (Claritax Books).

Replies (11)

Please login or register to join the discussion.

avatar
By johnjenkins
15th Sep 2015 14:39

ooooooooo

this is a nasty one that could hurt many companies.

Again one sided. Perhaps if, at appeal, instances of CIS refunds of Ltd co's being delayed by years due to "minor" discrepancies, were brought to the Tribunals attention, then they might look at it in "fact" not in "compliance"

Thanks (1)
avatar
By cwalker83852
15th Sep 2015 14:57

"Picking" of the facts

What you fail to mention, is that the company was informed as far back as 2009 that due to late payment of PAYE their registration was cancelled.  They appealed and won, keeping their registration - being told that the rules would be applied strictly in the future.

However, the company made no effort to improve payment times, and again in 2010 were informed their registration would be cancelled.  They appealed and won yet again.

The company had 2 years worth of warnings and yet failed to take heed.

Thanks (4)
avatar
By johnjenkins
15th Sep 2015 15:24

This is really

getting interesting. Surely if Whitter won the two previous appeals HMRC shouldn't even have thought about taking their gross status away let alone appealing to 2nd tier. Obviously something has changed. Even so HMRC should not be allowed to get away with not paying CIS refunds to Ltd Co's immediately after 6th April as sole traders are. The first tier tribunal take this "fact" into account so why not the 2nd. tier?.

Thanks (0)
Replying to Tax Dragon:
avatar
By the_Poacher
15th Sep 2015 16:37

Taking the pi*s?
So apparently this company was flouting the rules for years, we're challenged and got away with it twice but the third time was unlucky. No doubt they had many warnings before the first attempt to cancel. I've absolutely no sympathy for them.

Hmrc is in chaos and things seem to be getting worse but their failings don't excuse ours

Thanks (1)
avatar
By johnjenkins
16th Sep 2015 10:29

If you can't

pay your bills on time, it could be for a number of reasons. The most time outstanding was 40 days. I don't call that non-compliant. I disagree. HMRC failings, especially in CIS does excuse ours. How many companies are still waiting for their refunds years down the line. Compare that to 40 days.

Let's expand a bit. CIS tax owing to Ltd company. Corporation tax owed by company. Along comes HMRC and takes money direct from account to cover CT. Don't tell me this won't happen cos we all know it will.

Thanks (0)
Replying to Calculatorboy:
avatar
By the_Poacher
16th Sep 2015 11:38

40 days is late
Most people in this country pay the right amount of tax on time. This company didn't.

Thanks (0)
avatar
By chunkycat
16th Sep 2015 12:47

I agree with John Jenkins - Did the punishment fit the crime ?  I don't believe so. We can all quote examples of CIS not being refunded to Companies not just for several years, but in some cases NEVER.  40 days is late - who amongst us hasn't got Debtors exceeding 40 days by some considerable time ?  Should we be seeking to remove livelihoods of those Debtors ?    George Orwell is being proved right, yet again. With HMRC powers being increased significantly year on year - perhaps it is time for the whole country to give up and go on benefits !!

Thanks (0)
avatar
By Swimmingagainstthe Tide
16th Sep 2015 12:48

Punishment must fit the 'crime'

The company was warned and still didn't comply so they deserved to be sanctioned but the punishent must surely fit the crime.  Is this not the corporate equivalent of hanging somebody for stealing loaf of bread?  Fine the company, fine them an amount proportionate to the tax compliance failure but do not impose a sanction that kills a viable business and puts people out of work for no good reason.  The law needs changing.

Thanks (0)
avatar
By johnjenkins
16th Sep 2015 13:54

The construction

Industry is the only Industry that is penalised in this way - ludicrous.

Thanks (1)
7om
By Tom 7000
16th Sep 2015 14:22

If I was the judge...

This happened in 2010/11...have they been good since?

If yes keep it if no lose it

Thanks (0)
avatar
By The Black Knight
16th Sep 2015 16:01

Total non compliance seems to be the answer. they don't enforce that at all even when they are told.

There is widescale non compliance with the deductions of CIS and or the associated paperwork.

Not seen anyone caught yet.

No good expecting HMRC to live in the real world of late payment and juggling just to pay your tax so they can waste it.

Plenty of criminals not paying tax and committing fraud but nothing is ever done.

HMRC are clearly charged with the decline of UK plc as a policy decision.

When he couldn't pay his bill he should have prepacked the company and not paid HMRC at all.

 

Thanks (0)