DECISION

1. This is an appeal against the decision of HM Revenue and Customs ("HMRC") to withdraw gross payment status under the Construction Industry Scheme ("CIS") pursuant to section 66 Finance Act 2004.

The facts

2. The documentary evidence in this appeal comprised a bundle of documents produced by HMRC. Mrs Bennett and Mr Peirce both gave unsworn evidence. Mr Murray, representing the Appellant, produced at the hearing a schedule of figures summarising the Appellant's monthly sales for 2008/09 and, for comparison, the same figures for 2007/08. Mr Murray also produced certain statistical information from an organisation called The Conference Board showing an economic index for the relevant period and a nationwide consumer confidence index, also for the relevant period.

3. The following facts were not in dispute.

4. Mrs Sandra Bennett and Mr Alan Peirce have been in business together for almost 40 years. They have been partners in Connaught Contracts ("the Appellant)" since 1 November 2001. Mrs Bennett was the nominated partner for tax purposes for the tax year ended 5 April 2009. The Appellant's accounting year ends on 31 October.

5. The Appellant carries on business as a carpet and flooring contractor. The Appellant's main business is that of laying carpets in refurbished buildings. Typically, the main contractor responsible for refurbishing a building will contract with the Appellant as part of the fit out. The type of premises typically being fitted out will be those of banks, professional firms and educational institutions. Often, the nature of the job requires the Appellant's staff to go in either at night time or at weekends to lay the appropriate flooring.

6. The Appellant is a small business and besides its two partners it employs three specialist fitters and one office worker, all whom are remunerated as employees and are subject to PAYE. Occasionally the Appellant will subcontract certain specialist jobs to outside companies.

7. On 20 July 2009 HMRC carried out an automatic annual Tax Treatment Qualification Test ("TTQT") to determine whether the Appellant satisfied the CIS compliance test. The qualifying period for the purpose of the test was 15 July 2008 to 15 July 2009.

8. HMRC's computerised system noted certain failures.

9. First, there was a late payment of interest for 2007/08 of £13.27 which was due by 16 March 2009 was paid 32 days late on 17 April 2009.

10. Secondly, there were late payments of Mrs Bennett’s self-assessment liabilities. For the income tax year 2007/08 part of a balancing tax payment of £21,629.33, which was due by 31 January 2009 was paid late. The details are that £15,000 was paid before the due date on 30 January 2009, £5,000 was paid 14 days late on 14 February 2009 and £1,629.33 was paid 42 days later on 14 March 2009. In addition, the first payment on account of the income tax liability for 2008/09 of £10,000 which was due on 31 January 2009 was also paid late. £8,370.67 was paid 42 days late on 14 March 2009 and £1,673.61 was paid 76 days late on 17 April 2009.

11. HMRC's notification advising Mrs Bennett (as the registered partner of the Appellant) of these failures and that gross payment status was being withdrawn was issued on 12 August 2009.

12. The Appellant asked for a review by HMRC of its decision. The review was completed on 4 March 2010 and concluded that the decision should be upheld.

13. The Appellant's accountants appealed to this Tribunal on 30 March 2010.

The legislation

14. Under the CIS a contractor making payments to a subcontractor is obliged to withhold income tax from the payment. The CIS has been revised on several occasions and the relevant provisions are now contained in the Finance Act 2004 and Regulations enacted thereunder. These provisions came into effect on 6 April 2007. In short, the requirement to withhold tax is removed if the subcontractor is registered for gross payment with HMRC.

15. The relevant statutory provisions are summarised below.

16. Section 63 Finance Act 2004 deals with the provisions relating to registration of subcontractors. Section 63 provides as follows:

“(1) If the Board of Inland Revenue are satisfied, on the application of an individual or a company, that the applicant has provided—

(a) such documents, records and information as may be required by or in accordance with regulations made by the Board, and

(b) such additional documents, records and information as may be required by the Inland Revenue in connection with the application,

the Board must register the individual or company under this section.

(2) If the Board are satisfied that the requirements of subsection (2), (3) or (4) of section 64 are met, the Board must register—

(a) the individual or company, or

(b) in a case falling within subsection (3) of that section, the individual or company as a partner in the firm in question,

for gross payment.

(3) In any other case, the Board must register the individual or company for payment under deduction.”

17. Section 66 Finance Act 2004 permits HMRC to cancel a person's registration for gross payment. Section 66 provides, so far as is relevant :

(1) 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 has 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

(2) Where the Board make a determination under subsection (1), the person's registration for gross payment is cancelled with effect from the end of a prescribed period after the making of the determination (but see section 67(5)).

(3) ….

(4) ….

(5) On making a determination under this section cancelling a person's registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation.

(6) Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (1), the person must be registered for payment under deduction.

(7) ….

(8) A person whose registration for gross payment is cancelled under this section may not, within the period of one year after the cancellation takes effect (see subsections (2) and (4) and section 67(5)), apply for registration for gross payment.

(9) In this section “a prescribed period” means a period prescribed by regulations made by the Board.

18. It will therefore be seen that section 66(1) (a) allows HMRC to cancel gross payment status if an application for gross payment status would have been refused at that time.

19. Section 64 Finance Act 2004 sets out the requirements that have to be met by an applicant seeking registration for gross payment. Section 64 (3) provides that where an individual applies for gross payment registration as a partner in a firm:

(a) the applicant must satisfy the conditions in Part 1 of Schedule 11 to this Act (if an individual) or Part 3 of that Schedule (if a company), and

(b) in either case, the firm itself must satisfy the conditions in Part 2 of that Schedule.

20. In other words, where an individual applies for registration for gross payment as a partner in a partnership the individual must satisfy both the conditions in Part 1 (ie conditions applicable to an applicant who is an individual) and Part 2 (ie conditions to be satisfied by firms). As regards the conditions of the Part 1, the applicant is not required to satisfy the "business test" or the "turnover test", but is only required to satisfy the "compliance test": see paragraph 1 (2) below. The partnership test requires that the applicant satisfies the "business test" (paragraph 6), the "turnover test" (paragraph 7) and the "compliance test" (paragraph 8). In this case, HMRC accept that the "turnover" and "business" tests are satisfied. The real issue in contention is whether the "compliance test" in paragraph 4 and paragraph 8 has been satisfied at the date of a subsequent annual review.

21. The relevant provisions of paragraphs 1 to 8 of Schedule 11 are as follows:

Part 1

Conditions to be Satisfied by Individuals

General

1 (1) In the case of an application for an individual to be registered for gross payment, the following conditions must be satisfied by the individual.

(2) But where the application is for the registration of the individual as a partner in a firm, this Part of this Schedule has effect with the omission of paragraphs 2 and 3.

2….

3 ….

The compliance test

4 (1) The applicant must, subject to sub-paragraphs (3) and (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 (c 9), and

(b) all requests made in the qualifying period to supply to the Inland Revenue accounts of, or other information about, any business of his.

(2) ….

(3) 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.

(4) 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 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.

(5) ….

(6) The applicant must, if any contribution has at any time during the qualifying period become due from him under—

(a) Part 1 of the Social Security Contributions and Benefits Act 1992 (c 4), or

(b) Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c 7),

have paid the contribution when it became due.

(7) There must be reason to expect that the applicant will, in respect of periods after the qualifying period, comply with—

(a) such obligations as are referred to in sub-paragraphs (1) to (6), and

(b) such requests as are referred to in sub-paragraph (1).

(8) Subject to sub-paragraphs (3) and (4), a person is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraphs (1) to (5) if there has been a contravention of a requirement as to—

(a) the time at which, or

(b) the period within which,

the obligation or request was to be complied with.

Part 2

Conditions to be Satisfied by Firms

General

5 In the case of an application for an individual … to be registered for gross payment as a partner in a firm, the following conditions must be satisfied by the firm.

The business test

6 The applicant must satisfy the Inland Revenue, by such evidence as may be prescribed in regulations made by the Board of Inland Revenue, that the firm's business—

(a) is carried on in the United Kingdom, and

(b) satisfies the conditions mentioned in paragraph 2(a) and (b).

The turnover test

7(1) The partners must satisfy the Inland Revenue, by such evidence as may be prescribed in regulations made by the Board of Inland Revenue, that the carrying on of the firm's business is likely to involve the receipt in the year following the making of the application of an aggregate amount by way of relevant payments which is not less than whichever is the smaller of—

(a) the multiple turnover threshold; and

(b) the amount specified for the purposes of this paragraph in regulations made by the Board;

and in this sub-paragraph “relevant payments” has the meaning given by paragraph 3(2).

(2) In sub-paragraph (1) “the multiple turnover threshold” means the sum of—

(a) the amount obtained by multiplying the number of partners in the firm who are individuals by the amount specified in regulations as the minimum turnover for the purposes of paragraph 3(1); and

(b) in respect of each partner in the firm which is a company (other than one to which paragraph 11(1)(b) would apply), the amount equal to what would have been the minimum turnover for the purposes of paragraph 11(1) if the application had been for registration of that company for gross payment.

(3) The Board may make regulations—

(a) for determining the number of partners in the firm to be taken into account for the purposes of sub-paragraph (2) (for example, where the number of partners has fluctuated over a period);

(b) for the purpose of enabling a firm which does not satisfy the condition in sub-paragraph (1) to be treated as satisfying that condition in such circumstances as may be prescribed.

The compliance test

8 (1) Subject to sub-paragraphs (2) and (3), each of the persons who are partners at the time of the application must have complied, so far as any such charge to income tax or corporation tax is concerned as falls to be computed by reference to the profits or gains of the firm's business, 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 (c 9); and

(b) all requests made in the qualifying period to him as such a partner to supply to the Inland Revenue accounts of, or other information about, the firm's business or his share of the profits or gains of that business.

(2) Where a person 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,

the firm is, in such circumstances as may be prescribed by the regulations, to be treated, in relation to that partner, as satisfying the condition in that sub-paragraph as regards that obligation or request.

(3) Where a person has failed to comply with such an obligation or request as is referred to in sub-paragraph (1), the firm is to be treated, in relation to that partner, 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 person had a reasonable excuse for the failure to comply, and

(b) if the excuse ceased, he complied with the obligation or request without unreasonable delay after the excuse had ceased.

(4) There must be reason to expect that each of the persons who are from time to time partners in the firm will, in respect of periods after the qualifying period, comply with such obligations and requests as are referred to in sub-paragraph (1).

(5) Subject to sub-paragraphs (2) and (3), a person is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraph (1) if there has been a contravention of a requirement as to—

(a) the time at which, or

(b) the period within which,

the obligation or request was to be complied with.

22. It will be noted that paragraphs 4(3) and 8 (2) allow certain defaults to be ignored as specified in Regulations. The regulations referred to in those paragraphs are contained in the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2045) ("the Regulations"). Paragraph 32 (Table 3) of the Regulations provides that a failure to pay income tax by the due date is ignored for the purposes of the compliance test, providing payment is made within 28 days. Only one such “disregard” is allowed in a twelve month period. In addition, paragraph 32 has been amended to provide that late or non-payment of an amount under £100 is also ignored.

23. Paragraph 14 Schedule 11 Finance Act 2004 defines the "qualifying period" as a period of 12 months ending with the date of the application in question.

24. In addition to paragraphs 4 (4) and 8 (3) of Schedule 11, section 118 (2) Taxes Management Act 1970 provides that a person shall be deemed not to have failed to do anything required to be done within a limited time if he did so within such further time, if any, as may be allowed or where a person had reasonable excuse he did it without unreasonable delay after the excuse has ceased.

25. Section 67 Finance Act 2004 provides an appeal mechanism in respect of the cancellation of gross payment status and describes the jurisdiction of the Tribunal in subsection (4). Section 67 provides:

1) A person aggrieved by—

(a) the refusal of an application for registration for gross payment, or

(b) the cancellation of his registration for gross payment,

may by notice appeal ….

(2) The notice must be given to the Board of Inland Revenue within 30 days after the refusal or cancellation.

(3) The notice must state the person's reasons for believing that—

(a) the application should not have been refused, or

(b) his registration for gross payment should not have been cancelled.

(4) The jurisdiction of the tribunal on such an appeal that is notified to the tribunal 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.

(5) Where a person appeals against the cancellation of his registration for gross payment by virtue of a determination under section 66(1), the cancellation of his registration does not take effect until whichever is the latest of the following—

(a) the abandonment of the appeal,

(b) the determination of the appeal by the tribunal, or

Arguments for the Appellant

26. Mr Murray for the Appellant said that the Appellant was a long-established business. He noted that the Appellant was on “the fringes” of the CIS and it was arguable whether, as a technical matter, the Appellant needed to be registered for gross payment under the CIS. The reason the Appellant is registered under the CIS, however, was because a number of the Appellant's clients would feel uncomfortable if they were not and not being registered would therefore adversely affect the Appellant's business. Therefore, although there was significant doubt whether the Appellant was technically within the CIS, the decision had been made many years ago to register for gross payment.

27. Mr Murray submitted that the main ground for this appeal related to the circumstances in existence when the late payments of income tax arose. He accepted that the tax payments had been paid late, as described in paragraph 22 above. The circumstances were, in his submission, wholly exceptional.

28. The tax payments in question fell due at the end of January 2009. The business of the Appellant had been badly hit by the global financial crisis which was occurring at that time. Mr Murray pointed out that the Lehman Brothers collapse had occurred in September 2008 and a crisis arose with some major UK banks in October 2008. The Appellant's orders started to fall off in November and December 2008 and in January and February 2009 the business was, in Mr Murray’s words, “almost wiped out”, with turnover falling by 68.65% for January 2009 and by 85.22% for February 2009 when compared with the same months in the previous year. The position improved slightly in March 2009 as confidence in the market came back to some degree, and the Appellant's turnover for March 2009 was 35.9% below that for the same month in the previous year. However, the rest of 2009 continued to be difficult, with the monthly turnover figures for 2009 only exceeding those 2008 in one month (August) and showing significant decreases in other months up to and including October (which was last month for which figures were made available).

29. Mr Murray said that the Appellant's business had been very badly hit and indeed had almost disappeared. The Appellant's main concern had been in relation to the long-standing employees. Even during this extraordinarily difficult period they had kept on all their employees. The Appellant had tried to pay the employees enough to meet their outgoings (such as mortgage payments etc).

30. Mr Murray produced a short report of economic indices compiled by The Conference Board. The first index showed economic activity slumping in the autumn of 2008 and recovering gradually throughout 2009. The second index which concerned nationwide consumer confidence also showed consumer confidence falling off sharply towards the end of 2008 and only gradually recovering during 2009. Mr Murray said that he produced these external indices simply in order to provide external support for his proposition that the Appellant's business suffered badly during the financial crisis.

31. Mr Murray referred to the business bank statement for January 2009. The account was in the name of “Alan Albert Peirce Esq T/A Connaught Contracts” and was, according to Mr Murray, the main business account for the partnership. At 30 January 2009 the account shows a credit balance of £12,125.11. Those funds were inadequate to meet the tax liability as well as the wage bill to January and amounts outstanding to suppliers.

32. Mr Murray submitted that the Appellant was in a dire financial position caused directly by an unprecedented financial crisis. Since the previous year had been successful the self-assessment balancing payment and the payment on account on 31 January 2009 were both large in amount even though at the time of payment the business had run into significant problems. Mr Murray pointed out that, notwithstanding the difficulties the Appellant was experiencing, it paid had the most of the income tax due on time or within 14 days. The Appellant, Mr Murray said, had paid the outstanding tax as soon as possible. The Appellant had a good record of compliance in the immediately preceding 12 months for all taxes.

33. Mr Murray raised the question of proportionality. If the Appellant lost its gross payment status many of its customers would not put them on their subcontractors list. The loss of these customer contracts would lead to closure of the business and redundancy of the employees. The main concern of Mrs Bennett and Mr Peirce throughout had been their employees, one of whom was aged 46 and who had worked for the Appellant for 29 years.

34. Mr Murray submitted that any penalty imposed should be proportionate to the offence. The Appellant had paid interest and penalties in respect of the late payment of tax which occurred, as he said, in extraordinary circumstances. It was disproportionate, therefore, of HMRC to take a further action which threatened closure of the business.

35. Mr Murray pointed to the Appellant's record prior to the financial crisis. Essentially, he submitted that the Appellant's record until the crisis had been good although he admitted not perfect. Nonetheless, the notice of withdrawal of gross payment had “come out of the blue.”

36. Mr Murray also submitted that the treatment of the Appellant was contrary to stated government policy of supporting small businesses during the financial crisis and referred to a statement by the former Chancellor of the Exchequer, Alistair Darling on 24 March 2010.

37. There was also, according to Mr Murray, a lack of transparency in the treatment of the Appellant. This was the only case he has seen where gross payment status had been cancelled. In his experience some taxpayers were being allowed to keep their gross payment status while others were not. He considered that the Appellant was a minor offender and had been unfairly singled out.

38. Mr Murray complained that there had been repeated problems in trying to contact HMRC to discuss the potential withdrawal of gross payment status. He said he had been passed from one office to another and have found it frustrating not to be able to speak to the Customer Operations Appeal Review Unit where the only telephone number given was a call centre.

Arguments for HMRC

39. Mr Robinson drew attention to the fact that with a general partnership the tax compliance of the partners (in this case Mrs Bennett) had to be considered. In this case Mrs Bennett had failed to pay her income tax liability for the income tax year 2007/08 on time.

40. Mr Robinson noted that the payment on account for 2008/09 was after an application for the payment on account to be reduced.

41. Mr Robinson submitted that late payment of income tax could only be ignored under paragraph 32 of the Regulations where the payment was no more than 28 days late. In the present case, part of the outstanding income tax was paid more than 28 days late and therefore could not be ignored. Mr Robinson noted that from 23 November 2009, failures in respect of late payment of interest charges are ignored by HMRC for the purposes of the TTQT. Moreover, under paragraph 32 of the Regulations (as amended) Parliament had set a de minimis limit of £100 and amounts over that de minimis limit could not be disregarded. This was, in Mr Robinson's view, the answer to Mr Murray's submission that the defaults by the Appellant were relatively small.

42. As regards “reasonable excuse”, Mr Robinson submitted that there was no reasonable excuse in this case. He noted that Mr Murray had supplied turnover figures and the bank statement January 2009 but not documentary evidence to support a claim that there were severe cash flow difficulties that the business. Moreover, it was for Mrs Bennett to demonstrate that she personally had a reasonable excuse for delay in respect of the payment of tax that was due on 31 January 2009.

43. Mr Robinson referred to Mrs Bennett's tax return and that of the partnership for the tax year ended 5 April 2008, based on accounts for the year ended 31 October 2007. The partnership return showed a profit of £105,387 and partner's drawings of £110,178. For the tax year ended 5 April 2009, based on accounts for the year ended 31 October 2008, the partnership tax return shows a profit of £104,363 and partner's drawings of £125,931. Mr Robinson accepted that the accounts for the year ended 31 October 2008 largely covered a period that ended before the financial crisis began. In Mr Robinson's view, however, those accounts showed that business cash flow problems were largely due to the levels of drawings by the partners from the business.

44. As regards Mrs Bennett's tax returns, Mr Robinson noted that the return for the tax year ended 5 April 2008 indicated a £23,718 contribution to a pension scheme. There was no corresponding payment for the following tax year, only a Gift Aid payment of £688. In other words, in the tax year ended 5 April 2009 Mrs Bennett had significant partnership drawings but made no pension contribution.

45. Mr Robinson observed that taxpayers can approach HMRC if they experience financial difficulties and negotiate Time to Pay arrangement provided they do so before the due date for payment of tax. There was no evidence that Mrs Bennett had made contact with HMRC before 31 January 2009.

46. On the question of proportionality, Mr Robinson referred to the decision of Lewison J in Barnes v Hilton Main Construction [2005] STC 1355 where it was held that the test of proportionality was not a test which was open to the General Commissioners in that case to apply. It is to be noted that the decision concerned the CIS as it was enacted in section 565 Income and Corporation Taxes Act 1988.

47. As regards the relationship between proportionality and "reasonable excuse", Mr Robinson cited a decision of this Tribunal in Terence Bruns trading as TK Fabrications v HM Revenue and Customs [2010] UKFTT 58. Again, this was a decision involving the cancellation of registration for gross payment. At paragraph 32 the Tribunal stated:

"We add that we consider that an excuse can arguably be regarded as a reasonable by reference to the consequences of the withdrawal of gross payment status. This would be the case where such a withdrawal would, on the facts, be a disproportionate sanction for the non-compliance in question. The fact, which we find, that a withdrawal of gross payment status would be likely to cause the Appellant to lose his livelihood and suffer severe economic loss on the sale or scrappage of his equipment, could render his excuse reasonable on this further stand-alone ground. These consequences which would be likely to follow from a withdrawal of gross payment status would, in our judgement, be wholly disproportionate to the late payment of tax in this case (which HMRC were, we assume, in any case compensated in interest). This factor could well render of the Appellant's excuse reasonable even if, contrary to our findings above, there was no other bases on which has excuse to be held to be reasonable."

48. Mr Robinson accepted that this paragraph in the Bruns decision was against him but argued that it conflicted with another view of the Tribunal in John Grosvenor v The Commissioners for H M Revenue and Customs TC 00227 and was, in any event, obiter since in Bruns the Tribunal had already decided that the Appellant was not in default. In Mr Robinson's submission the consequences of loss of gross payment status could not be taken into account in determining the question of whether there was a "reasonable excuse."

49. The John Grosvenor case, to which Mr Robinson referred, was a decision of this Tribunal. This was also a case concerning the cancellation of registration for gross payment under the CIS. At paragraph 37 of the decision Judge Staker said:

"I further find that the consequences of cancellation of gross payment status is not relevant to the issue whether or not there is a reasonable excuse, and that the material before me displays no other reasonable excuse for the late payments."

50. In Mr Robinson's submission, this was a correct statement of the law.

51. Finally, Mr Robinson referred to the decision of Hart J in Templeton (HM Inspector of Taxes) v Transform Shop Office and Bar Fitters Ltd [2006] STC 900. This was a decision on an earlier version of the CIS legislation where the learned judge emphasised that the purpose of that legislation was to require strict compliance with tax obligations in order to obtain a gross payment certificate (as was required at the time by the legislation).

52. Mr Robinson also addressed Mr Murray's submissions to the effect that the Appellant had a good previous payment record. He referred to HMRC's public guidance in relation to the CIS under the heading "What can be a "Reasonable Excuse"?". The relevant extract reads as follows:

"Where a subcontractor has missed a payment, or payments after 1 June 2008, and claims, as a reasonable excuse, that it was due to cash-flow problems, you can take a more sympathetic view where the subcontractor has some evidence of general financing difficulties, and has had a reasonably good payment record, prior to that date."

53. Mr Robinson pointed out that the Appellant had incurred a late payment surcharge of £486.93 (5% x £ 9738.77 27) on 27 April 2007 in respect of the income tax year ended 5 April 2006. Mr Robinson observed that the payment of tax giving rise to the surcharge had been more than 28 days late and emphasised that the guidance quoted above only applied where the taxpayer had a "reasonably good" payment record. Mr Robinson also noted that a number of other tax payments had given rise to interest charges and had not given rise to a surcharge.

54. As regards Mr Murray's complaint that the withdrawal of the Appellant's gross payment status following the TTQT had "come out of the blue", Mr Robinson noted that the CIS regime as introduced in 2007 had been widely publicised by HMRC with extensive mail shots and use of website entries which explained the workings of the new regime.

55. Finally, in reply to Mr Murray's assertion that HMRC's treatment of the Appellant ran contrary to stated government policy of helping small businesses during the financial crisis, Mr Robinson referred to the statement set out in paragraph 52 above and noted that it was necessary for a taxpayer to produce some evidence of general financing difficulties. In this case, the Appellant provided insufficient documentary evidence, which had been requested by HMRC on more than one occasion. Moreover, the amount of tax paid late could not be regarded as minor.

56. Accordingly, Mr Robinson requested that the Tribunal find that the compliance test had been failed, that no reasonable excuse existed and that the appeal should be dismissed.

Appellant's reply

57. Mr Murray explained Mrs Bennett's relationship to the partnership. She had a 90% share in the partnership and Mr Peirce had a 10% share. Her personal finances were, according to Mr Murray, indistinguishable from those of the partnership and it was for this reason that Mr Murray had previously submitted to HMRC the partnership bank statement of January 2009.

58. Mr Murray drew attention to Mrs Bennett's tax returns for 2008 and 2009, referred to in paragraph 44 above. Apart from her partnership drawings there was very little other income on her tax returns, viz £1107 of bank interest in 2008 and £1625 of bank interest in 2009.

59. Mr Murray noted that Mrs Bennett had injected £30,000 from her private reserve deposit account into the partnership in February 2009 in order to meet tax liabilities and support the business. Mrs Bennett confirmed that this withdrawal had largely emptied her private reserve bank account. She also confirmed that her own personal current account with the bank simply contained ordinary household expenses would not be sufficient to pay tax liabilities.

60. In response to Mr Robinson's submissions in relation to the partnership tax returns for 2008 and 2009 in paragraph 44 above, Mr Murray rejected Mr Robinson's contentions. Mr Murray explained that the drawings referred to in the returns included not just payments to partners, but also pension payments and tax payments.

61. In relation to the summary of the balance sheet for the year ended the 31st to October 2007, contained in the partnership’s 2008 tax return, Mr Murray pointed out that the capital employed in the business had improved from £56,467 at the beginning of the year to £105,387. As regards the balance sheet for 31 October 2008, contained in the partnership’s 2009 tax return, Mr Murray explained that the increased drawings were accounted for by the fact that tax payments of the partnership were higher because of the higher profits in the prior year. The balance of net business assets was approximately £83,819. Far from draining money from the business, the Appellant's balance sheet had been bolstered by more than 50% from the opening balance for net assets of £56,467 recorded as the opening balance of the net assets in the summary of the balance sheet as that 31 October 2007.

62. Mr Murray also submitted that the case law referred to by Mr Robinson, particularly the Templeton and Barnes cases were decisions on the old CIS legislation and were of limited relevance to the legislation contained in the Finance Act 2004.

Our decision

63. It was not in dispute that part of Mrs Bennett's self-assessment income tax liability which was due on 31 January 2009 was paid late and that the failures could not be disregarded under Regulation 32 of the Regulations.

Reasonable excuse

64. We have concluded that the Appellant did have a reasonable excuse within the meaning of paragraphs 4(3) and 8(3) of Schedule 11, section 118 (2) Taxes Management Act 1970.

65. We accept Mr Murray's contention, and find as a fact, that the Appellant, including Mrs Bennett, experienced cash flow difficulties beyond its control from the end of January 2009 to the date when the balance of the self-assessment payment was made in April 2009. This period coincided almost exactly with one of the worst financial crises in this country's history. We accept Mrs Bennett's statement that she had little cash in her own private bank account and that the injection of £30,000 in February 2009 almost entirely emptied her savings account. It is apparent from Mrs Bennett’s tax return that her sources of income other than that derived from the partnership were very limited. We therefore consider that the exceptional circumstances that caused the near failure of the Appellant's business constituted a reasonable excuse for the relevant statutory provisions.

66. While considering the issue of reasonable excuse we should deal with the different views expressed by this Tribunal regarding whether the consequences of withdrawal of gross payment status can be taken into account when considering whether there was a reasonable excuse. The Bruns case indicated that the consequences could be taken into account and the John Grosvenor case held that they could not be taken into account. Overall, we think that the approach taken in the John Grosvenor case is to be preferred since the relevant statutory provision examines whether there was a reasonable excuse for the failure in question and this does not, in our view, permit the Tribunal to investigate the consequences of withdrawal of gross payment status.

Other matters

67. Our decision on reasonable excuse makes it unnecessary for us to decide the issue of proportionality. This is a complex area and we are reluctant to express a view in the absence of full legal argument on this point.

68. In addition, our decision also makes it unnecessary to consider the issue raised in the decision of this Tribunal in John Scofield v The Commissioners for HM Revenue and Customs TC 00659, namely whether section 66 Finance Act 2004 confers a discretion on HMRC whether to withdraw gross payment status.

69. Accordingly, for the reasons given above, this appeal is allowed.

70. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents