Introduction

The case of R W Westworth Ltd v. Revenue & Customs ([2010] UKFTT 477 (TC)) presents a pivotal examination of the Construction Industry Scheme (CIS) compliance requirements. R W Westworth Limited, a ground work contractor established in 1998, faced the cancellation of its gross payment status under CIS due to multiple late PAYE payments over the Review Period from December 2007 to December 2008. The central issue revolved around whether the Company's reliance on a newly appointed consultant constituted a reasonable excuse for these defaults. The parties involved were R W Westworth Ltd (the Appellant) and HM Revenue and Customs (HMRC) as the Respondent.

Summary of the Judgment

The First-tier Tribunal for Tax examined the appeal by R W Westworth Ltd against HMRC's decision to cancel its gross payment status under the CIS. The Company had incurred 12 late PAYE payments during the Review Period due to cash flow issues exacerbated by the failure of a major customer and reliance on a consultant for financial management. HMRC sought cancellation under section 66 & schedule 11 of the Finance Act 2004, citing non-compliance with tax obligations. The Tribunal, however, determined that the Company's reliance on the consultant provided a reasonable excuse for the delays. Consequently, the Tribunal allowed the appeal, reinstating the Company's gross payment status.

Analysis

Precedents Cited

The primary precedent considered was from the case of Fat Sam's American Food and Beverage Co Ltd v Customs and Excise Cmrs, referenced in Customs and Excise Cmrs v Steptoe [1992] STC 757. In this precedent, the Tribunal held that a single unforeseeable event like a burglary could constitute a reasonable excuse only if it directly led to compliance failures within a specific timeframe. Specifically, defaults occurring six months or more after the event were not excused. The Tribunal in the Westworth case distinguished the facts of their case from this precedent by emphasizing the ongoing reliance on a consultant rather than a one-time event.

Legal Reasoning

The Tribunal focused on the compliance test under schedule 11 of the Finance Act 2004, which requires companies to demonstrate reasonable compliance with tax obligations. While the Company failed to meet the compliance test by making multiple late PAYE payments, the Tribunal assessed whether there was a reasonable excuse for these failures. The Company's decision to engage a consultant to manage its financial affairs, due to the directors' lack of expertise in accounting and taxation, was deemed reasonable. The Tribunal emphasized that the consultant was entrusted with significant authority and responsibility, justifying the Company's reliance on his management, which led to the compliance issues.

Impact

This judgment clarifies the scope of what constitutes a reasonable excuse under the CIS compliance test. It establishes that ongoing reliance on a competent consultant to handle financial obligations can be considered a reasonable excuse for non-compliance, provided that such reliance is justified by the company's internal limitations and the consultant's role is appropriately substantial. This precedent offers a framework for other companies within the construction industry to rely on professional assistance without jeopardizing their status, as long as the reliance is well-founded and the professional is adequately empowered.

Complex Concepts Simplified

Gross Payment Status

Under the Construction Industry Scheme (CIS), contractors pay their subcontractors via gross payment status, meaning PAYE (Pay As You Earn) tax deductions are not made at the point of payment. Instead, subcontractors handle their own tax affairs. Maintaining gross payment status requires compliance with specific tax obligations.

Compliance Test

The compliance test assesses whether a company has adhered to its tax obligations. Failure to comply can result in the loss of beneficial statuses, such as the gross payment status under CIS.

Reasonable Excuse

A reasonable excuse is a justification accepted by tax authorities that a company was unable to comply with its tax obligations due to circumstances beyond its control. This concept is evaluated based on the specific facts and context of each case.

Conclusion

The Tribunal's decision in R W Westworth Ltd v. Revenue & Customs underscores the importance of reasonable operational reliance in compliance assessments under the CIS. By recognizing the Company's dependence on a consultant, the Tribunal provided a nuanced interpretation of what constitutes a reasonable excuse, balancing regulatory compliance with practical business operations. This judgment serves as a significant reference for businesses in the construction sector navigating the complexities of tax compliance, highlighting the potential for managerial delegation to mitigate compliance risks.