Introduction

The case of Devon & Cornwall Surfacing Ltd v. Revenue & Customs ([2010] UKFTT 199 (TC)) addresses the issue of whether a company's reliance on its company secretary can constitute a reasonable excuse for failing to comply with tax obligations under the Construction Industry Scheme (CIS). This judgment was delivered by the First-tier Tribunal (Tax) on May 5, 2010, following an appeal by Devon & Cornwall Surfacing Limited against HM Revenue and Customs (HMRC)'s cancellation of its gross payment status registration.

Summary of the Judgment

Devon & Cornwall Surfacing Limited appealed against HMRC's decision to cancel its registration for gross payment status under the CIS, citing failures in compliance tests related to late filings and payments. The Company admitted to delays in submitting Contractors' Monthly Returns and making necessary payments but argued that these were due to reliance on their company secretary. The Tribunal examined whether this reliance constituted a reasonable excuse under section 66 and schedule 11 of the Finance Act 2004. Concluding that the reliance was reasonable given the circumstances, the Tribunal allowed the appeal, reinstating the Company's gross payment status.

Analysis

Precedents Cited

The judgment referenced several key precedents to underpin its decision:

• Rowland v HMRC [2006] STC (SCD) 536: Established that reliance on a third party can constitute a reasonable excuse in direct tax contexts.
• Profile Security Systems v Customs & Excise Commissioners [1996] STC 808: Recognized certain employees as third parties in tax compliance contexts.
• Polarstar Ltd v Customs & Excise Commissioners (1996) Decision No 14445: Similar to Profile Security Systems, it treated company officers as third parties for VAT purposes.
• Enterprise Safety Coaches: Confirmed that reliance on third parties can be a valid basis for a reasonable excuse in direct tax matters.

These precedents collectively supported the notion that reliance on designated company officers, like a company secretary, can be justifiable grounds for non-compliance if the reliance is reasonable under the circumstances.

Legal Reasoning

The Tribunal's legal reasoning hinged on interpreting what constitutes a "reasonable excuse" under the relevant sections of the Finance Act 2004. Key points in their analysis included:

• The absence of a statutory definition for "reasonable excuse" necessitates a contextual evaluation based on the circumstances of each case (referencing Rowland v HMRC).
• Determining whether the Company's reliance on the company secretary was reasonable, given Mr. Vincent's lack of personal expertise in tax matters and his trust in the secretary's capabilities.
• Assessing whether the Company acted promptly to rectify the compliance failures once they were discovered, fulfilling the criteria of having complied without unreasonable delay after the excuse ceased.

The Tribunal concluded that the Company's reliance on its company secretary was reasonable, especially since the secretary was entrusted with tax matters and had a history of handling such responsibilities in other associated companies. Furthermore, the Company's swift actions to address the compliance issues once they became aware of them reinforced the reasonableness of their excuse.

Impact

This judgment sets a significant precedent in the realm of tax compliance under the CIS by:

• Affirming that reliance on a company secretary or similar officers can constitute a reasonable excuse for non-compliance, provided the reliance is justified by the circumstances.
• Clarifying the scope of what constitutes a third party in the context of tax compliance, distinguishing between VAT and direct tax scenarios.
• Providing guidance for companies on the importance of establishing clear lines of responsibility for tax matters to avoid potential compliance failures.

Future cases involving disputes over reasonable excuses for tax non-compliance will likely reference this judgment to determine the validity of relying on company officers or third parties.

Complex Concepts Simplified

Reasonable Excuse

A "reasonable excuse" refers to a justifiable reason for failing to comply with tax obligations, considering all the circumstances surrounding the failure. It is not defined explicitly in the law, allowing for case-by-case assessments.

Compliance Test under Construction Industry Scheme (CIS)

The compliance test assesses whether a company meets its tax obligations under the CIS, which includes timely filing of returns and making necessary payments. Failure to comply can lead to penalties or cancellation of gross payment status.

Gross Payment Status

This status allows contractors to make payments to subcontractors without deducting tax, provided the subcontractors are registered and compliant with CIS requirements. Maintaining this status requires meeting specific compliance criteria.

Conclusion

The Tribunal's decision in Devon & Cornwall Surfacing Ltd v. Revenue & Customs underscores the importance of reasonable reliance on company officers for tax compliance. By recognizing that a company's trust in its company secretary can be a legitimate basis for non-compliance, provided the reliance is reasonable and the company acts promptly to rectify issues, the judgment offers clarity and guidance for similar future cases. This decision reinforces the need for companies to establish reliable internal mechanisms for tax compliance while also acknowledging the potential for legitimate errors stemming from entrusted responsibilities.