Devon & Cornwall Surfacing Ltd v Revenue & Customs

Factual and Procedural Background

The Appellant Company appeals against the cancellation of its registration for gross payment status under the Construction Industry Scheme (CIS) following a review by HM Revenue and Customs (HMRC) for the year ended 18 July 2008. The cancellation was made pursuant to section 66(1)(a) of the Finance Act 2004, which allows HMRC to cancel registration if the company would be refused registration at that time. The appeal concerns whether the Company satisfied the compliance test, one of the statutory requirements for registration, which involves compliance with tax obligations.

It was undisputed that the Company met the business and turnover tests but failed the compliance test due to late filing of Contractors Monthly Returns between November 2007 and February 2008, and late payment of PAYE, National Insurance Contributions (NIC), and subcontractor deductions during the review period. The Company argued it had a reasonable excuse for these failures and had since complied without unreasonable delay.

The Company’s director explained that the Company relied on a company secretary, who was responsible for accounting and tax matters, including dealings with HMRC. The secretary was also employed by other companies and was not involved in management. The failures were attributed to a combination of technical issues (broadband problems), the company secretary’s sickness and holiday absences, and confusion over payment references. Upon receiving a penalty demand, the Company promptly paid the amount and arranged for external accountants to oversee compliance going forward.

Legal Issues Presented

1. Whether the Company had a reasonable excuse for failing to comply with its tax obligations during the review period.
2. Whether reliance on the company secretary can constitute a reasonable excuse for non-compliance in the context of direct tax obligations under the Finance Act 2004.
3. Whether the Company complied with its obligations without unreasonable delay after the excuse ceased and can be expected to comply in the future, thereby satisfying the compliance test.

Arguments of the Parties

Appellant's Arguments

• The Company relied on a company secretary, appointed due to the director’s lack of personal knowledge about tax and VAT obligations, to handle all accounting and tax matters.
• The failures to file returns and make payments on time were due to factors beyond the Company’s direct control, including broadband connectivity issues and the company secretary’s sickness and holiday absences.
• The late payment of a balancing payment was caused by an administrative error by the company secretary, who made the payment under another company's reference number.
• Upon becoming aware of the failures, the Company promptly paid penalties and took steps to ensure future compliance by involving external accountants.
• It was reasonable for the Company to rely on the company secretary, who had prior experience with the Company’s accountants, to comply with tax obligations.

Respondent's Arguments

• HMRC accepted that the Company met the business and turnover tests but maintained that the compliance test was not satisfied due to late filings and payments.
• HMRC acknowledged that the Company could be expected to comply with future obligations, as confirmed in correspondence.
• The Respondent did not dispute the factual basis of the Company’s reliance on the company secretary but did not explicitly concede that reliance constituted a reasonable excuse.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by identifying that the central question was whether the Appellant had a reasonable excuse for failing to comply with its tax obligations during the review period and whether it had complied without unreasonable delay thereafter. The Company’s failure to meet the compliance test was linked to late filing and payments.

The Tribunal considered the factual context, including the Company’s reliance on a company secretary with prior experience connected to the Company’s accountants, and the technical and administrative difficulties encountered. It noted that while the company secretary was an officer of the Company, for the purposes of reasonable excuse under direct tax law, such reliance can be considered reliance on a third party.

Drawing on the precedent in Rowland v HMRC, the Tribunal acknowledged that unlike VAT law, direct tax legislation does not exclude reliance on a third party as a reasonable excuse. The Tribunal found it reasonable for the Company to rely on the company secretary and that this reliance led to the failures. It further noted that once the Company became aware of the failures, it took prompt remedial action.

Accordingly, the Tribunal concluded that the Company had a reasonable excuse and had satisfied the compliance test.

Holding and Implications

The Tribunal allowed the appeal, overturning the cancellation of the Company’s registration for gross payment status under the CIS.

The direct effect of this decision is that the Company retains its gross payment status, having satisfied the compliance test by virtue of a reasonable excuse and subsequent compliance. No new legal precedent was established beyond applying existing principles from the cited authorities to the facts of this case.