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05 May 2011
A TRIBUNAL CASE that ruled that cash flow problems did count as a "reasonable excuse" for late payment of tax signals a trend towards business-friendly rulings, a leading law firm has said.
Tribunal judge John Walters QC found in favour of Alan Kincaid, who appealed against an HM Revenue & Customs decision to remove the gross payment status of his A K Construction company.
Under the Construction Industry Scheme, companies can receive gross payments from contractors without paying the 20% automatic levy charged if they do not have gross payment status. HMRC said that Kincaid had been more than a year late with some payments, which meant that he failed to meet the compliance test required to retain the status.
The commissioner's position was that cash flow problems did not count as a reasonable excuse, however, Walters ruled that "no authority was given for this proposition". Kincaid's cash flow problems were caused by an earlier decision to withdraw his gross payment status, which was overturned but meant that the company had been paying too much in tax.
As Kincaid appealed the decision, Walters said: "The appellant had done all that he could to avoid this problem" and added that this did constitute a reasonable excuse.
Heather Self, a director at McGrigors, said there is "a trend developing in tribunals taking a commercial approach to what is a reasonable excuse".
"We have had the reasonable excuse defence in VAT cases for a long time but it is quite new in direct tax. We are starting to see judges ask what a reasonable excuse is," she said.
This trend resulted from "people sitting in first-tier tribunals who have commercial experience", she added.
A HMRC spokeswoman said: "As a general proposition HMRC does not accept that a cash flow problem in itself constitutes 'reasonable excuse' or that this particular case sets a precedent. HMRC's position remains that there must be an exceptional and unforeseen event for cash flow difficulties to constitute 'reasonable excuse'."
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Visitor comments Add your comment
what a farce
What a farce this judgement is. Every business I know has cash flow problems so that means that every business has a reasonable excuse. Most cash flow problems are caused by the owners/managers/directors running their businesses badly. In the past it has always been the case that everybody gets paid before the taxman and many businesses have only survived by using unpaid tax as an extended creditor. This decision will merely allow this to continue to happen.
Posted by: Max Dale, 09 May 2011 | 19:28
Construction is not like every business
Every business may well at times have cashflow problems because customers exceed their payment terms. But in construction, even when they do pay, (by cheque!) if 20% or even 33% is deducted upfront due to loss of gross status, then the problem is exacerbated. If a company used to gross status, suddenly has to change to 20%, it becomes a massive challenge to overcome loss of cashflow. So more leniency please for construction firms, especially subcontractors.
Posted by: JontyW, 12 May 2011 | 09:52
Shambolic
If "cashflow problems" result in a payment being over a year late, then that indicates far more problems than just the cashflow.
I am concerned about the amount of companies that seem to be simply do not seem to plan ahead - with some good planning and forecasting, it is reasonably easy to get an idea of what tax/CIS/VAT you are going to need to pay across. You can then budget accordingly.
Posted by: lizzie w, 12 May 2011 | 17:22
CIS tax can cause cash flow problems
I seem to operate in a different world..My clients in the Construction Industry have 20% deducted from all their invoices as they are unable (some of them) to apply for Gross Status. This creates a large sum owing to them in a fiscal tear £20k + but it takes up to 6 months after the end of the relevant fiscal year for HMR&C to pay the refund....I think that is a very reasonable exc use provided the company is still able to trade with that size of debt owing!!!!
Posted by: taxbakbristol, 17 Aug 2011 | 13:56
CIS repayments
When the CIS "system" can take up to three years to agree and repay deductions
so the clients cashflow problems are directly caused by HMRC, I think that is reasonable grounds
Posted by: Eleanor, 17 Aug 2011 | 17:23