Gross Payment Status under Construction Industry Scheme

A First Tier Tax Tribunal (‘FTTT’) ruling in the matter of John Schofield v HMRC has demonstrated that HMRC does not always apply its statutory powers correctly.

The issue lay as to whether HMRC had correctly cancelled Mr Schofield’s gross payment status under the Construction Industry Scheme (“CIS”).  The appeal was first heard by the FTTT in July 2010 but was adjourned whilst the Tribunal considered the effect of s.66 Finance Act 2004.

Under s.66 FA 2004 HMRC may at any time change a contractor’s status from gross to net payment if they believe that had the contractor applied for gross status at that time they would have been refused, i.e. as soon as a contractor is in breach of the requisite conditions they lose that status.

Mr Schofield’s original appeal was based on the argument that the Revenue’s decision making was flawed and as such void. The Revenue had argued that cancellation under the provision was automatic and posited that when Parliament debated the provision this was not explored whereas Mr Schofield’s counsel argued that the Revenue had a discretion as to whether to apply s.66. In fact there had been discussion of the point when the Finance Act was debated which was recorded in Hansard, had the FTTT not questioned this view may have been accepted. 

The FTTT found that the Revenue had failed to exercise their statutory discretion and as such Mr Schofield won his appeal and his gross payment status was restored. This will be a great relief for those operating CIS schemes.