Two taxpayers D and M commenced trading in 1993 as a partnership with D holding the necessary construction industry certificate. The partnership became an LLP in 2006. Unfortunately the accountants failed to realise that in terminating the partnership they would need to apply for a Construction Industry Scheme certificate for the new LLP and they failed to do so. There were also a number of other changes which added complexity to the preparation of the accounts. The LLP traded with a number of public companies one of which was MFI. In September 2008 MFI, which accounted for £1.2-£1.5m of the LLP's turnover of £6m at that time went into liquidation causing a bad debt of £300,000. As a result they filed their returns late and incurred a late filing penalty.

HMRC subsequently removed the taxpayer's gross payment status under the CIS scheme on the grounds that the partners had failed to comply with all the obligations imposed on them in the qualifying period. The taxpayer appealed contending that the partners had a reasonable excuse for all the failures which had been resolved without unreasonable delay once identified.

Evidence was also produced from the taxpayer's customers that they would cease to trade if they lost their gross payment status and it was also contended that prior to 2007 it was normal Revenue practice to defer the issue of a certificate until all tax affairs were up to date.

The First-tier Tribunal dismissed the appeal; there was a reasonable excuse if a substantial amount of business was lost through no fault of management. However, whilst the loss of key customer MFI was problematical, it was difficult to accept that it amounted to a reasonable excuse not to comply with the partner's tax obligations.

The new regulations introduced in April 2007 gave very little opportunity to find in favour of the taxpayer under the new compliance test. Having considered the details of the bank statements submitted by the taxpayer, the tribunal did not accept that the partners had a reasonable excuse based on lack of funds for their failure to pay.

The alleged complexities brought about by various changes were also irrelevant given that the partners had been in business for a long time. The decisions in Barnes v Hilton and Arnold v G-Con made it clear that if a company might have to close with the consequential loss of jobs it was not a matter to be taken into account. That was neither disproportionate nor contrary to the scheme as gross payment status was an exemption to the usual rule for the collection of tax in the construction industry.

The full text of the judgment is available at http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00608.html