Beech Developments (Manchester) Ltd v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
JudgeLady Justice Falk,Lord Justice Lewison,Lord Justice Underhill
Judgment Date09 May 2024
Neutral Citation[2024] EWCA Civ 486
CourtCourt of Appeal (Civil Division)
Docket NumberCase No: CA-2023-000952
Between:
(1) Beech Developments (Manchester) Limited
(2) Westpoint Manchester Limited
(3) Newton Street Manchester Limited
(4) PS 121 Limited
(5) Byrom Street Limited
(6) Blackfriars Street Limited
Appellants
and
The Commissioners for His Majesty's Revenue and Customs
Respondents

[2024] EWCA Civ 486

Before:

Lord Justice Underhill

(Vice-President of the Court of Appeal (Civil Division))

Lord Justice Lewison

and

Lady Justice Falk

Case No: CA-2023-000952

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

KING'S BENCH DIVISON

ADMINISTRATIVE COURT

MR JUSTICE FORDHAM

[2023] EWHC 977 (Admin)

Royal Courts of Justice

Strand, London, WC2A 2LL

Michael Firth KC (direct access) for the Appellants

Philip Simpson KC (instructed by HMRC Solicitor's Office and Legal Services) for the Respondents

Hearing dates: 24 and 25 April 2024

Approved Judgment

This judgment was handed down remotely at 10.00am on 9 May 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Lady Justice Falk

Introduction

1

This is an appeal against a decision of Fordham J dismissing a claim for judicial review brought by six related entities, which for convenience I will refer to collectively as “Beech”. The appeal, which is brought with the permission of the judge, engages a single point of interpretation of the regulations governing the Construction Industry Scheme (“CIS”).

2

The CIS is provided for by Chapter 3 of Part 3 of the Finance Act 2004 (“FA 2004”). The governing regulations are the Income Tax (Construction Industry Scheme) Regulations 2005, SI 2005/2045 (the “CIS regulations”). It is uncontroversial that the broad purpose of the CIS is to reduce the risk of evasion of tax by workers in the construction industry. In outline, it does so by requiring persons who carry on construction business and certain others (“contractors”) to make deductions from payments to persons engaged by them (“sub-contractors”) and account for the amounts deducted to HMRC. The cost of materials is excluded so that the deduction is confined to the element attributable to labour. Amounts so deducted are then available for credit against the sub-contractor's own liabilities. The rate of deduction is determined by the status of the sub-contractor. If the sub-contractor is not registered with HMRC the rate is currently 30%. If the sub-contractor is registered the rate is 20%. However, if certain conditions are met it is possible to register for gross payment, in which case no deduction will be made.

3

This appeal relates to a situation where, contrary to the terms of the legislation, no deduction, or an insufficient deduction, is made from a payment to a sub-contractor not registered for gross payment. In that case the contractor must still account to HMRC for the amount that should have been deducted. If they do not do so then HMRC may make a “determination” of the amount in question under reg. 13 of the CIS regulations, which is treated for the purposes of the Taxes Management Act 1970 (“ TMA 1970”) as if it was an assessment to income tax. Further – and unsurprisingly given that no deduction has been suffered – there is no provision that permits the sub-contractor to obtain a credit against their own liabilities for amounts that the contractor is required to pay but which have not been deducted. However, where the sub-contractor does in fact meet their own tax liabilities the mischief at which the scheme is aimed is not only not present, but without more HMRC would receive and retain a greater sum than they would have been entitled to had the correct deduction been made. Alternatively, the contractor may have taken care to comply with the CIS regime but made an innocent mistake and be left out of pocket.

4

Regulation 9 of the CIS regulations recognises these possibilities by providing a mechanism that empowers HMRC, if certain conditions are satisfied (referred to as condition A or condition B), to issue a direction to the effect that the contractor is not required to pay. Prior to this appeal HMRC's interpretation of the CIS regulations, which has in the past also been adopted by the First-tier Tribunal (“FTT”), has been that there is no power to issue a direction under reg. 9 if a determination has already been made under reg. 13 of the amount in question. Fordham J agreed. As I will explain, HMRC have modified their position to one which requires as a minimum that the application of reg. 9 has been raised by the contractor before a determination is made.

5

Beech's position is that there is no such requirement. They say that reg. 9 may be put in issue following a determination, which will only become final and therefore unable to be affected by a direction if it is not appealed or, if it is appealed, when the appeal is finally determined.

6

I have reached the conclusion that Beech's interpretation is to be preferred.

The relevant legislation

FA 2004

7

As in force during the relevant period, the most relevant provisions of the primary legislation in FA 2004 were as follows:

61. Deductions on account of tax from contract payments

(1) On making a contract payment the contractor … must deduct from it a sum equal to the relevant percentage of so much of the payment as is not shown to represent the direct cost to any other person of materials used or to be used in carrying out the construction operations to which the contract under which the payment is to be made relates.

(2) In subsection (1) “the relevant percentage” means such percentage as the Treasury may by order determine.

(3) That percentage must not exceed—

(a) if the person for whose labour (or for whose employees' or officers' labour) the payment in question is made is registered for payment under deduction, the percentage which is the basic rate for the year of assessment in which the payment is made, or

(b) if that person is not so registered, the percentage which is the higher rate for that year of assessment.”

(The terms contractor, sub-contractor and contract payment are defined in ss. 58–60. Subject to some exceptions, a contract payment is essentially a payment by a contractor to a sub-contractor under a contract relating to “construction operations”, a concept broadly defined in s.74.)

“62. Treatment of sums deducted

(1) A sum deducted under section 61 from a payment made by a contractor—

(a) must be paid to the Board of Inland Revenue, and

(b) is to be treated for the purposes of income tax or, as the case may be, corporation tax as not diminishing the amount of the payment.

(2) If the sub-contractor is not a company a sum deducted under section 61 and paid to the Board is to be treated as being income tax paid in respect of the sub-contractor's relevant profits. If the sum is more than sufficient to discharge his liability to income tax in respect of those profits, so much of the excess as is required to discharge any liability of his for Class 4 contributions is to be treated as being Class 4 contributions paid in respect of those profits.

(3) If the sub-contractor is a company—

(a) a sum deducted under section 61 and paid to the Board is to be treated, in accordance with regulations, as paid on account of any relevant liabilities of the sub-contractor;

(b) regulations must provide for the sum to be applied in discharging relevant liabilities of the year of assessment in which the deduction is made;

(c) if the amount is more than sufficient to discharge the sub-contractor's relevant liabilities, the excess may be treated, in accordance with the regulations, as being corporation tax paid in respect of the subcontractor's relevant profits; and

(d) regulations must provide for the repayment to the sub-contractor of any amount not required for the purposes mentioned in paragraphs (b) and (c).

(4) For the purposes of subsection (3) the “relevant liabilities” of a sub-contractor are any liabilities of the sub-contractor, whether arising before or after the deduction is made, to make a payment to the Inland Revenue in pursuance of an obligation as an employer or contractor.

(5) In this section—

(a) “the sub-contractor” means the person for whose labour (or for whose employees' or officers' labour) the payment is made;

(b) references to the sub-contractor's “relevant profits” are to the profits from the trade, profession or vocation carried on by him in the course of which the payment was received;

(c) “Class 4 contributions” means Class 4 contributions within the meaning of the Social Security Contributions and Benefits Act 1992 (c. 4) or the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7).

(6) References in this section to regulations are to regulations made by the Board of Inland Revenue.

(7) Regulations under this section may contain such supplementary, incidental or consequential provision as appears to the Board to be appropriate.

71. Collection and recovery of sums to be deducted

(1) The Board of Inland Revenue must make regulations with respect to the collection and recovery, whether by assessment or otherwise, of sums required to be deducted from any payments under section 61.

…”

8

As can be seen, s.71 requires regulations to provide for the recovery of sums that should have been deducted as well as sums actually deducted. However, the crediting provisions in s.62 apply only to sums actually deducted. In respect of those, for a non-corporate subcontractor the credit is primarily against their income tax liability (s.62(2)). For a corporate sub-contractor the credit is first against its liabilities as an employer and contractor (“relevant liabilities” – typically PAYE and NICs, together with its own CIS liabilities), and only thereafter may be set against tax on its profits. The reasons for the difference in approach, beyond the point that a corporate entity obviously needs to...

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