Cormack (HMIT) v CBL Cable Contractors Ltd
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE LADDIE,Mr Justice Laddie |
| Judgment Date | 23 June 2005 |
| Neutral Citation | [2005] EWHC 1294 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/ 2004/APP/ 0073 |
| Date | 23 June 2005 |
[2005] EWHC 1294 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Laddie
Case No: CH/ 2004/APP/ 0073
Mr Tim Eicke (instructed by Solicitor of Inland Revenue) for the Appellant
Mr Giles Goodfellow QC (instructed by Messrs Smith & Graham) for the Respondent
Hearing dates: 9 June 2005
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
CBL Cable Contractors Limited ("CBL") carries on a substantial construction business. It acts as a sub-contractor on large projects. I am told by its Counsel, Mr Giles Goodfellow QC, that it currently has some 125 employees. At all material times it has held a Construction Industry Scheme 5 Certificate ("CIS Certificate"). In 1999, the Revenue objected successfully to the grant of the CBL's previous CIS Certificate but subsequently it relented and the certificate was granted. CBL operated under the latter certificate until its expiry in 2002. A further certificate was refused by the Inspector of Taxes but that refusal was overturned by the General Commissioners for the Division of Hartlepool ("the Commissioners"). This is an appeal by HM Inspector of Taxes ("the Revenue") by way of Case Stated, under s. 56(6) Taxes Management Act 1970 (" TMA 1970") and Regulation 20 of the General Commissioners (Jurisdiction and Procedure) Rules 1994 ( SI 1994/1812), against the latter determination of the Commissioners.
The purpose of a CIS Certificate was explained by Ferris J in Shaw (Inspector of Taxes) v Vicky Construction Ltd [2002] STC 1544:
"[3] In the absence of the statutory provision with which this appeal is concerned Vicky would be entitled, like any other sub-contractor, to be paid the contract price in accordance with its contract with the contractor without any deduction in respect of its own tax liability. However it became notorious that many sub-contractors engaged in the construction industry 'disappeared' without settling their tax liabilities, with a consequential loss of revenue to the exchequer.
[4] In order to remedy this abuse Parliament has enacted legislation, which goes back to the early 1970s, under which a contractor is obliged, except in the case of a subs-contractor who holds a relevant certificate, to deduct and pay over to the Revenue a proportion of all payments made to the sub-contractor in respect of the labour content of any sub-contract. The amount so deducted and paid over is, in due course, allowed as a credit against the sub-contractor's liability to the Revenue.
[5] The need to make and pay over such deductions can be an irritation to the contractor obliged to carry out this exercise. It also adversely affects the cash flow of the sub-contractor. Accordingly it is advantageous to a sub-contractor to have a statutory certificate rendering such a deduction unnecessary. The provision of such a certificate tends to make the sub-contractor holding the certificate a more attractive party for the contractor to deal with and, by enabling the sub-contractor to receive the contract price without deduction, improves the sub-contractor's cash flow."
In other words, to avoid the loss to the Revenue caused by sub-contractors defaulting on their tax liabilities, the contractor is obliged to pay the sub-contractor's likely tax liability in advance. The existence of a CIS Certificate enables the sub-contractor to be treated like any other trader both by the Revenue and by the contractors for whom it works. It will be appreciated from this that a CIS Certificate is very valuable to the sub-contractor. The ability to control the grant of these certificates is also of importance to the Revenue. In substance, the statutory scheme is designed to ensure that they are only granted to sub-contractors who are likely to comply with their tax obligations.
Past compliance or lack of it is a major factor to be taken into account in determining whether an application for a CIS Certificate should be granted or refused. Because of this, in this case the Inspector of Taxes and the Commissioners considered the compliance records of CBL. Furthermore, at some point, I believe during 2000, 90% of CBL's issued share capital was acquired by a company called BMS Limited which was controlled by Mr Bernard Goodchild. He also acquired the other 10% of the issued share capital. Because of this change of control, the Revenue was entitled to, and did, make a direction under s.561(6) & (7) Income and Corporation Taxes Act 1988 (" ICTA 1988") so that the compliance records of Mr Goodchild could also be examined when considering the renewal of CBL's CIS Certificate.
The Revenue refused to renew the CIS Certificate and CBL appealed to the Commissioners. Before them the Revenue relied upon three categories of alleged failures to justify its decision pursuant to ICTA 1988 Section 561(2):
i) Late payment by CBL of corporation tax for the accounting period allegedly ending on 31 March 2001.
ii) Late payment by CBL of PAYE/NIC/CIS 25 payments during the three year 'qualifying period' prior to the date of the application for renewal.
iii) Late submission of Self Assessment Returns for Mr Goodchild.
At the hearing, which lasted about a day, the Commissioners received written and oral evidence giving inter alia detailed explanations of the nature of and reasons for the failures and the steps taken to ensure future compliance. The oral evidence was given by Mr Goodchild and two other directors and managers of CBL, all of whom were available for cross-examination by the Revenue and questions from the Commissioners. The Revenue called no evidence of its own. Having listened to the evidence and considered the documents drawn to their attention, the Commissioners made various findings of fact to which I will refer below. Based upon them, the Commissioners came to the following conclusions:
"9. We the Commissioners having heard the various representations and contentions consider that:
9.1 Taking into account the circumstances of the issue of the previous certificate, the size and complexity of the taxpayer's obligations and the relative actions and inaction by the Revenue contemporaneously, the failures by the taxpayer and Mr. Goodchild now identified by, and relied upon by, the Revenue were minor and technical ones and the Revenue was unreasonable in its decision to refuse to issue to the taxpayer a CIS 5 Certificate.
9.2 The compliance test is not an absolute test in that the sub-contractor will be treated as satisfying the requirements of the test if any failure within the Qualifying Period is minor and technical (and the list of such is not limited to those set out in the Inland Revenue leaflet IR40) and does not give reason to doubt that the sub-contractor will meet its obligations in future and that we consider that to be the case."
The Legislative Framework
The legislative framework in which this dispute has to be considered is as follows. S 565 ICTA 1988 sets out the conditions to be satisfied by companies in order that they may obtain a CIS Certificate under s.561 ICTA 1988. Of particular relevance is the obligation under s.565(3):
"(3) The company must, subject to sub-section (4) below, have complied with all obligations imposed on it by or under the Tax Acts or the Management Act in respect of periods ending within a qualifying period and with all requests supply to an inspector accounts of, or other information about, the business of the company in periods so ending."
The expression "Tax Acts" is defined widely to include all provisions of the Income Tax Acts and the enactments relating to the taxation of income and chargeable gains of companies and company distributions (including provisions relating also to income tax). The expression "Management Act" is defined as meaning the TMA 1970. The "Qualifying Period" is defined by s.565(9) as the period of three years ending with the date of the company's application for a certificate under s.561 ICTA 1988.
S 565(4) and (8) ICTA 1988 provide respectively:
"(4) A company which has failed to comply with such an obligation or request as referred to in sub-section (3) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that the conditions mentioned in sub-section (8) below will be satisfied.
(8) There must be reason to expect that the company will, in respect of the periods ending after the end of the qualifying period, comply with all such obligations as are referred to in sub-sections (2) to (7) above and with such requests as are referred to in sub-section (3) above."
There are essentially identical provisions relating to individuals in s. 562 (8), (10) and (12).
S 561(9) ICTA 1988 provides:
"(9) A person aggrieved by the refusal of an application for certificate under this section or the cancellation of such a certificate may, by notice given to the Board within thirty days after refusal or, as the case may be, cancellation, appeal to the General Commissioners or, if he so elects in the notice, to the Special Commissioners; and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section."
Furthermore s 561(2) provides:
"If the Board are satisfied, on the application of an individual or a company, that –
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(c) where the application is for the issue of...
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