HM Revenue and Customs v Facilities and Maintenance Engineering Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Park |
| Judgment Date | 31 March 2006 |
| Neutral Citation | [2006] EWHC 689 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2005/APP/0829 |
| Date | 31 March 2006 |
[2006] EWHC 689 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Park
Case No: CH/2005/APP/0829
Tim Eicke (instructed by the Solicitor of HM Revenue and Customs) for the Appellants
Mr John Baylie (a director of the company) for the Respondent
Hearing dates: 13 March 2006
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.
Overview
I will refer to the appellants as the Revenue and to the respondent company as FAME. FAME carries on business in the construction industry, and acts as a subcontractor to main contractors. The Income and Corporation Taxes Act 1988 lays down a general rule that, when a main contractor makes payments to a subcontractor, it must make a deduction from that part of the payment which relates to labour and pay to the Revenue the amount deducted. However, there is a procedure whereby the sub-contractor can obtain a certificate from the Revenue which exempts it from having such deductions made from its receipts from main contractors. If the subcontractor holds a certificate it receives payments from main contractors gross, without deduction. Some of the cases, including this one, indicate that the possession of a certificate is commercially important to a sub-contracting company. It is not just a matter of cash flow, because main contractors are reluctant to do business with sub-contractors who do not have certificates.
The scheme laid down in the legislation is sometimes referred to as the Construction Industry Scheme, or the CIS for short. Exemption certificates are sometimes referred to as CIS certificates, an abbreviation which I will use from time to time in this judgment.
When a sub-contractor which, because it holds a CIS certificate, receives payments gross from a main contractor pays salaries and wages to its own employees it is liable to deduct PAYE income tax and national insurance contributions, NICs. It is, of course, expected to make the deductions and to account for them to the Revenue in accordance with the law. If it does not it may find itself in difficulties because of a section (which I say more about later) under which the Revenue can cancel the existing CIS certificate or refuse to renew it when it expires.
That is what happened to FAME. It had a certificate which was due to expire, and, because of its poor record of failing to account for PAYE and NICs on time, the Revenue refused to issue a new certificate. The Act provides for a right of appeal against the refusal of a certificate, and FAME exercised the right by appealing to the General Commissioners. The Commissioners allowed the appeal, but the Revenue have appealed to the High Court. The Revenue's appeal has come before me. For reasons which I will explain I consider that I must allow this appeal. The result may bear very hardly on FAME and its directors, but in my opinion the law (which includes not just the relevant statutory provisions but also past cases of a similar nature) makes it inevitable that the appeal must be allowed.
I will return to the particular facts of this case, and the arguments which have been presented to me in it, later in this judgment. First, however, I must describe the relevant statute and case law.
The statutory provisions
The section which, in the absence of a certificate, imposes the obligation on a main contractor to make a deduction from a payment to a sub-contractor is s.559 of the Income and Corporation Taxes Act 1988, and the section which obliges the main contractor to account for the payment to the Revenue is s.559A. It is unnecessary for me to set them out in full.
However, the s.559 obligation to make a deduction does not apply if the subcontractor 'is excepted from this section by virtue of section 561' (s.559( 2)). S.561(1) provides that a person (in practice a sub-contractor) is excepted from s.559 'if a certificate under this section has been issued to that person and is in force when the payment is made'.
S.561(2)(c) provides that a company which applies for a CIS certificate is entitled to have one issued to it if the Board (originally meaning the Board of Inland Revenue, but now, I think, meaning the Board of HM Revenue and Customs) are satisfied that the company satisfies the conditions set out in s.565. Section 561 itself does not say in so many words that the company cannot qualify to have a certificate unless it satisfies the s.565 conditions, but I believe that that is the effect of it, and other judges have approached it in that way. In any case, it is clear from the terms of s.565, to which I come next, that the conditions are mandatory if a certificate is to be obtained.
S.565 is the vital provision, both for a company which is seeking to obtain a certificate, and for a company like FAME which is appealing against the refusal of a certificate. I need to set out the key parts of the section in full.
565 Conditions to be satisfied by companies
(1) In the case of an application for the issue of a certificate under section 561 to a company … the following conditions are required to be satisfied by the company.
(2) [I can omit this subsection, and also subsections (2A), (2C) and (2C), which set out conditions which are satisfied in the case of FAME.]
(3) The company must, subject to subsection (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 the qualifying period and with all requests to supply to an inspector accounts of, or other information about, the business of the company in respect of periods so ending.
(4) A company which has failed to comply with such an obligation or request as is referred to in subsection (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 in subsection (8) below will be satisfied.
(5) The company must, if any contribution has at any time during the qualifying period become due from the company under Part I of the Social Security Act 1975 …, have paid the contribution when it became due.
(6) [I can omit this subsection, which relates to returns, etc, required by the Companies Act 1985.]
(7) [I can also omit this subsection, which is about Northern Irish companies.]
(8) There must be reason to expect that the company will, in respect of periods ending after the end of the qualifying period, comply with all such obligations as are referred to in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above.
(8A) Subject to subsection (4) above, a company shall not be taken for the purposes of this section to have complied with any such obligation or request as is referred to in subsections (3) to (7) above if there has been a contravention of a requirement as to the time at which, or the period within which, the obligation or request was to be complied with.
(9) In this section 'qualifying period' means the period of three years ending with the date of the company's application for a certificate under section 561.
There is another statutory provision to which I will need to refer (the one about appeals), but for the moment I wish to make some observations on the provisions of s.565 which I have set out in the foregoing paragraph.
i) The provisions are rigorously prescriptive. By subsection (1) the conditions of the section are 'required' to be satisfied by a company which is applying for a certificate. If the company does not satisfy the conditions, the Revenue cannot issue a certificate to it. As I explain below, the most important condition is that the company should itself have had for the past three years a satisfactory record of compliance with its own obligations. If it has not had such a record, it is not open to it to say that, although it does not satisfy what I might call the past compliance condition, it will put things right in future, so a certificate should be issued to it. The tightly drawn provisions of the Act leave no scope for an argument along those lines. The only element of relaxation of the section is the reference in subsection (4) to a failure which is 'minor and technical', about which I shall have more to say later.
ii) The critical subsection which a company must satisfy (and the subsection which is the problem for FAME) is subsection (3). In practice the important aspect of that subsection is that for the past three years (the qualifying period, defined in subsection (9)) the company must have complied properly with its own obligations to make PAYE returns and payments to the Revenue —the past compliance condition. Subsection (5) extends this to bring in returns and payments of NICs as well. The policy is clear. The possession by a subcontractor company of a s.561 certificate enables it to receive payments from a main contractor without tax deduction where the payments would otherwise fall to be made under deduction of tax. For a subcontractor company to be entitled to such a benefit its own record of paying amounts which it is obliged to pay to the Revenue must be satisfactory: if the company itself has a poor record it should not enjoy the advantage of receiving payments gross rather than net.
iii) Further, subsection (8A) makes it clear that the company must not only make to the Revenue all payments of PAYE and NICs for which it is liable: it must also in principle make the payments on time. I include in that sentence the words 'in principle' because a...
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