J P Whitter (Waterwell Engineers) Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Lord Justice Christopher Clarke,Lord Justice Jackson |
| Judgment Date | 24 November 2016 |
| Neutral Citation | [2016] EWCA Civ 1160 |
| Date | 24 November 2016 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2015/3091 |
[2016] EWCA Civ 1160
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE WARREN AND JUDGE COLIN BISHOPP
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Jackson
Lord Justice Christopher Clarke
and
Lord Justice Henderson
Case No: A3/2015/3091
Mr Thomas Chacko (instructed by Mr Ian Whalley, solicitor) for the Appellant
Mr James Rivett (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing date: 25 October 2016
Approved Judgment
Introduction
This appeal raises an important point of principle concerning the power of the Respondents, the Commissioners for Her Majesty's Revenue and Customs ("HMRC"), to cancel the registration of a taxpayer for gross payment under the legislation which governs the Construction Industry Scheme ("the CIS"). The relevant legislation was contained, at all times material to the present appeal, in Chapter 3 of Part 3 of the Finance Act 2004 (" FA 2004") and the Income Tax (Construction Industry Scheme) Regulations 2005 ("the 2005 Regulations"). The question of principle is whether, before exercising the power of cancellation conferred by section 66(1) of FA 2004, the Board of Inland Revenue (now HMRC) are obliged, or at least entitled, to take into account the impact on the taxpayer's business of the cancellation of its registration for gross payment.
The CIS was introduced in order to counter widespread tax evasion by sub-contractors in the construction industry. Originally enacted in Chapter II of Part I of the Finance Act 1971, under the heading "Sub-Contractors in Construction Industry", the legislation governing the scheme was re-enacted with substantial modifications in Chapter II of Part III of the Finance (No. 2) Act 1975 (sections 68 to 71, and schedules 12 and 13), and then consolidated in Chapter IV of Part XIII of the Income and Corporation Taxes Act 1988 (" ICTA 1988") (sections 559 to 567). The legislation was then again re-enacted with modifications by FA 2004, under the heading "Construction Industry Scheme". In that form, with minor amendments, it remains in force today.
The overall structure and purpose of the legislation has remained the same since the inception of the statutory scheme some 45 years ago. In a passage which has often been cited with approval in later cases, Ferris J described the background to the legislation, and the advantages to a sub-contractor of being registered for gross payment, in Shaw v Vicky Construction Ltd [2002] EWHC 2659 (Ch), [2002] STC 1544, ("Vicky") at [2] to [5]:
"2. Vicky is engaged in the construction industry. In the course of its business it does work in that field as a sub-contractor engaged by another company (the contractor).
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 sub-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."
The taxpayer and appellant in the present case is a relatively small family-owned and operated company, J P Whitter (Waterwell Engineers) Limited ("the Company"). As its name implies, the Company carries on business as water well engineers, drilling boreholes and wells for water companies, commercial and agricultural businesses and the domestic market. It operates throughout the United Kingdom, and at the time when its registration for gross payment was cancelled in August 2011 it had about 25 employees, including a number of family members on the administration side. The business had grown steadily since it was started by Philip Whitter in 1972, and its later incorporation in the 1980s. In the three years to 2011, the business had a turnover of approximately £4.4 million, making a net profit over the same period of about £180,000. Approximately £1.9 million of that turnover derived from contracts with United Utilities. Other major customers accounted for a further £900,000.
There is no finding of fact as to when the Company was first registered for gross payment, but it appears from the correspondence in the appeal bundle that this happened in about 1984. Thereafter, the Company's registration was kept under regular review by HMRC. Latterly, at any rate, such reviews were generally carried out by computer on an annual basis. In July 2009 the Company failed a review for the first time, because of late payment of PAYE, and its registration was cancelled. The Company appealed, and in November 2009 its appeal was upheld. In the letter allowing the appeal, dated 12 November 2009, the officer with conduct of the matter in the Hull CIS Team gave a clear warning that in order to continue to benefit from gross payment status both the payment of tax and filing of returns had to be made on time. Under the new guidance, the rules would be applied strictly with no scope to allow for "minor and technical" failures as before. Reference was made to the latest guidance on the subject, which the Company was requested to bear in mind for the future.
Despite this warning, the Company failed its next annual review in June 2010 and its registration was again cancelled. The Company's accountants, Wilds, appealed by letter dated 8 July 2010. The letter said:
"We note that you wish to withdraw this gross paying certificate due to late payment of PAYE. Whilst my client agrees that they have been tardy occasionally in making their PAYE remittances they have, I am sure you will agree, always been paid.
This business has been grown meticulously by the Whitter family to a position where it can now confidently apply for tenders from United Utilities and indeed have just obtained two very large contracts with them. The withdrawal of the gross paying certificate will quite obviously put those contracts in jeopardy as United Utilities will not deal with companies who do not have a gross paying certificate … The withdrawal of the certificate will therefore severely hinder the company who have managed to survive over a very difficult last eighteen months to two years."
HMRC then mistakenly took the point that the appeal had been lodged out of time, when in fact it was clearly in time. When this was pointed out, Mrs D Smith of the Hull CIS Team replied on 20 August 2010, apologising for the error and saying:
"On this occasion I am prepared to overlook these failures, your appeal is upheld and the company will retain gross payment status."
The letter recommended the Company to make all of its PAYE payments electronically, and again warned that if the Company was to continue to benefit from gross payment status both the payment of tax and filing of returns had to be made on time.
Unfortunately, this second warning was no more effective than the first, and on 30 May 2011 there was another annual review which the Company again failed due to late payment of PAYE. On this occasion, before making a decision whether to withdraw the Company's gross payment status, the Hull CIS Team wrote to the Company on 20 June 2011 identifying the defaults and giving the Company an opportunity to provide an explanation for them, supported by documentary evidence, or to advise whether it had entered into a formal "time to pay" arrangement. The writer said that an informed decision could then be taken as to whether a "reasonable excuse" existed for some or all of the compliance failures.
The letter identified seven late payments of PAYE, and in due course the First-tier Tribunal found that the following late payments of PAYE had been made:
| Due Date | Date Paid | Period Late |
| 22 Aug 2010 | 1 Oct 2010 | 40 days |
| 22 Sept 2010 | 6 Oct 2010 | 14 days |
| 22 Oct 2010 | 29 Oct 2010 | 7 days |
| 22 Nov 2010 | 26 Nov 2010 | 4 days |
| 22 Jan 2011 | 28 Jan 2011 | 6 days |
| 22 Feb 2011 | After 20 June 2011 | At least 118 days |
| 22 Mar 2011 | 31 Mar 2011 | 9 days |
The Company replied to this letter on 14 July 2011. The reply was written by Ms Sally Whitter, a daughter of Philip Whitter, who was the company secretary and had worked for the Company for over 20 years. She apologised for the delays, which...
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