JP Whitter (Waterwell Engineers) Ltd v Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Sumption,Lord Mance,Lord Carnwath,Lord Lloyd-Jones,Lord Briggs |
| Judgment Date | 13 June 2018 |
| Neutral Citation | [2018] UKSC 31 |
| Court | Supreme Court |
| Date | 13 June 2018 |
[2018] UKSC 31
Lord Mance
Lord Sumption
Lord Carnwath
Lord Lloyd-Jones
Lord Briggs
Appellant
Thomas Chacko
Jessica Boyd
(Instructed by Ian Whalley Solicitors)
Respondent
James Eadie QC
James Rivett
(Instructed by Solicitor's Office HM Revenue and Customs)
Heard on 10 May 2018
( with whomLord Mance, Lord Sumption, Lord Lloyd-JonesandLord Briggsagree)
This appeal raises a short question on the operation by the respondent Commissioners (“HMRC”) of the Construction Industry Scheme under the Finance Act 2004 (“the Act”). The appellant company (“the company”) was registered for gross payment under the scheme. As is now accepted, it failed to comply with the requirements of the scheme without reasonable excuse. In consequence, on 30 May 2011, HMRC exercised their power under the Act to revoke its registration. In doing so, they took no account of the likely effect of their action on the company's business. The company contends that this represented a failure to take account of a material consideration, in breach of both domestic public law, and of the European Convention on Human Rights (“the Convention”).
The facts are set out in detail in the judgment of Henderson LJ in the Court of Appeal: [2016] EWCA Civ 1160. A summary is sufficient for present purposes. The company is a family-run business of water well engineers, started in 1972. In 2011 it had about 25 employees, and an annual turnover of about £4.4m, much of it derived from contracts with a small number of major customers.
It was first registered for gross payment in about 1984, and its registration was regularly reviewed thereafter. It first failed a review in July 2009, when its registration was cancelled, and the same occurred in June the following year; but on both occasions the registration was reinstated by HMRC following an appeal. Between August 2010 and March 2011 the company was late in making PAYE payments on seven occasions, the delays being generally of a few days, but on one occasion of at least 118 days. This led to a further review and to the cancellation which is the subject of the present proceedings. The company's appeal succeeded before the First-tier Tribunal (“FTT”) ( [2012] UKFTT 639 (TC)), but that decision was not upheld by the Upper Tribunal ( [2015] UKUT 0392 (TCC)) or the Court of Appeal ( [2016] EWCA Civ 1160). It now appeals to this court with permission given by the court itself. By section 67(5) of the Act, the cancellation does not take effect until the final determination of the appeal.
The FTT accepted the company's evidence that major customers would be likely to withdraw work if it lost its gross payment status. It found that at the time of HMRC's decision cancellation would have been likely to lead to the loss of around 60% of the company's turnover, and the dismissal of about 80% of its employees, and that recovery would be expected to take about ten years. The FTT also recorded that in July 2011 significant changes were made to the company's PAYE systems, with the result that payments thereafter were always made on time. We have no information as to what has happened to the business in the period since 2011, nor as to the likely effect of the loss of its status if this appeal fails, and the cancellation now takes effect. In that event, the company would not be able to re-apply for one year after the cancellation takes effect: section 66(8).
As Henderson LJ noted, the overall structure and purpose of the legislation has remained broadly the same since the inception of the statutory scheme some 45 years ago. He cited Ferris J's description of the background in Shaw v Vicky Construction Ltd [2002] EWHC 2659 (Ch); [2002] STC 1544:
“3. In the absence of the statutory provision with which this appeal is concerned Vicky would be entitled, like any other subcontractor, 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 subcontractor 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 …”
The relevant provisions in the present case are contained in the Finance Act 2004, Part 3 Chapter 3 “Construction Industry Scheme”. The main operative provisions are section 61, which provides for deductions on account of tax from “contract payments” as defined; and section 60 which excludes from the definition payments made to a person registered for gross payment when the payment is made. Registration of sub-contractors is governed by sections 63 and 64. Section 63 provides that if HMRC are satisfied that the relevant requirements of sections 63 and 64 are satisfied in respect of a company, it must be registered for gross payment; but, if not, it must be registered for payment under deduction. Henderson LJ rightly observed (para 23) that the registration provisions are “highly prescriptive”, HMRC having no discretion at this stage; and that payment under deduction is the “default position”.
The detailed requirements for registration of a company are set out in Part 3 of Schedule 11. Again these requirements were rightly described by Henderson LJ as “highly prescriptive” (paras 27–28). Relevant in the present case is para 12 which sets out “The compliance test”. This generally requires the company to have complied, in the “qualifying period” of 12 months preceding the application, with all obligations imposed on it under the Tax Acts or the Taxes Management Act 1970. This is subject to certain exceptions prescribed by regulations for failures to be “treated as satisfying” the relevant condition (“prescribed ‘minor failures’”, as Henderson LJ described them) (para 12(2)). Also a company that has failed to comply is treated as satisfying the condition if HMRC are “of the opinion that … the company had a reasonable excuse for the failure to comply” and that it “complied … without unreasonable delay after the excuse had ceased” (para 12(3)). The company must also have paid required social security contributions during the qualifying period (para 12(4)); and have complied with specified obligations under the Companies Act 1985 (para 12(5)). Paragraph 13 enables the Treasury by order, subject to approval in draft by the House of Commons, to vary the conditions for registration for gross payment.
Section 66 provides for cancellation of registration for gross payment:
“(1) The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if it appears to them that —
(a) if an application to register the person for gross payment were to be made at that time, the Board would refuse so to register him,
(b) he has made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or
(c) he has failed to comply (whether as a contractor or as a sub-contractor) with any such provision …”
As is common ground, the use of the word “may” in section 66(1) imports an element of discretion, by contrast with the mandatory words of section 63. The dispute is as to its scope.
Where registration for gross payment is cancelled under section 66(1), the person must be registered for payment under deduction (section 66(6)). As already noted, he may not reapply for registration for gross payment for one year after the cancellation takes effect (section 66(8)), but the effect of the cancellation is suspended pending determination of an appeal (section 67(5)).
By section 67 a person aggrieved by cancellation of registration may appeal by notice given to HMRC within 30 days. Provision for HMRC review or determination by the tribunal are set out in sections 49Aff of the Taxes Management Act 1970. A favourable conclusion on HMRC review is treated as if it were an agreement for settlement under section 54, and so equivalent to a determination of the appeal (section 49F(2)). As already seen, the first two cancellations were disposed of in this way. However, on the third occasion, HMRC maintained its position and the appeal accordingly was referred to the tribunal.
Section 102 of the 1970 Act gives HMRC a general power “in their discretion [to] mitigate any penalty”. It is not however suggested that cancellation of registration can be treated as a “penalty” within this provision.
In the alternative, the company relies on its right to protection of property under Article 1 of the First Protocol to the Convention (“A1P1”):
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except...
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