Neil Martin Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lady Justice Smith,Lord Justice Wilson |
| Judgment Date | 25 October 2007 |
| Neutral Citation | [2007] EWCA Civ 1041 |
| Docket Number | Case No: C3/2006/2212 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 October 2007 |
[2007] EWCA Civ 1041
Lord Justice Chadwick
Lady Justice Smith and
Lord Justice Wilson
Case No: C3/2006/2212
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR ANDREW SIMMONDS QC)
HC05C02703
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Nicholas Bowen and Mr Andrew Willins and Mr Duncan Fairgrieve (a Registered European Lawyer) (instructed by Gabb & Co of Old Bank House, Beaufort Street, Crickhowell, Powys NP8 1AD) for the Appellant
Mr Michael Kent QC and Mr Jonathan Cannan (instructed by Mr David Hogg, Acting Solicitor for HMRC, Somerset House, Strand, London WC2R 1LB) for the Respondents
Hearing dates: 9 and 10 May 2007
This is an appeal from an order made on 28 September 2006 by Mr Andrew Simmonds QC, sitting as a Deputy Judge of the High Court in the Chancery Division, on the hearing of preliminary issues in proceedings brought by the appellant, Neil Martin Limited, against the Commissioners of Inland Revenue (now the Commissioners for Her Majesty's Revenue and Customs).
The claim in the proceedings was for damages for breach of duty in failing to process within a reasonable time the claimant's application for a certificate under the scheme established in respect of sub-contractors in the construction industry by provisions which were (at the relevant time) enacted in Chapter IV of Part XIII of the Income and Corporation Taxes Act 1988 (“ ICTA”).
The preliminary issues before the judge – pursuant to an order made on 19 September 2005 in the Manchester District Registry – included: (1) whether a breach by the Commissioners of section 561(2) ICTA would give rise to a cause of action for damages; and (3) whether the Commissioners owed a common law duty of care to process the claimant's application for a certificate under section 561(1) ICTA with reasonable expedition. Issues (2) and (4) required the judge to determine whether, if either duty were established in law, the Commissioners were in breach of that duty in the circumstances alleged in the particulars of claim.
The judge answered both issues (1) and (3) in the negative: paragraphs 1(1) and 1(3) of his order. He gave permission to appeal on those issues. But he found that, had either duty been established, the Commissioners would have been in breach of that duty: paragraphs 1(2) and 1(4) of the order. Permission to appeal from the judge's determination under issues (2) and (4) was not granted. The Commissioners seek to challenge that determination (in part, at least) by way of cross-appeal under a respondents' notice. They need the permission of this Court to do so. The judge's decision on issues (1) and (3) led, necessarily, to the dismissal of the claim: paragraph 2 of the order.
Construction industry tax deduction schemes
As the judge explained at paragraph [8] of his judgment, [2006] EWHC 2425 (Ch), sub-contractors in the construction industry have been (and continue to be) subject to statutory deduction schemes. The general purpose and effect of such schemes was described by Mr Justice Ferris in Shaw (Inspector of Taxes) v Vicky Construction Ltd [2002] EWHC 2659 (Ch), [3]–[5]; [2002] STC 1544, 1547c-e:
“[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 the 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 cashflow 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 cashflow.”
The judge referred, also, to the observations of Mr Justice Laddie in Cormack (Inspector of Taxes) v CBL Cable Contractors Ltd [2005] EWHC 1294 (Ch), [3]: http://www.bailii.org/ew/cases/EWHC/ Ch/2005/1294.html
“[3] 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.”
The statutory framework
The statutory basis for the tax deduction schemes, prior to the coming into effect of section 76 of the Finance Act 2004, was found in sections 559 to 567 ICTA (which together comprise Chapter IV, Part XIII of that Act). Those sections were amended in material respects with effect from 1 August 1999 by section 139(2) of, and schedule 27 to, the Finance Act 1995 and by section 178(1) of the Finance Act 1996. For reasons which I shall explain later in this judgment, it is necessary to have in mind the position both before and after that amendment.
The judge set out the statutory provisions in some detail (at paragraphs [12] to [15] of his judgment). For the purposes of this appeal they may, I think, be summarised as follows:
(1) Section 559(4) ICTA, read with section 559(5), required that, when making a payment to a sub-contractor to which section 559 applies, a contractor should deduct a sum equal to the amount of tax at the basic rate (or such lesser proportion as the Treasury might by order determine) from so much of that payment as was not shown to represent the direct cost to the sub-contractor (or to any other person) of materials used or to be used in carrying out the construction operations to which the sub-contract relates. The sum deducted was to be paid to the Revenue; and was treated for the purposes of income tax (or corporation tax, as the case might be) as tax on the profits of the trade of the person for whose (or for whose employees') labour the contractor made the payment.
(2) Section 559 ICTA applied (subject to sub-section (2)) to any payments made under a contract relating to construction operations (an expression defined in section 567) which was not a contract of employment where one party to the contract was a sub-contractor and the other party to the contract (“the contractor”) was either a sub-contractor under another such contract relating to all or any of the construction operations or was a person to whom section 560(2) applied: section 559(1). In that context a person was a “sub-contractor” if he fell within section 560(1) ICTA. Any person carrying on a business which included construction operations was a person to whom section 560(2) applied: section 560(2)(a) ICTA.
(3) Section 559(2) ICTA, read with section 561(1), provided that a person to whom a certificate had been issued under section 561(2) was excepted from the requirement as to the deduction of tax on payments made to him which I have just described. Section 561(2) ICTA was in these terms (so far as material):
“561(2) If the Board are satisfied, on the application of an individual or a company, that —
(a) where the application is for the issue of a certificate to an individual (otherwise than as a partner in a firm), he satisfies the conditions set out in section 562;
…
(c) where the application is for the issue of a certificate to a company, the company satisfies the conditions set out in section 565 …,
the Board shall issue to that individual or company a certificate excepting that individual or company … from section 559.”
(4) A person aggrieved by the refusal of an application for a certificate under section 561 ICTA might, by notice given to the Revenue within 30 days after the refusal, appeal to the General Commissioners (or, if he so elected, to the Special Commissioners): section 561(9) ICTA.
(5) As the judge explained (at paragraph [14] of his judgment) the conditions to be satisfied by an individual applicant, under section 562 ICTA, and those to be satisfied by a company applicant, under section 565 ICTA, were broadly similar. Prior to the coming into force of Schedule 27 to the Finance Act 1995 on 1 August 1999, the relevant conditions in respect of an individual applicant (so far as material) were those set out at section 562(2) and...
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