Neil Martin Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 28 September 2006 |
| Neutral Citation | [2006] EWHC 2425 (Ch) |
| Docket Number | Case No. HC 05C02703 |
| Court | Chancery Division |
| Date | 28 September 2006 |
[2006] EWHC 2425 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
MR ANDREW SIMMONDS QC
Case No. HC 05C02703
Mr Nicholas Bowen (instructed by Gabb & Co, Old Bank House Beaufort Street, Crickhowell Powys NP8 lAD) for the Claimant
Mr Michael Kent QC and Mr Jonathan Cannan (instructed by the Solicitor to HM Revenue & Customs, East Wing, Somerset House, London WC2R 1LB) for the Defendants
HEARING DATES: 27–30 JUNE AND 18 JULY 2006
APPROVED JUDGMENT
I direct pursuant to CPR PD 39 para.6 that 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
In February 1988 Mr Neil Marin established a construction industry contracting and sub-contracting business with the trading style Martin Construction & Landscapes Mr Martin continued to operate as a sole trader until 1999 by which time the business had grown considerably and employed over thirty people. During this period Mr Martin had the benefit of a sub-contractor's tax certificate issued by the Inland Revenue under statutory provisions to which I will refer in more detail later in this judgment This certificate enabled Mr Martin to be paid gross for sub-contracting work rather than subject to deduction of tax which would otherwise be required.
Following advice from his accountant Mr Martin decided to transfer his business to a limited company The Claimant company, Neil Martin Limited was duly incorporated on 26 February 1999 Mr Martin's intention was to transfer the sole trader business to the Claimant, and for the Claimant to commence trading, on or about 16 June 1999 following a transitional period during which certain administrative matters, such as the transfer of assets, establishment of new banking facilities and VAT registration could be dealt with.
One of the most important matters to be attended to Was the obtaining of a sub-contractor's tax certificate for the Claimant. This case is concerned with the Claimant's application for such a certificate and how the Defendants ("the Revenue") dealt with that application. In barest outline, the Claimant submitted its application to its local tax office at BarrowinFurness Cumbria in either May or June l999. The certificate was not received until September 1999 The Claimant alleges that, in consequence it has suffered serious economic loss. It claims that, because it could not produce the tax certificate during the relevant period, it lost new business and its cashflow in respect of completed work was badly disrupted.
In May 2005 the Claimant commenced these Proceedings in the Manchester District Registry seeking damages from the Revenue in respect of its alleged losses on the basis of breach of statutory duty and/or breach of a common law duty to process the Claimant's application for a certificate with reasonable expedition.
On 28 September 2005 District Judge Needham ordered that the following issues be tried as preliminary issues (and he also ordered that the claim be transferred to the Royal Courts of Justice):
"(1) Whether a breach by the Defendant of section 561(2) of the Income and Corporation Taxes Act 1988 would give rise to a cause for action for damages by the Claimant.
(2) If so, whether the Defendant was in breach of section 561(2) of the Income and Corporation Taxes Act 1988 in the circumstances alleged by the Claimant in the Particulars of Claim.
(3) Whether the Defendant owed a common law duty of care to the Claimant to process the Claimant's application for a certificate under section 561(1) of the Income and Corporation Taxes Act 1988 with reasonable expedition.
(4) If so, whether the Defendant was in breach of that common law duty of care in the circumstances alleged by the Claimant in the Particulars of Claim".
It is these issues which I have tried. As will be apparent, they concern whether the Revenue owed the Claimant the legal duties upon which the claim is based and, if so, whether there were any breaches of those duties. I am not concerned to deal with any issues going to causation or quantum However I have approached my task on the footing that, if I found either of the relevant legal duties to exist and found the Revenue to have been in breach of any such duty, I should specify the precise period of culpable delay so as to assist with resolution of the second stage of the claim.
I was told that this is the first case to reach trial in which it has been argued in remotely comparable circumstances that the Revenue is liable to pay damages for breach of a private law obligation It therefore raises issues of some general interest.
The Claimant was represented by Mr Nicholas Bowen (instructed by Gabb & Co). The Revenue was represented by Mr Michael Kent QC and Mr Jonathan Cannan (instructed by the Solicitor td HM Revenue & Customs). I should record at the outset that I derived great assistance from the comprehensive submissions made by Counsel on both sides.
Sub-contractors in the construction industry are subject to a statutory deduction scheme the aim of which is to combat tax fraud. Until 31 July 1999 the relevant arrangements were known as the Construction industry Tax Deduction Scheme ("ClTDS") From 1 August 1999 a revised arrangement known as the Construction Industry Scheme ("CIS") has had effect. The statutory basis for each scheme is to be found in the provisions contained in sections 559 to 567 of the Income and Corporation Taxes Act 1988 (" ICTA") and regulations made thereunder.
The general purpose and effect of these arrangements was explained by Ferris J in Shaw (Inspector of Taxes) v Vicky Construction Ltd [2002] STC 1544 at paragraphs 3–5:
'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 subcontractors engaged in the construction industry "disappeared" without settling their tax liabilities, with the consequential loss of revenue to the exchequer.
In order to remedy this abuse Parliament has enacted legislation, which goes back to the early l 970s, 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.
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 subcontractor 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 subcontractor's cashflow"
I also refer to the observations of Laddie J in Cormack (Inspector of Taxes) v CBL Cable Contractors Ltd [2005] EWHC 1294 who, having quoted the above passage from Vicky said (at paragraph 3):
"In other words, to avoid the loss to the Revenue caused by subcontractors 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 subcontractors who are likely to comply with their tax obligations"
The principal difference between the CITDS and the CIS Was the introduction of registration cards under the latter scheme. Under the CITDS payments to sub-contractors with a certificate (known as a "714 certificate") were made gross; payments to sub-contractors without a certificate were made subject to deduction of tax at a rate set pursuant to statute. This rate generally shadowed the basic rate of income tax. From 1 July 1997 to 31 July 1999 the rate was 23%. Under the CIS payment to sub-contractors with a certificate (which, as appears below, became known as a CIS6 certificate) were made gross; payments to sub-contractors with a registration card were made subject to deduction (the rate remaining 23% until 5 April 2000 when it was reduced to 18%); and it was illegal for any payment to be made to a sub-contractor who held neither a certificate nor a registration card.
Under both the CITDS and the CIS certificates were only granted if certain very specific conditions were satisfied. As Laddie J remarked in Cormack these conditions were designed to ensure that certificates were only issued to sub-contractors who were likely to be reliable in accounting to the Revenue for tax due. When the CIS was introduced, changes were made to the conditions for obtaining a certificate which, broadly speaking, made those conditions more rigorous. Under the CIS, the only condition for issuing a registration card was an identity check.
The statutory provisions
The principal provisions of Part XIII Chapter IV of ICTA governing the CIS are as follows. Section 559 provides, so far...
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