Revenue and Customs Commissioners v J P Whitter (Water Well Engineers) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 July 2015 |
| Neutral Citation | [2015] UKUT 392 (TCC) |
| Date | 13 July 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Hon Mr Justice Warren, Judge Colin Bishopp
James Rivett, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared on behalf of the Appellants
Thomas Chacko, counsel, instructed by Mr Ian Whalley, solicitor, appeared on behalf of the Respondent
Income tax – Construction industry scheme – Cancellation of gross payment status – Finance Act 2004 (“FA 2004”), s. 66 – HMRC discretion – Scope of – Whether properly exercised – Failure to take into account effect of cancellation on appellant – Appeal allowed.
The Upper Tribunal (UT) has overturned the decision of the First-tier Tribunal (FTT) in J P Whitter (Waterwell Engineers) Ltd TAX[2012] TC 02316 and reinstated a notice cancelling the gross payment status of Whitter (Water Well Engineers) Ltd (the company) under the Construction Industry Scheme (CIS), finding that the FTT were wrong to conclude that the financial consequences of cancelling the company's registration was a relevant factor to be taken into account by HMRC when deciding how to exercise the discretion conferred by the Finance Act 2004 (“FA 2004”), s. 66(1).
This was an appeal by HMRC against the decision of the FTT that had allowed the company's appeal against HMRC's decision to cancel their registration for gross payment under the CIS. The FTT had found that HMRC should have taken into account the fact that the cancellation of the company's registration would have a significant detrimental effect on the company's business when exercising their power to cancel its registration and that they did not do so. This amounted to a failure to take into account a relevant factor and rendered HMRC's decision wrong in law and susceptible to review by the Tribunal.
The UT noted that the cancellation in question was the third time the company's CIS registration had been cancelled by HMRC and that the reason for the cancellations was persistent late payment of PAYE. On two earlier occasions, appeals against cancellation had been upheld following assurances by the company over future compliance.
HMRC had cancelled the company's registration under FA 2004, s. 66(1)(a), on the grounds that if the company had applied for registration at that time, the application would have been refused. This was on the basis that the requirements for registration were not satisfied because the company's defaults did not fall within the circumstances prescribed in regulations and that there was no reasonable excuse for them. The UT had already noted that FA 2004, Sch. 11, para. 12 laid down a compliance test to be satisfied as one of the conditions for registration.
The UT considered the question of whether there could be a breach of human rights, including the case of Shaw (HMIT) v Vicky Construction Ltd TAX[2003] BTC 68 (which considered human rights in the context of a refusal by HMRC to register a contractor for CIS) but concluded that article 1 of Protocol 1 of the European Convention of Human Rights had no part to play in the manner of exercise of the power under FA 2004, s. 66 because CIS was a proportionate response to the “notorious practice of sub-contractors being paid gross and then never accounting for their tax liabilities”.
The UT noted that the CIS had been introduced to counter the systematic abuse of sub-contractors disappearing without having met their tax liabilities and the strict conditions which applied in order for a person to obtain registration for gross payment reflected the balance which Parliament considered appropriate to ensure the effective collection of tax: a sub-contractor was entitled to receive payment gross but only if he could show a good track record. Similarly, a person should retain his registration only if he continued to display an adequate record. The power to cancel registration was there principally to ensure compliance with the substance of the CIS.
In that respect, firstly, the financial consequences of a decision to cancel registration for gross status were irrelevant to any issue of future compliance. Secondly, all sub-contractors knew the risk of cancellation of registration if, among other matters, they did not comply with the requirements of the compliance test. In conclusion, the financial consequences of cancellation of a taxpayer's registration for gross payment was not a relevant factor to be taken into account by HMRC when deciding how to exercise the discretion conferred by FA 2004, s. 66(1).
As far as jurisdiction was concerned, the UT agreed with the FTT's conclusion that the FTT had supervisory jurisdiction only and not jurisdiction to substitute its own decision for that of HMRC following the decisions of Piers Consulting Ltd TAX[2011] TC 01456 and Cardiff Lift Co TAX[2011] TC 01470 and that a decision by HMRC to cancel a person's registration for gross payment which has not been properly made should simply be quashed. Having found on the substantive matter concerning the relevance of the financial consequences of cancelling the company's registration for gross payment and having decided that the jurisdiction of the FTT was supervisory only, it followed that HMRC's appeal had to be allowed.
In this case, the taxpayer company had its gross payment status under CIS cancelled by HMRC three times for late payment of PAYE. The company appealed each cancellation and HMRC allowed the first two appeals following assurances by the company over future compliance. However, only after HMRC had cancelled its registration for the third time did the company change its systems significantly to ensure payments of PAYE were made on time. HMRC refused the company's third appeal and the company appealed to the FTT who upheld the company's appeal finding that HMRC were wrong not to take into account the significant detrimental effect loss of the company's registration would have on its business. The UT, however, has disagreed and reinstated the cancellation notice finding the financial consequences of cancellation was not a relevant factor to be taken into account by HMRC.
[1] This appeal raises an issue about the scope of HMRC's power to cancel a taxpayer's registration for gross payment under the construction industry scheme. On 3 August 2011, HMRC issued a notice by which they cancelled the registration of the Respondent (“the Company”) for that status. In their decision released on 18 October 2012 (“the Decision”), the First-tier Tribunal, Judge Cannan and Mr Whitehead (“the Tribunal”), held that HMRC should, when exercising that power, have taken into account the fact (which they found) that cancellation of the Company's registration would have a significant detrimental effect on its business. HMRC did not do so. The Tribunal held that this failure was a failure to take into account a relevant factor so that HMRC's decision “was wrong in law and susceptible to review by this Tribunal”: see Decision [73]. They allowed the Company's appeal, deciding that they did not have jurisdiction to substitute their own view based on the facts found and all relevant factors.
[2] HMRC now appeal against those conclusions, contending that they did not need to take account of the financial consequences for the Company when exercising their power. If that is wrong, then they contend that the Tribunal did have power to substitute their own view for that of HMRC and that we, on this appeal, have the same power which we should exercise. The Company contends that the Tribunal were right in all of their conclusions. However, so far as jurisdiction is concerned, the Company submits that if it is the case that the Tribunal had jurisdiction to substitute its own view, the appropriate course is for us to remit the matter to the First-tier Tribunal and not to decide the matter ourselves.
[3] The facts as found by the Tribunal are set out in the Decision at [22] to [48]. We do not need to repeat them at length here. For present purposes, the following is a sufficient summary taken from those paragraphs:
a) The Company carries on business, as its name implies, as water well engineers. It drills boreholes and wells for water companies, commercial and agricultural businesses and the domestic market. It operates on a UK wide basis. It is very much in the nature of a family business started by Philip Whitter in 1972 and was later incorporated in the 1980s.
b) Prior to incorporation, and at all material times since, Mr Whitter and the Company have used the services of Wilds Chartered Accountants. Their services have included operating the Company's payroll system.
c) The business has grown steadily and presently has about 25 employees, including a number of family members on the administration side. 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 well known customers accounted for a further £900,000.
d) Employees of the Company are paid weekly. Each Monday time sheets are collected and sent to Wilds who prepare pay slips and payments are made by BACS transfer on the Wednesday. On or shortly after the 5th of each month Wilds send details to the Company of amounts due to be paid to HMRC in relation to PAYE and national insurance contributions. Historically payments have been made to HMRC either by BACS transfer or by cheque. Often payments have been late. This is because of the procedure operated for paying suppliers rather than any particular cash flow shortage.
e) It was inevitable that the system would cause payments to HMRC which fell due either on the 19th or 22nd of each month to be made late. That had been the position for many years and HMRC had never chased payment or indeed expressed any concern that PAYE...
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