Shaw (Inspector of Taxes) v Vicky Construction Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice Ferris
Judgment Date06 Dec 2002
Neutral Citation[2002] EWHC 2659 (Ch)
Docket NumberCase No: CW2002/APP/0174

[2002] EWHC 2659 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

The Honourable Mr Justice Ferris

Case No: CW2002/APP/0174

Between:
Shaw (Hmit)
Appellant
and
Vicky Construction Ltd
Respondent

Mr Hugh McKay instructed by Solicitor for the Inland Revenue for the Appellant.

Mr Jeremy Cousins QC and Mr Timothy Jones instructed by The Wilkes Partnership for the Respondent.

APPROVED JUDGMENT

Hearing date: 15th October, 2002

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The Hon Mr Justice Ferris

Mr Justice Ferris
1

This is an appeal by the Inspector of Taxes from a decision of the General Commissioners for Birmingham North allowing an appeal of the taxpayer, Vicky Construction Limited, ("Vicky") against the Inspector's decision to refuse to issue to the taxpayer a certificate under section 561 of the Taxes Act 1988.

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 1970's, 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.

6

The legislation which governs the relevant regime is contained in sections 559 to 567 of the Income and Corporation Taxes Act 1988, the material parts of which I now examine.

7

The basic requirement is imposed by section 559 the details of which do not matter for present purposes. It imposes the general requirement on a contractor to make deductions from payments made to the sub-contractor and to pay over to the Revenue the amounts deducted. The section also prescribes how such amounts are to be treated in the hands of the Revenue.

8

Section 561 provides an exception from the requirements of section 559 in the case of a payment made to a sub-contractor who holds a certificate under section 561 which is in force when the payment is made. The issuing of such a certificate is governed by the following provisions of section 561. Looking at the section only in its application to Vicky, it provides that if the Board is satisfied, on the application of Vicky, that Vicky satisfies the conditions set out in section 565 it must issue a certificate excepting Vicky from section 559. 9. References to "the Board" in section 561 and elsewhere in the provisions I shall mention are, of course, references to the Board of Inland Revenue. In practice the functions of the Board are performed in relation to any particular taxpayer by the Inspector of Taxes dealing with that taxpayer's affairs.

10

Section 565 sets out, in subsections (2) to (9), the conditions which must be satisfied by a company if it is to obtain a certificate under 561. As there is no dispute that Vicky satisfies many of these requirements I will not trouble with those which are satisfied. Those in respect of which there is an issue are contained in subsections (3), (4), (8), (8A) and (9), which provide as follows

"(3) The company must, subject to subsection (4) below, have complied with all obligations imposed on it by or under the Tax Acts or the Management Act in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of, or other information about, the business of the company in respect of periods so ending.

(4) A company which has failed to comply with such an obligation or request as is referred to in subsection (3) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that the conditions mentioned in subsection (8) below will be satisfied."

"(8) There must be reason to expect that the company will, in respect of periods ending after the end of the qualifying period, comply with all such obligations as are referred to in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above.

(8A) Subject to subsection (4) above, a company shall not be taken for the purposes of this section to have complied with any such obligation or request as is referred to in subsections (3) to (7) above if there has been a contravention of a requirement as to the time at which, or the period within which, the obligation or request was to be complied with.

(9) In this section "qualifying period" means the period of three years ending with the date of the company's application for a certificate under section 561."

11

Finally, in reviewing the relevant legislation I must refer to section 561(9) which provides a right of appeal in the following terms

"(9) A person aggrieved by the refusal of an application for a certificate under this section or the cancellation of such a certificate may by notice given to the Board within 30 days after the refusal or, as the case may be, cancellation, appeal to the General Commissioners or, if he so elects in the notice, to the Special Commissioners; and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section."

12

Figures which were before the Commissioners indicate that in the period between April

1997

and April 2001 Vicky had an expanding turnover which increased from about

£92,000 per annum to about £740,000 per annum.

13

Unhappily, during at least the latter part of that period, Vicky has had a poor record in respect of the due payment of PAYE tax deducted by it from the remuneration of its employees. No information about the position before May 2000 was before the Commissioners but the position in respect of a 16 months period between then and August 2001 was as follows:

Year 2001/2002

Month

Amount

Due date

Date paid

Days late

1

£6,251.55

19/05/00

07/06/00

15

2

£4,079.91

19/06/00

23/06/00

4

3

£3,190.55

19/07/00

08/09/00

20

4

£5,089.26

19/08/00

08/09/00

20

5

£7,095.98

19/09/00

08/10/00

19

5

£7,095.98

19/09/00

08/10/00

19

6

£9,391.26

19/10/00

03/11/00

14

7

£14,327.24

19/11/00

12/01/01

54

8

£21,054.29

19/12/00

26/01/01

38

9

£12,881.24

19/01/01

09/03/01

49

10

£6,964.49

19/02/01

21/03/01

30

11

£14,368.10

19/03/01

17/04/01

59

12

£20,800.63

19/04/01

25/04/01

6

1

£16,977.55

19/05/01

22/06/01

34

2

£23,449.00

19/06/01

29/06/01

10

3

£29,542.60

19/07/01

25/07/01

6

4

£26,754.24

19/08/01

08/08/01

early

14

The dates and figures in the first four columns of this table were before the Commissioners and were found by them to be correct. The last column in the table has been added by me. It is a matter of calculation from the dates in the two preceding columns.

15

At some time before July 2000 Vicky applied to the relevant Inspector of Taxes for a certificate under section 561. (It may well have held a certificate before that time but there was no evidence about this and any earlier certificate had clearly expired or was about to expire). The result of this application was stated in a letter from the Inspector addressed to the company secretary of Vicky dated 24th July 2000. The letter reads as follows:

"Dear Sir

APPLICATION FOR SUBCONTRACTORS TAX CERTIFICATE

You have applied for a certificate under S 561 ICTA 1988. One of the conditions for getting a certificate in the new scheme is "timely compliance". This requires you to have paid all tax, NIC and deductions on behalf of your employees and subcontractors, and to have made all returns and supplied all accounts or information as required by the Inspector, when due, over the three years leading up to your application. It is not enough to bring your affairs up to date at the last minute.

I have considered your application and I find that you have not met the timely compliance obligation as your Corporation Tax Return was filed late for the period to 30th April 1998. Strictly, as you have failed the compliance test, you do not qualify for a certificate. However, in view of the fact that this is a new rule in the scheme, and you may not have been fully aware of the rule throughout the three-year period, I...

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