The High Court held that the inescapable consequence of the rules relating to the Construction Industry Scheme (CIS), as applied to the taxpayer's persistent lateness in paying its PAYE and NICs obligations in the three years before its application for a new certificate, was that the taxpayer did not meet the past compliance condition prescribed by s. 565(3) of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’). Accordingly, the Revenue and Customs Commissioners had been entitled to refuse to renew its CIS certificate.

Facts

The taxpayer company carried on business in the construction industry, and acted as a subcontractor to main contractors. ICTA 1988 laid down a general rule that, when a main contractor made payments to a subcontractor, it had to make a deduction from that part of the payment which related to labour and pay to the Revenue the amount deducted. However, there was a procedure (the Construction Industry Scheme (CIS)) whereby the sub-contractor could obtain a certificate from the Revenue which exempted it from having such deductions made from its receipts from main contractors. If the subcontractor held a CIS certificate it receives payments from main contractors gross, without deduction. The possession of a certificate was commercially important to the taxpayer, not only as a matter of cash flow, but also because main contractors were reluctant to do business with subcontractors who did not have certificates.

ICTA 1988, s. 561(2)(c) provided that a company which applied for a CIS certificate was entitled to have one issued to it if the Board of Revenue and Customs were satisfied that the company had fulfilled the conditions set out in s.565 which were mandatory if a certificate was to be obtained.

By s. 565(3) must 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.

By s. 565(4), a company which had failed to comply with such an obligation or request was to be treated as satisfying the condition as regards that obligation or request if the Board were of the opinion that the failure was minor and technical and did not give reason to doubt that the taxpayer would comply with all such obligations in the future.

The taxpayer had a certificate which was due to expire, and, because of its poor record of failing to account for PAYE and NICs on time, the Revenue refused to issue a new certificate. ICTA 1988 provided for a right of appeal against the refusal of a certificate, and the taxpayer appealed to the general commissioners. The commissioners allowed the appeal, but the Revenue appealed to the High Court.

Issue

Whether the general commissioners were entitled to conclude that the taxpayer's failure was minor and technical and that it would comply with its obligations in the future.

Decision

Park J (allowing the appeal) said that, on the undisputed facts, the general commissioners’ finding that the taxpayer's failures were minor and technical was not one which it was open to them to make. The regularity and frequency of the company's failures to make payment of its own PAYE and NICs obligations on time (failures in all except two months out of 34), and the lengths of the periods by which the company's payments were late, were broadly similar to those which the court had held in Shaw (HMIT) v Vicky Construction Ltd[2003] BTC 68, Arnold (HMIT) v G-Con [2005] EWHC 2456 (Ch) and Woods (HMIT) v Lightpower Ltd [2005] EWHC 1799 (Ch) to be incapable of being minor and technical. If anything they were slightly worse. The only possible conclusion on the facts was that the taxpayer did not satisfy the past compliance condition in s. 565(3), and that it could not successfully invoke s. 565(4) to escape the consequences through the exception for failures which were only minor and technical.

For s. 565(4) to apply, a company needed to show, not just that its past failures were minor and technical, but also that the past failures did not give reason to doubt that the company would comply with its obligations in future. In the taxpayer's case the commissioners had found that the company did meet that second requirement and that was a finding which it was open to them to make, given that they had heard the evidence of one of the directors, and were satisfied that the company had reorganised its systems so that the regular non-compliances of the past were not going to recur in the future. The finding was, perhaps, generous to the taxpayer but it could not be said that it was an impossible one for the commissioners to make. However, it was clear beyond doubt that, to get the benefit of s. 565(4), a company had satisfy both conditions of the subsection. The taxpayer did not satisfy the first condition (the minor and technical condition), so it did not assist the company that it did satisfy the second condition.

Further, whether failures of compliance were minor and technical or not could not depend on whether the Revenue had warned the company of the consequences of them or not. In any event, the taxpayer would have received a Revenue leaflet IR40 about the CIS scheme which made it clear what the consequences of failing to meet the past compliance condition could be. It was also irrelevant that the company's compliance with other aspects of its obligations under the tax system, other than the obligation to account for PAYE and NICs, had been entirely satisfactory.

Furthermore, the fact that the taxpayer, having been made aware of the consequences, would be at pains to comply with its obligations in future did not, on the plain terms of s. 565 afford any ground on which the commissioners or the court could decide this case in favour of the company. It was clear that s. 565(3) prescribed a mandatory condition and that it was a condition which looked to the past. If subsection (4) did not take a company out of subsection (3), which it did not if the past failures had been more than minor and technical, it got the company nowhere (at least for the next three years) for it to say that it had put its house in order and would not fail to meet its own compliance obligations for the future.

The legal position was that the rules preventing a subcontracting company from obtaining a CIS certificate if it had a record of past failures in compliance were stringent. The rules left little or nothing to discretion, other than to assess in a borderline case, which this case was not, whether past failures were only minor and technical. Despite that position, it appeared that some subcontracting companies had an impression that, once they could get beyond dealing with the Revenue and bring their cases on appeal to the commissioners or the courts, the landscape changed, and that the commissioners or the courts could do whatever they thought to be reasonable. But this was not the case. If the facts precluded the Revenue from issuing a CIS certificate, they also precluded the commissioners and the courts from issuing a certificate on appeal from the Revenue's refusal (Hudson (HMIT) v JDC Services Ltd [2005] BTC 3, Barnes (HMIT) v Hilton Main Construction Ltd [2005] BTC 568, Cormack v CBL Cable Contractors Ltd (2005) 77 TC 229 and Templeton v Transform Shop Office and Bar Fitters Ltd (2005) 77 TC 229 considered).

Chancery Division. Judgment delivered 31 March 2006