A special commissioner decided that where the Revenue became satisfied that they were wrong to refuse a CIS certificate on two stated grounds, they were not then entitled to rely on the applicant's alleged failure to fulfil its compliance obligations where the applicant had no means of knowing that the Revenue had not already considered those conditions. The applicant was entitled to expect that the stated reasons for refusal were the only reasons.

Facts

In July 2005, the taxpayer started business including the furnishing of labour in carrying out construction operations. It applied for a CIS 5 certificate on the basis of a predicted annual turnover of £4m. The Revenue formally refused the application on the grounds: (a) that the taxpayer did not satisfy the business test because it did not carry out construction work in the UK and did not provide labour for such construction work; it was considered to have a factoring arrangement with its clients and any contractor would be paying it as a nominee for the client; and (b) that it did not satisfy the turnover test because the payments received represented the turnover not of the taxpayer but of its clients. The Revenue subsequently agreed that the taxpayer had satisfied both the business test and the turnover test. However they alleged that the taxpayer was guilty of compliance failures.

The taxpayer argued that, since the reasons for refusal of the certificate had been agreed by the Revenue to be wrong, its appeal against the refusal should be allowed. It would be unfair to allow the Revenue to raise allegations of failure to comply with the compliance conditions at a late stage. The Revenue were putting forward a different factual case from the one on which they had based their refusal to grant the certificate, which would require a substantial amount of investigation and time at a hearing, and which could have been raised at the time of the original decision. If they were allowed to raise them the hearing would have to be adjourned, causing further delay and frustrating the purpose of the expedited hearing.

The Revenue contended that the compliance condition was a statutory test, not something that the Revenue were raising. Parliament required the Board to be satisfied that all the conditions were satisfied and the Board did not have any power to waive that. On an appeal the special commissioners also had to be satisfied that all the tests were fulfilled, whether or not the Revenue considered them in making the original decision. The taxpayer could have no legitimate expectation that a public authority would act contrary to the terms of a statute.

Issue

Whether the Revenue were entitled to raise the issue of the taxpayer's failure to comply with statutory obligations when that was not a reason given for refusing the certificate.

Decision

The special commissioner (Dr John Avery Jones) (deciding preliminary issues) said that if a certificate was refused, it meant that the Board were not satisfied that the company had satisfied the conditions in the Income and Corporation Taxes Act 1988, s. 565. For the appeal system to work, the taxpayer had to know the basis on which the Board were not satisfied, the Revenue had to know the taxpayer's grounds of appeal, and the commissioners had to know what decision they were reviewing.

In this appeal the Board refused the certificate on two grounds, that the taxpayer did not satisfy the business test and the turnover test, the reason being given in each case. It was now known, but the taxpayer could not have known at the time, that the Board had not even considered the compliance conditions; if the taxpayer failed the other conditions there was no need to look into the detail of compliance, involving not only the taxpayer but the directors of companies controlled by them, requiring time-consuming work by the Revenue.

If the Board had stated this in the refusal there would have been no problem about keeping their options open about raising compliance issues. However they now sought to rely on compliance failures that they particularised only on the day before the hearing. It was stated that the numbers of failures to file vouchers were based on a three-month sample but at the hearing they relied on the entire qualifying period. It was significant that the taxpayer had no means of knowing before 10 February 2006, when they were first told, that the Revenue had not previously turned their minds to compliance conditions. Unless the Revenue made clear that they had not considered the compliance conditions, it seemed that the taxpayer was entitled to expect that the stated reasons for refusal were the only reasons. If that were not the case the appeal system would be unworkable, as was illustrated by this appeal.

If the Revenue's decision was to delay looking into the compliance conditions until it was clear that they might be relevant because the taxpayer satisfied the other conditions, it was not a decision that the commissioner would want to change on review; it was clearly correct and sensible. The Revenue were not obliged to consider all the conditions at the same time or to waste time on investigations into something that might not arise. The objection to that decision was that they did not tell the taxpayer that they had made it. It was not the commissioner's task to put himself into the shoes of the Revenue and decide whether all three statutory conditions were satisfied. The commissioner's task on an appeal was to review the reasons that were stated for refusal of the certificate.

One exception to that conclusion was that if, in the course of considering representations by the taxpayer about the satisfaction of the conditions on which the refusal was based, matters came to light which demonstrated that other conditions were, or might not be, satisfied the Revenue were entitled, and bound, to investigate those as new facts. Accordingly the Revenue were entitled to raise compliance conditions only so far as they arose out of the information supplied by the taxpayer in showing that the turnover condition was satisfied. The appeal would therefore be adjourned for that to be decided if the parties could not agree it.

The commissioner had also been asked to decide whether the grounds on which the Revenue contended that the taxpayer was in breach of the compliance conditions had any foundation in law and whether the Revenue should be directed to issue a CIS 5 certificate to the taxpayer. Those grounds were failing to produce a registration card pursuant to reg. 7F(2) of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 (SI 1993/743) on each occasion that a payment was received, or, if the taxpayer subcontractor was unable to produce a certificate, then ICTA 1988, s. 559 applied and the subcontractor was obliged to produce a registration card pursuant to reg. 33(3).

Regulation 33 imposed obligations on the contractor only when a person was using a gross payment certificate; it was incidental to the contractor's duty to satisfy himself of the matters set out in reg. 33(2); it arose only where the contractor required production; and failure to produce did not involve a breach of obligation by the subcontractor; it merely had the consequence that s. 559 applied to the payment obliging the contractor to deduct and account for the appropriate percentage.

There should be a hearing to determine the facts and to decide whether the taxpayer had satisfied the compliance conditions, but that should not wait until after any appeal against the decision of the first preliminary issue. If the Revenue succeeded in the appeal, there would need to be investigation of further facts with a consequent additional hearing, but if the taxpayer succeeded and in the meantime the issue of the possible compliance failures had been resolved in the taxpayer's favour, it would be entitled to a certificate. Bearing in mind the time that had elapsed since the taxpayer applied for a certificate that was refused on grounds that the Revenue now accepted were wrong, that issue should be resolved as soon as possible and not wait for an appeal. The way forward was to have directions for a hearing to resolve those issues.

(2006) Sp C 553. Decision released 7 March 2006.