In determining an appeal on a preliminary issue arising from a challenge to the refusal of a CIS certificate, the High Court held that the special commissioners could not make a determination which would compel the Revenue to issue a certificate where the Revenue considered that the compliance test had not been satisfied, unless the commissioners had themselves decided, on the evidence before them, that the compliance test was satisfied.

Facts

The taxpayer appealed against the refusal of its application for a CIS5 certificate as a subcontractor under the construction industry scheme. The refusal had been based on the view that the taxpayer had satisfied neither the business test nor the turnover test under ICTA 1988, s. 565(1)(a) and (b), and the Revenue did not go on to consider the compliance test in s. 565(1)(c).

Before the special commissioner, the Revenue and Customs Commissioners (‘the Revenue’) accepted that the first two tests were in fact satisfied but sought to rely on failure to satisfy the compliance test under s. 565(1)(c).

The taxpayer argued that the Revenue's attempted reliance on the compliance test was too late. The Revenue submitted that the compliance test was a statutory test which had to be passed before a certificate could be issued. On appeal, the commissioners, like the Board, had to be satisfied on the evidence that all the tests, including the compliance test, were satisfied and had to be so satisfied even if the Board had not itself previously considered the compliance test.

The special commissioner declined to put himself in the shoes of the Board and decide for himself whether all three statutory tests had been satisfied, taking the view that his function was to review the reasons for refusal originally given (see (2006) Sp C 553). The commissioner recognised that, if the Revenue were restricted to the reasons given for their refusal, but the compliance test was in fact not fulfilled, the result of allowing the appeal would be indirectly granting a certificate knowing that the statutory conditions which were required to be satisfied might not be satisfied. However he did not think that he could take that into account.

The Revenue appealed since they were concerned that, if left unappealed, the commissioner's decision could have unwelcome consequences for them in other cases. The taxpayer did not appear and was not represented at the hearing, having decided not to pursue the substantive appeal.

Issue

Whether the commissioner had adopted the correct approach in restricting himself as to jurisdiction to review issues put forward by the taxpayer.

Decision

Warren J (allowing the appeal) said that in the case of Hudson (HMIT) v JDC Services Ltd [2005] BTC 3, Lightman J had concluded that the general or special commissioners were entitled to substitute their judgment for that of the Board. The whole thrust of that approach was that the commissioners, on appeal, were themselves to determine whether the statutory tests were fulfilled. However, the decision did not address the question of the function of the commissioners when the Board had itself not addressed one of the tests, as on the facts of the present case.

In that context, it was to be remembered that the commissioners themselves could not issue a certificate. Their function was to decide whether the refusal of the Board to issue a certificate was, or was not, justified and, if it was not, to make findings to that effect and to explain their reasons. The Board then acted on the decision. The statutory requirement was that all three tests in s. 565(1) had to be satisfied. It could not be right that the Revenue were prohibited both from raising the compliance test and at the same time from reconsidering whether or not they themselves should refuse to issue a certificate in the light of the compliance test.

Subject to questions of abuse of power and legitimate expectations, it would not be proper for the commissioners to refuse to receive the evidence which the Board wished to adduce and which established, in its view, that the compliance test was not satisfied. In this case, the commissioner's task involved putting himself in the shoes of the Revenue and taking account of the fact that he might indirectly be granting a certificate knowing that the compliance test was not satisfied.

For the appeal system to work, the taxpayer had to know the basis on which the Board was not satisfied, the Revenue had to know the taxpayer's grounds of appeal and the commissioners had to know what decision they were reviewing. However, the appeals procedure laid down in s. 561(9) could not override the statutory requirements for the issue of a certificate. In considering whether an expectation was legitimate or not, the court had to take into account the fact that a public authority, whose powers were statutory, could not validly act outside those powers. A legitimate expectation could only arise on the basis of a lawful promise, expectation or practice. There was no basis on which the Revenue's conduct in this case could be said to result in such unfairness as to constitute an abuse of power. Nor was there any frustration of legitimate expectations. The taxpayer and its advisers should be taken to have known that there were three tests, each of which had to be satisfied.

Chancery Division.
Judgment delivered 14 December 2006