The High Court held that the general commissioners had erred in concluding that the turnover test, which had to be satisfied before a subcontractor could obtain a CIS6 certificate, constituted a disproportionate infringement of the taxpayer's rights under the European Convention on Human Rights.

Facts

The taxpayer was a self-employed flooring contractor. He had been trading since 1968 and had been supplying and fitting wooden floors for over 50 years. He had always complied fully with his statutory obligations in relation to taxation and his tax affairs had been fully in order throughout. His clients were principally local authorities and other building contractors.

The taxpayer had been issued with successive CIS6 certificates for periods from August 1999 to January 2006 during which time he had satisfied the three statutory tests under ICTA 1988, s. 562 which had to be fulfilled before a subcontractor could obtain a certificate, namely, the business test, the compliance test and the turnover test. When he applied for a further certificate from 31 January 2006 the application was refused on the basis that the taxpayer had failed the turnover test.

On his appeal, the general commissioners found that the reason he failed the turnover test was because he worked only part-time. He was 68 years old in September 2005 and his business turnover was reduced owing to a period of ill-health during which he had undergone two operations in hospital. They found as a fact that the loss of the certificate would have a major adverse impact on the taxpayer's business, such that he might well lose his current contracts, given that local authorities and building contractors were reluctant to deal with uncertificated contractors. The commissioners found that the consequential effects upon the taxpayer's business would not be in the interests of justice and violated the taxpayer's human rights so that a certificate should be issued. The Revenue appealed

Issue

Whether the turnover test was a disproportionate infringement of the taxpayer's rights under the European Convention on Human Rights.

Decision

Warren J (allowing the appeal) said that the turnover test was introduced to prevent a trader in a fairly small way of business from obtaining a certificate. The test with a threshold of £30,000 prevented certification of persons who might be perceived as presenting a risk to the Treasury through tax evasion.

The right to respect for private and family life under art. 8 of the Convention was not engaged by the certification provisions under consideration. What might be engaged was the right, under art. 1 of the First Protocol, to protection of property or to peaceful enjoyment of possessions. In the context the certificate, or the right to obtain a certificate, was not the relevant property or possession. Rather, the property or possession (if any) is the right of a person in the position of the taxpayer to receive, as a subcontractor, payment in full in respect of contracts which he has made with a contractor (Shaw v Vicky Construction Ltd [2003] BTC 68 followed). Such a right was, however, subject to the second limb of art. 1, according to which that right did not in any way impair the right of a state, among other matters, to enforce such laws as it deemed necessary to secure the payment of taxes. A very high burden was placed on a person seeking to challenge the measures which a state had deployed to counter tax evasion: not only did the state enjoy a wide margin of appreciation but the ECJ itself (and a fortiori the national court) would respect the legislature's approach unless devoid of reasonable foundation: Gasus Dosier-und Fördertechnik GmbH v Netherlands (1995) 20 EHRR 403 considered. A turnover test was not by nature a disproportionate response to the perceived problem of tax evasion in the construction industry. It was well within the margin of appreciation for Parliament to have adopted, as one of its responses to the abuse of the tax system, a scheme of certification which included as one of its elements the turnover test.

There was, in any event, some flexibility in the actual application of the turnover test because of the way that the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993 made provision for evidence to satisfy the test. The six-month test and the main three-year test each gave some latitude to a strict approach which would require a subcontractor to show that he would reach the threshold turnover in each of the three succeeding years, an evidential burden which might be very hard to fulfil.

That structure thus reflected an element of proportionality. The statutory scheme did not fail to create a fair balance in relation to part-time subcontractors in the construction industry, even where the reason that the subcontractor worked only part time was because of some objectively identifiable reason preventing full- time work, such as ill-health or old age. A system which adjusted the threshold for part-time workers would be very complex, and there was no disproportionality in the failure to adopt such a complex solution.

Accordingly, the turnover test, as implemented with a single threshold of £30,000, was within the margin of appreciation which was allowed under art. 1 of the First Protocol to the European Convention. Further, it was impossible to say that the test, as so implemented, was devoid of rational foundation.

Chancery Division.
Judgment delivered 12 March 2007.