A special commissioner dismissed an appeal against the refusal to grant a construction industry scheme (CIS) certificate where the taxpayer company, which carried out administrative functions for a large number of one-man companies in the construction industry, was also furnishing labour and should have deducted PAYE tax and NICs unless the relevant client had its own CIS certificate. Since the taxpayer had not made those deductions, the Revenue were entitled to refuse to renew the certificate, as the failure was not minor and technical.

Facts

The taxpayer company provided a comprehensive administrative, compliance and company secretarial service for around 60,000 personal service companies (PSCs). By providing services through a PSC rather than directly under a contract of employment, a worker could obtain certain tax advantages. About 65 per cent of the taxpayer's business related to PSCs providing labour in the construction industry. On making payment for the work undertaken by a subcontractor such persons making payment to the taxpayer were concerned that they fell within the CIS in ICTA 1988, s. 559–567.

The taxpayer therefore applied for a CIS 5 certificate which was granted in 2003 for a three-year period ending on 30 June 2006. It applied for a new certificate on 3 April 2006 and was refused. The reasons given for refusal were, first, that the business condition imposed by s. 561 that the business of the applicant had to consist of, or include, the furnishing of, or the arranging for the furnishing of labour, had not been met since the taxpayer's business was administering companies, not furnishing or arranging for the furnishing of labour. Secondly, the taxpayer had not complied with all its obligations under the Tax Acts in the last three years by failing to deduct tax and NICs and failing to notify the Revenue that control of the taxpayer had changed to an intermediate holding company as required by reg. 42 of the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993 (SI 1993/743) made under s. 566. The Revenue said that neither failure was minor and technical, and that they gave reason to doubt the taxpayer's future compliance with its tax obligations, and that there was no reason to expect that the taxpayer would comply with all its obligations in future. The taxpayer appealed.

Issue

Whether the Revenue had erred in law by refusing to renew the taxpayer's CIS certificate.

Decision

The special commissioner (Charles Hillier) (dismissing the appeal) said that the taxpayer did not furnish labour. The only question was whether it arranged for the furnishing of labour.

Arranging for the furnishing of labour

The mere activity of committing another to provide labour, even if coupled with some negotiation of the terms on which it was to be provided, was not properly described as arranging for the furnishing of labour. Further, the effect of the taxpayer's contract with the PSC under the services agreement was to effect the discharge of its duty. But that effect did not involve the taxpayer doing anything: it did not acquire and have satisfied rights or obligations as part of that discharge. Neither was its earlier activity of putting the services agreement into place arranging for, or furnishing, labour.

That left only the negotiating of terms with the agency/user and the assent thereto which created the taxpayer's duty, or that coupled with its antecedent making of the services agreement with the PSC. Those activities on their own would only uncertainly be described as arranging for the provision of labour, but in the context of the CIS scheme and in particular the parallel provisions of s. 562(2)(a) and 560(1), and where the activities were relevant to the taxpayer's becoming subject to a duty to arrange the furnishing of labour, they should be treated as arranging for the furnishing of labour. Therefore if the taxpayer were to act as ostensible principal then, in relation to those contracts, its business would include arranging for the furnishing of labour for the purposes of s. 562(2)(a). Accordingly, the taxpayer satisfied the business condition.

Duty to deduct

The test in s. 559(1) was to be performed at the time the payment was made: if the subject matter passing pursuant to a contract related at that time to construction operations, then for the purposes of s. 559(1) the contract should be treated as relating to construction operations in relation to that subject matter. Where the effect of the services agreement was to give rise to a back-to-back contract between the taxpayer and the PSC, the taxpayer had an obligation to withhold under s. 559 or to inspect CIS 4 certificates, prepare vouchers and to report accordingly. The taxpayer had failed in that duty in such circumstances because the PSCs had neither CIS 4, 5 or 6 certificates and because it did not deduct, prepare vouchers or report as required.

Failure minor and technical

In determining whether or not a failure was minor and technical within s. 565(4), compliance in other aspects was irrelevant: the focus was on the failure, not other activities. Neither what was done nor what was intended to be done to put right the failure in the future was relevant. In determining whether a failure was minor and technical that phrase should not be construed with a view to whether the taxpayer would default in its future obligations. The question was whether the nature of the default made it minor and technical. The absence of warning from the Revenue that the subcontractor was at risk of jeopardising its certificate was not relevant. The previous issue of a certificate where such grant might have been refused was irrelevant. The issue as to whether a default was minor and technical was qualitative and quantitative and could be viewed in the light of the answer to the question whether the defaults were of any significance. The taxpayer's culpability was relevant to whether a failure was minor and technical (R & C Commrs v Facilities and Maintenance Engineering Ltd [2007] BTC 231; Cormack v CBL Cable Contractors Ltd [2006] BTC 253; Hudson (HMIT) v JDC Services Ltd [2005] BTC 3; and Arnold (HMIT) v G-Con Ltd [2007] BTC 244 considered).

The words ‘minor and technical’ had to be construed in their context. There were two discrete matters to be considered in applying s. 565(4) (or s. 562(10) in respect of individuals or s. 564(4) in respect of firms). One looked to the past. The other looked to the future. As far as the former was concerned, the underlying question was whether or not the past defaults of the taxpayer had been of any significance. Significance in that context included consideration of whether the defaults demonstrated a cavalier attitude of the taxpayer to his obligations under the tax legislation. Even if defaults were large or numerous in money terms, the circumstances might make them not significant for those purposes. In context the words had to be construed in a way which allowed them to be used to gauge whether there was a risk that the subcontractor would default on his tax obligations. That approach was consistent with the contents of Inland Revenue Leaflet IR40.

Therefore, in assessing whether a default was minor and technical the tribunal had to have regard to a taxpayer's culpability, and to whether and to what extent the Revenue acquiesced in a default. But it was clear that the mere fact of acquiescence was not enough since it was only relevant to culpability which was subjective. If the Revenue rolled over backwards in their acquiescence but the taxpayer did not know about it or take it into account, it would have no effect on the taxpayer's culpability (although it might mean that the Revenue's view was that the relevant issue was minor or technical); conversely if the Revenue did not acquiesce, but somehow or other the taxpayer reasonably believed that it had, then that could make the taxpayer, in appropriate circumstances, so lacking in culpability as to have a minor and technical defence.

A taxpayer only escaped from a minor and technical failure if it did not give reason to doubt future compliance with tax obligations. That was not a test of general expectation or doubt, but a test of whether the particular failure gave reason to doubt. It could not be simply the failure which was to be considered in applying that condition but the circumstances surrounding the failure: a mere failure, however small or large, would not on its own provide any reason to take a particular view of the future. Overall, the taxpayer's failures, taken together were significant and not minor and technical. The taxpayer had to some degree taken its eye off the ball in relation to the issue and was thus not wholly blameless.

(2007) Sp C 586.
Decision released 8 January 2007.