This month’s Chartered Accountants Tax Case Digest takes a look at a case where HMRC removed gross payment status from a contractor under the Construction Industry Scheme (“CIS”) for failure to comply with the requirements of the scheme without reasonable excuse.

The contractor argued that HMRC’s failure to take account of the likely effect of their action on the company’s business represented a failure to take account of a material consideration and was in breach of both domestic public law and of the European Convention on Human Rights (“the Convention”).

The Supreme Court unanimously dismissed the appeal. The statutory requirements for registration for gross payment are highly prescriptive though are subject to an exception for noncompliance where there is reasonable excuse. The Court considered it wholly inconsistent with the tightly drawn scheme for there to be implied a general dispensing power open to HMRC.

Background

The appellant company (“the company”) is a family-run business of water well engineers which began in 1972. In the early 1980s, the company registered for gross payment under the CIS. It then underwent regular reviews to determine whether it ought to retain its registration certificate. It first failed a review in July 2009, when its registration was cancelled. The same occurred in June 2010. On both occasions the registration was reinstated by HMRC following an appeal.

Between August 2010 and March 2011 the company was late in making PAYE payments on seven occasions. The delays were generally of a few days, but on one occasion at least 118 days. The company accepted that it failed to comply with the requirements of the CIS and did not have a reasonable excuse. At that time the company had about 25 employees and an annual turnover of about £4.4m, much of it derived from contracts with a small number of major customers. A further review followed. On 30 May 2011 HMRC, acting under section 66(1) of the Finance Act 2004, cancelled the company’s registration. HMRC took no account of the consequences for the company’s business.

The company appealed to the First-tier Tribunal (“FTT”) which accepted the company’s evidence that the cancellation, once it took effect, would have had a seriously detrimental impact on the company. The FTT allowed the company’s appeal, holding that HMRC had been wrong not to take account of the likely impact on the company’s business. However, that decision was overturned by the Upper Tribunal with which the Court of Appeal agreed.

The company then appealed to the Supreme Court.

Decision

The Supreme Court unanimously dismissed the appeal. The statutory requirements for registration for gross payment are highly prescriptive. They are contained in the Finance Act 2004 and include a requirement that the applicant for registration complied, within the previous 12 months, with various tax obligations subject to an exception for non-compliance with reasonable excuse.

Section 66(1) of the Act provides that “the Board of Inland Revenue may at any time make a determination cancelling a person’s registration for gross payment” where certain conditions are satisfied. The word “may” imported an element of discretion into this power. This appeal examined the scope of that discretion.

The company set out two arguments.

1. Discretion under section 66 is unfettered in its terms, which do not exclude consideration of the consequences of cancellation for the company.

The company argued that, without any indication to the contrary, the impact on the company must be a relevant consideration.

2. The company relied on right to protection of property under Article 1 of the First Protocol to the European Convention on Human Rights (“A1/P1”).

It argued that cancellation clearly involved an interference with the possessions represented by, at a minimum, the sub-contractor’s entitlement to the full contract price or the bundle of rights inherent in registration.

A1/P1 provides as follows:-

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

HMRC generally adopted the same reasoning of the Court of Appeal and did not accept that cancellation involved an interference with a possession for the purposes of A1/P1.

Alternatively, HMRC also relied on the wide margin afforded to Member States under the Convention in fiscal matters.

The Supreme Court held that the Court of Appeal was correct. Apart from the Convention, the company’s first argument, that the discretion under section 66 is unfettered, overlooked the basic principle that any statutory discretion must be exercised consistently with the objects and scope of the statutory scheme.

That discretion does not extend to considerations which relate neither to the requirements for registration for gross payment, nor to the objective of securing compliance with those requirements. The scheme is highly prescriptive, setting out narrowly-defined conditions for registration in the first place, including a record of tax compliance. The same conditions are brought into the cancellation procedure by section 66.

The mere fact that the cancellation power is discretionary rather than mandatory is no surprise. An element of flexibility allows for cases where the failure is limited, temporary and poses no practical threat to the objectives of the CIS. It is wholly inconsistent with that tightly drawn scheme for there to be implied a general dispensing power available to HMRC.

In respect of A1/P1, there is force in the argument of HMRC that, even if the rights conferred by registration amount to “possessions”, they cannot extend beyond the limits set by the legislation by which they are created. However, it is not necessary to decide the appeal on that basis, since the Court of Appeal correctly held that any interference with A1/P1 rights was proportionate.

Once it is accepted that the statute does not in itself require the consideration of the impact on the individual taxpayer, there is nothing in A1/P1 which would justify the court in reading in such a requirement. For the aforegoing reasons, the appeal was dismissed.

The full judgment in this case is available from:- https://www.supremecourt.uk/cases/docs/uksc-2017-0016-judgment.pdf