Taxation – Proportionality – Registration for gross payment — Chapter 3 of Part 3 of Finance Act 2004 – Income Tax (Construction Industry Scheme) Regulations 2005 – Appellant’s registration for gross payment cancelled owing to persistent late payment of PAYE – Whether adverse effect on appellant’s business a relevant consideration to be taken into account on cancellation decision – Whether cancellation decision disproportionate – Appeal dismissed
The appellant taxpayer was a small family-owned company which carried on business as a water well engineer. It was registered for gross payment under the Construction Industry Scheme (CIS) enacted in Chapter 3 of Part 3 of the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005.
The appellant’s registration was kept under regular review, with those reviews being carried out, in later years, by computer on an annual basis. In July 2009, the appellant failed a review for the first time, because of late payment of PAYE, and its registration was cancelled pursuant to section 66 of the 2004 Act. Although the registration was reinstated on an appeal to the respondents, a clear warning was given that, for the appellant to continue to benefit from gross payment status, both the payment of tax and filing of returns had to be made on time.
A similar thing happened in 2010, with the appellant again failing its annual review by reason of late payments of PAYE, and its registration again being cancelled and then reinstated on appeal, with a further warning given. Finally, on a review in 2011, there was a further review failure leading to a further cancellation of the appellant’s registration, which, on that occasion, was upheld by the respondents, who considered that no reasonable excuse had been provided for the failures. The appellant requested an internal review, claiming that if its gross payment registration was removed, it would lose its major customer, would be unable to continue trading and would have to make several people redundant.
Confirming the respondents’ decision, the reviewing officer indicated that, in light of the decision of the High Court in Barnes (Inspector of Taxes) v Hilton Main Construction Ltd [2005] EWHC 1355 (Ch); [2005] STC 1532), no test of proportionality could be read into the legislation so that the effect on the appellant of cancelling its registration could not be taken into account.
Although the appellant was successful on an appeal to the first-tier tribunal (FTT), which distinguished the decision in Barnes and held that the respondents had erred in law in not taking into account the adverse effect on the appellant’s business, that decision was later reversed by the Upper Tribunal and the respondent’s decision reinstated: see [2015] UKUT 0392 (TCC). The appellant appealed.
Held: The appeal was dismissed.
(1) The CIS was introduced in order to counter not just tax avoidance, but widespread criminal evasion of tax in the construction industry. The remedy chosen by parliament was a system which required all payments by a contractor to a sub-contractor in the industry to be made under deduction of tax, unless the sub-contractor had applied for, and obtained, registration for gross payment. The registration provisions of the 2004 Act were highly prescriptive and stringent, as was the compliance test laid down in para 12 of Part 3 of Schedule 11 to that Act, subject to the “reasonable excuse” exception laid down in para 12(3). Since registration for gross payment was a privilege earned by demonstrating a good track record with regard to the compliance test, provision clearly had to be made for cancellation of the privilege, and reversion to the default position of payment under deduction of tax, if circumstances no longer warranted its continuation. Section 66(1) empowered, but did not oblige, the respondents to make a determination cancelling a person’s registration for gross payment with effect from the end of a prescribed period if it appeared to them that any of the three specified conditions was satisfied. The existence of that discretion was one of several safeguards for the taxpayer built into the legislation, along with the requirement to give reasons for a cancellation decision, the right of appeal under section 67 and the entitlement to re-apply for registration for gross payment after one year had elapsed from the cancellation.
(2) There was no indication, in that tightly-constructed statutory scheme, that parliament intended the respondents to have the power, or still less a duty, to take into account matters extraneous to the CIS regime when deciding whether or not to exercise the power of cancellation in section 66(1). Such extraneous matters included, in the present context, matters which did not relate, directly or indirectly, to the requirements for registration for gross payment and to the objective of securing compliance with those requirements. Had parliament intended to authorise the respondents to take into account the impact of cancellation on the taxpayer’s business, one would expect that to be stated expressly, and some guidance to be given the primary legislation about how such a difficult task was to be performed. Accordingly, section 66(1), on its true construction, neither authorised nor required the respondents to take into account the likely impact on the taxpayer’s business and financial position when deciding whether or not to exercise their power to cancel registration for gross payment.
(3) There were many contexts in which the common law would require proportionality between ends and means to be observed by a public authority in the exercise of its functions. However, that did not assist the appellant since the CIS legislation as a whole was clearly proportionate in the balance which it struck between ends and means, and in the procedural safeguards for the taxpayer which were built into it. Any common law requirement of proportionality would be satisfied if the matters that the respondents were entitled to take into account in exercising their discretion under section 66(1) were broadly confined to matters relevant under the statutory scheme to the grant of registration for gross payment, but with a wider margin of discretion than the often highly prescriptive terms of the legislation would otherwise permit. The impact of cancellation of registration on the appellant’s business was an extraneous factor. Gross registration was a privilege which had to be earned by satisfying various conditions and which was liable to be lost if those conditions were no longer satisfied. The compliance conditions were all matters within the control of the taxpayer, and the consequences of non-compliance were clearly spelt out in the legislation.
(4) For similar reasons, the appellant could not mount any proportionality challenge under the European Convention on Human Rights. While Article 1 of the First Protocol (A1P1) to the Convention had to be considered at the stage of exercising the discretion conferred by section 66(1), since cancellation of a certificate involved an interference with the appellant’s possessions, it did not follow that the proportionality review under the Convention always needed, at that stage, to go beyond the proportionality of the CIS regime as a whole. In all save the most exceptional cases, it would be a complete answer that the discretion formed an integral part of a Convention-compliant statutory regime. The impact on the appellant’s business did not come near to satisfying the test of exceptional circumstances so as to justify a wider proportionality review at the stage of exercise of the power of cancellation. Given the practical and cash-flow advantages of registration for gross payment, it was always probable that cancellation of the registration would seriously affect the taxpayer’s business. Far from being exceptional, such consequences were likely to be the norm, and taxpayers had to be taken to be well aware of the risks to their business which cancellation would bring. The adverse effect on the appellant’s business was an entirely predictable consequence of the appellant’s non-compliance, for which it had only itself to blame. While the result might seem harsh in individual cases, a degree of harshness in a regime which was designed to counter tax evasion, and where continued compliance was within the power of the sub-contractor, could not be characterised as disproportionate. Both deterrence, and ease of compliance, were important factors which helped to make the CIS scheme as a whole clearly compliant with A1P1.
Thomas Chacko (instructed by Ian Whalley, of Blackburn) appeared for the appellant; James Rivett (instructed by the General Counsel and Solicitor to HMRC) appeared for the respondent.
Sally Dobson, barrister
