Taxation – Proportionality – Registration for gross payment — Section 66 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. 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. The appellant appealed to the First-tier Tribunal which accepted the appellant’s evidence that the cancellation, once it took effect, would have had a seriously detrimental impact on the appellant and allowed its appeal, holding that the respondents had been wrong not to take account of the likely impact on the appellant’s business. However, that decision was overturned by the Upper Tribunal and the respondent’s decision reinstated: [2015] UKUT 0392 (TCC).
The Court of Appeal agreed, holding that there was no indication that Parliament had intended the respondents to have the power or the duty to take into account matters extraneous to the CIS when deciding whether to exercise the power of cancellation pursuant to section 66(1); and that the discretion under section 66 formed part of a statutory regime which complied with article 1 of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms (A1/P1): [2016] EWCA Civ 1160; [2016] PLSCS 323. The appellant appealed to the Supreme Court.
Held: The appeal was dismissed.
(1) The Court of Appeal had reached the right conclusion. Although the respondents’ discretion under section 66 of the 2004 Act was unfettered, the basic principle was that any statutory discretion had to be exercised consistently with the objects and scope of the statutory scheme. The power could not be read as extending to 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. The scheme was highly prescriptive starting with the narrowly defined conditions for registration in the first place, among which the record of compliance with the tax and other statutory requirements was a mandatory element, allowing no element of discretion. The same conditions were brought into the cancellation procedure by section 66. The mere fact that the cancellation power was not itself mandatory was unsurprising. Some element of flexibility might be desirable in any enforcement regime to allow for cases where the failure was limited and temporary (even if not within the prescribed classes) and posed no practical threat to the objectives of the scheme. It was wholly inconsistent with that tightly drawn scheme for there to be implied a general dispensing power such as implied by the appellant’s submissions.
(2) There was force in the respondents’ submission that, even accepting that rights conferred by registration amounted to “possessions” within A1/P1, they could not extend beyond the limits set by the legislation by which they were created. However, it was unnecessary to decide the appeal on that point, since the Court of Appeal had been right to hold that any interference was proportionate. The statute did not in itself require the consideration of the impact on the individual taxpayer and there was nothing in A1/P1 which would justify the court in reading in such a requirement. Registration was a privilege conferred by the legislation, which had significant economic advantages, but it was subject to stringent conditions and the risk of cancellation. The impact on the appellant was no different in kind from that which was inherent in the legislation. Therefore, the exercise of the power within the scope of the statutory framework came well within the wide margin of appreciation allowed to the state for the enforcement of tax.
Thomas Chacko and Jessica Boyd (instructed by Ian Whalley Solicitors, of Blackburn) appeared for the appellant; James Eadie QC and James Rivett (instructed by the General Counsel and Solicitor to HMRC) appeared for the respondent.
Eileen O’Grady, barrister
