Taxation – Construction industry scheme – Non-liability direction – Appellants paying sub-contractor without deducting tax or making payments to HMRC under Construction Industry Scheme – Respondent commissioners determining liability – Respondents refusing appellants’ application for non-liability direction – Court dismissing application for judicial review – Appellants appealing – Whether respondents having power to issue non-liability direction where existing and prior determination of liability to pay same amount – Appeal allowed
The appellants comprised six companies in the same group and were all contractors within the construction industry scheme. They made payments to a sub-contractor without making any deductions on account of tax, as required by section 61 of the Finance Act 2004, and did not pay HMRC the amounts that should have been deducted, as required by regulation 7(1) of the Income Tax (Construction Industry Scheme) Regulations 2005. In each case the respondent commissioners made determinations under regulation 13(2) of the 2005 Regulations, determining the amount which the taxpayer was liable to pay.
Regulation 9 of the 2005 Regulations empowered respondents to issue a direction that the contractor was not required to pay where the contractor could establish that the failure to deduct was due to an honest error or belief or the sub-contractor was not chargeable to tax or had made a personal tax return taking the payments into account and the contractor requested a direction that it was not liable to pay the excess.
The appellants’ appealed the determinations but the First-tier Tribunal stayed the appeal pending the resolution of judicial review proceedings.
Regulation 9 was not invoked by the appellants before the determinations was made and the respondents refused the appellants’ subsequent request for a non-liability direction under regulation 9(5). The court dismissed the appellants’ application for judicial review holding, amongst other things, that regulation 13(3) provided that the existence of a prior, extant liability determination precluded the making of a subsequent non-liability direction: [2023] EWHC 977 (Admin). The appellants appealed.
Held: The appeal was allowed.
(1) Once made, a direction under regulation 9 was final. There was no provision in the regulations that contemplated that it might be adjusted or removed later. The appeal provisions in regulation 9 related to a refusal to issue a direction, not to the terms of a direction that was issued. In contrast, a determination might be adjusted upwards or downwards, including to nil. It was made “to the best of [the officer’s] judgment” (regulation 13(2)) and was subject to appeal under the Taxes Management Act 1970 as if it were an assessment (regulation 13(5)). It would become final only when it was either not appealed within the requisite time limit or any appeal was finally determined, whether through tribunal proceedings or through the operation of section 54 of the 1970 Act. In that respect there was therefore no symmetry between the two limbs of regulation 13(3).
(2) The first limb of regulation 13(3) presented no difficulty, because there was no need to address the possibility that a direction might cease to apply. Its existence simply precluded any determination of the amount in question. In contrast, a determination might fall away through the appeal process or be reduced so that it no longer covered a particular amount. Once that had occurred there would be nothing to prevent a direction operating in respect of that amount.
The circumstances in which a direction might be made were set out in regulation 9, the operative provision being regulation 9(5) (an officer “may direct”). If regulation 13(3) was intended to curtail the circumstances in which a direction might be made then it might be expected that there would, as a minimum, be a cross-reference to that in regulation 9. Regulation 13 more naturally dealt with the interaction of directions and determinations that were actually made. On the respondent’s approach, regulation 13(3) could remove the power apparently conferred by regulation 9 to make a direction, without there being any hint of that within regulation 9, which would be surprising.
(3) The ability to request a direction under regulation 9 was not open-ended. Once a determination had been made and became final, either through not being appealed or by an appeal being determined, there would be no scope to challenge it on the basis that a direction should be or should have been made. Further, if the contractor did not properly put regulation 9 in issue before the FTT then the appeal would be determined without reference to it, and any challenge to the FTT’s decision raising it as a new point was likely to receive short shrift. The FTT was given a full fact-finding rather than a merely supervisory role. It followed that, if the FTT found that the grounds of appeal were made out because reasonable care had been taken and there had been an error in good faith or there was the requisite genuine belief, then the tribunal could require the respondents to make a direction under regulation 9(5), and no doubt would do so.
(4) Even if the power the respondents relied on existed in this case, the proposition that whether the contractor was required to pay an amount for which it had been determined to be liable should depend on the exercise of the respondents’ discretion, rather than on the language of the legislation, and should do so in circumstances where, if the order of events had been different, then a direction would have prevented a determination being made, was unattractive. It was made all the more so in circumstances where the overall result might well be a windfall because the sub-contractor’s liabilities had, in fact, been discharged, such that the mischief at which the construction industry scheme was directed did not exist. Such a result would need clear words to justify it.
Accordingly, the respondents did have power to issue a direction under regulation 9 in respect of an amount that had been the subject of a determination under regulation 13. Provided that the determination remained capable of adjustment, regulation 13(3) provided a means for such a direction to be reflected in the determination. It followed that earlier FTT decisions that proceeded on the basis that the respondents had no such power were wrong to do so and should not be followed: North Point (Pall Mall) Ltd v HMRC [2021] UKFTT 0259 (TC) disapproved.
The respondents’ decision not to consider the appellants’ claim under regulation 9(4) would be quashed and the respondents would be required to reconsider the claim.
Michael Firth KC (instructed by Direct Access) appeared for the Appellants; Philip Simpson KC (instructed by HMRC Solicitor’s Office and Legal Services) appeared for the respondents.
Eileen O’Grady, barrister
