CONSTRUCTION INDUSTRY SCHEME – Appellant late with PAYE payments every month in the 3-year qualifying period – whether defaults "minor and technical" (s 565(4) Taxes Act 1988) – no – appeal dismissed
THE SPECIAL COMMISSIONERS
GLAZE & FRAME LIMITED Appellant
- and -
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Special Commissioner: DR JOHN F. AVERY JONES CBE
Sitting in public in London on 23 August 2005
Andrew Gotch CTA (Fellow), Professional Tax Practice Limited, for the Appellant
Nicola Parslow, HM Inspector of Taxes, Central England Appeals Unit, for the Respondents
© CROWN COPYRIGHT 2005
"(3) The company must, subject to subsection (4) below, have complied with all obligations imposed on it by or under the Tax Acts or the Management Act in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of, or other information about, the business of the company in respect of periods so ending.
(4) A company which has failed to comply with such an obligation or request as is referred to in subsection (3) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that the conditions mentioned in subsection (8) below will be satisfied.
(8) There must be reason to expect that the company will, in respect of periods ending after the end of the qualifying period, comply with all such obligations as are referred to in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above."
The issue in the appeal is whether the Appellant has satisfied the two tests in subs (4) relating to the past and the future.
(1) The Appellant, Glaze & Frame Limited, is a company.
(2) The Appellant's registration number is 3730157.
(3) The Appellant was incorporated on 10 March 1999.
(4) The Registered Office is 1 York Hill, Loughton, Essex, IG10 1RL.
(5) The sole director of the Appellant is Mr T A Sawyer.
(6) The 100% shareholder of the Appellant is Mr T A Sawyer.
(7) The Appellant succeeded to the trade previously carried on by Mr T A Sawyer as a sole trader on 1 May 1999 and commenced trading on that date.
(8) The business address of the Appellant is 388 Harrow Road, London, W9 2HU.
(9) The Appellant was issued with a Subcontractor's Tax Certificate (CIS6) on 13 July 1999.
(10) On 21 June 2002 the Appellant made an application on form CIS85 (Company) to renew its Subcontractor's Tax Certificate (CIS6).
(11) The application was signed by Paul Walsh, as Company Secretary of the Appellant.
(12) Payments were made by the Appellant in respect of its liabilities under the PAYE system and in respect of its Corporation Tax liabilities as follows during the qualifying period in relation to the application mentioned at (10) above:
|Month||Due Date||Date Paid||Tax/NIC £||Days Late|
|Month||Due Date||Date Paid||Tax/NIC £||Days Late|
|Month||Due Date||Date Paid||Tax/NIC £||Days Late|
|AP||Due Date||Date Paid||Amount £||Days Late|
(13) A CIS6 Certificate was authorised on 12 August 2002.
(14) On 6 June 2005 the Appellant made an application on form CIS85 (Company) to renew its CIS6.
(15) The application was signed by Paul Walsh, as Company Secretary of the Appellant.
(16) Payments were made by the Appellant in respect of its liabilities under the PAYE system and in respect of its corporation tax liabilities as follows during the qualifying period in relation to the application mentioned at (14) above as follows:
|Due Date||Date Paid||Tax £||NIC £||Days Late|
|Accounting Period Ended||Due Date||Date Paid||Tax||Days Late|
(17) The following actions have been taken to collect the PAYE liability:
|Year||Month||Issue of Reminder
|Issue of P101||Visit to Business Premises Made|
28-Apr-04 & 17-May-04
(18) On 23 June 2005 the Inspector gave a Notice of his decision that he was unable to grant a Certificate.
(19) On 29 June 2005 Pollock Taylor appealed against the Inspector's decision on behalf of the Appellant.
(1) The Appellant is a glazing contractor with a turnover of £1.5m employing 20 people. About 80% of its work is contracting (of which 60% to 70% is for Ealing Family Housing Association), and 20% retail. A CIS certificate is necessary to its contracting business. The Housing Association has written to the Appellant saying that in the absence of a certificate it will not continue to engage the Appellant because of the extra administrative work that would be entailed.
(2) Mr Pollock's firm calculates the PAYE deductions using a bureau and makes the payments to employees on the Appellant's behalf by BACS. It gives Mr Sawyer the PAYE figure by about the 5th of the following month. Mr Sawyer pays the PAYE with the other monthly creditors. The cheques are prepared at the end of the month and sent out in batches over the following days, which accounts for the payment dates shown above. He is aware of the 19th of the following month being the due date for payment of PAYE but his established pattern of payments has continued with only computer generated letters from the Revenue which he did not see personally as the post was opened by his assistant who, being aware that PAYE payments were in hand, did not bring these to Mr Sawyer's attention. Form IDMS1 (see paragraph 4(17)) is a reminder sent immediately if payment is not received by the 19th of the month saying "It is most important that you make payment immediately if recovery proceedings are to be avoided." Form P101 states that payment must be made within 7 days and "If you do not do so the specified amount may be recovered by Distraint without further warning." The Appellant had the funds to pay on time but did not realise the importance of doing so.
(3) Mr Pollock described Mr Sawyer's attitude to compliance of his tax obligations as being as good as it could possibly be, particularly when compared to other clients in the industry. Mr Sawyer often put his firm under pressure to do compliance work quickly. Apart from the delays in making the PAYE payments, which was unknown to him as the payments were made by the Appellant, the record in relation to other tax obligations was excellent.
(4) Mr Wright, distraint officer, made the visits on 5 July 2004, 7 December 2004 and 2 February 2005. On the second of those visits he was shown details of the cheque previously posted. He says that on that visit he warned of distraint action if the cheque was not received. He also says that he warned that on the due date a P101 would be issued giving 7 days to pay after which he would start to take distraint action, the nature of which he explained. He thought that he met the same person on his third visit, which Mr Sawyer agrees was himself. Mr Sawyer says (and I accept) that he remembers two different people calling on different occasions to pick up cheques but he was not the person that Mr Wright met on 7 December 2004. He also says that his assistant had no recollection of the visit. As I have not heard evidence from the assistant I find that Mr Wright did make the explanations to the assistant, and was mistaken when he says that he thought he met the same person on the third visit. Unfortunately these warnings were not passed on to Mr Sawyer. On one occasion when a letter was received from the collector about a payment that they had already made Mr Sawyer was made aware of this and he telephoned the collector.
(5) Mr Eldridge, the Inspector who refused the certificate, considered the Appellant's history of returns and payments and in the light of the guidance in IR40 concluded that the defaults were not minor and technical and so did not need to consider the test relating to the future in s 565(4) and (8). There was no place on the application form for explanations about defaults but if an explanation had been given after the refusal and appeal he would have considered it and would have been able to allow the appeal by agreement. No explanations were ever received from the Appellant. (Mr Gotch explained that having received the refusal he thought that there was no point in making further representations and was progressing the appeal.) Mr Eldridge was not aware of the circumstances relating to the issue of the previous certificate.
(1) The refusal to issue a certificate is inconsistent with the policy purpose of the legislation in question.
(2) It is not in the interest of public policy for the Revenue arbitrarily to change its approach to dealing with a taxpayer without notice when circumstances remain unchanged.
(3) The failure of the Appellant was minor and technical.
(4) The Appellant's failure gives no reason to doubt that it will comply with its obligations under s 565(3) in the future.
(5) The statute requires the exercise of a discretion by the Inspector and the Inspector has failed to exercise his discretion properly or at all.
(1) The Inspector properly applied the statutory tests; and his decision was properly arrived at.
(2) During the qualifying period all 36 PAYE payments due were late. Out of the 36 late payments, 28 were made more than 14 days late. There were 3 Corporation Tax payments due in the qualifying period. All three payments were made late.
(3) The inspector correctly found that there were failures, that the failures were not minor and technical and that there was no reason to expect future compliance.
Policy of the legislation
"In the absence of the statutory provision with which this appeal is concerned Vicky would be entitled, like any other sub-contractor, to be paid the contract price in accordance with its contract with the contractor without any deduction in respect of its own tax liability. However it became notorious that many sub-contractors engaged in the construction industry "disappeared" without settling their tax liabilities, with a consequential loss of revenue to the exchequer. In order to remedy this abuse Parliament has enacted legislation, which goes back to the early 1970's, under which a contractor is obliged, except in the case of a sub-contractor who holds a relevant certificate, to deduct and pay over to the Revenue a proportion of all payments made to the sub-contractor in respect of the labour content of any sub-contract".
Lightman J described the purpose of the legislation in similar terms in Hudson v JDC Services Ltd  STC 834 at :
"A special regime is laid down governing payments to such sub-contractors (as therein defined) which originated in ss 29 and 30 of the Finance Act 1971 (''the 1971 Act'') and was designed to clamp down on the practice prevalent at the time of subcontractors evading the payment of tax. That regime requires contractors (again as therein defined) to deduct on account of tax from payments which they make to sub-contractors and to pay over the Revenue a proportion of all payments made to sub-contractors in respect of labour unless the sub-contractors possess a CIS Certificate. The exception is framed to exclude from the regime payments to sub-contractors where there is no substantial risk of evasion and to whom (as evidencing the absence of such risk) CIS Certificates have been issued".
Change in approach to the Appellant
"I should mention that Mr Eicke also complains that the Commissioners erred in law in that they took into account irrelevant matters, namely the circumstances surrounding the issue of the previous Certificate…. I do not think that this takes the case any further. First, even if this matter were irrelevant, it would not alter the fact that the other facts relied on by the Commissioners were sufficient to support their conclusion. Second, I do not accept that this matter is necessarily irrelevant. As Mr Goodfellow argues, the fact that the Revenue had issued a previous certificate in the knowledge of what appears to have been similar circumstances can cast some light on whether the Revenue acquiesced in CBL's actions. Furthermore it could be a factor which is to be put in the balance in determining whether CBL had demonstrated a cavalier attitude to its tax responsibilities or whether it was a company which took those responsibilities seriously".
Minor and technical
"The expression 'minor and technical' is not itself a technical expression. The process of discerning the meaning which Parliament intended to convey is not greatly assisted by considering dictionary definitions of 'minor' and or 'technical.' Still less does it assist to point out that the failure must be both 'minor' and 'technical' to qualify. The prospect of the relevant decision maker concluding that a particular failure is minor but not technical, or vice versa, risks introducing a degree of pedantry into the test which would deprive it of all practical value save as a moot point for legal debate. We are dealing here with a composite phrase which must be construed purposively. The purpose which Parliament plainly had in mind was to procure strict compliance with tax obligations by making such compliance the price of obtaining a certificate. Parliament also recognised that failures to achieve such strict compliance might be, in the context of the grant of such certificates, venial. Whether, in a particular case, the failure is to be so regarded is a decision which (if Hudson is correct) has been left ultimately to the Commissioners to be found as a matter of fact and degree."
Laddie J said this in Cormack v CBL Cable Contractors Limited, 15 June 2005 (not yet reported)  EWHC 1294 (Ch):
- …It seems to me that the words "minor and technical" have to be construed in their context. As Lightman J pointed out in Hudson, there are two discrete matters to be considered in applying section 565(4) (or section 562(10) in respect of individuals or section 564(4) in respect of firms). One looks to the past. The other looks to the future. As far as the former is concerned, the underlying question is whether or not the past defaults of the taxpayer have been, to use Lightman J's words, "of any significance". Significance in this context includes consideration of whether the defaults demonstrate a cavalier attitude of the taxpayer to his obligations under the tax legislation. Even if defaults are large or numerous in money terms, the circumstances may make them not significant for these purposes. The words "minor and technical" can have different meanings. There is nothing in the legislation to suggest that they are primarily or exclusively concerned with size and frequency. Some of the liabilities covered by the legislation are not concerned directly with the payment of money. In context "minor and technical" should be construed in a way which allows them to be used to gauge whether there is a risk that the sub-contractor will default on his tax obligations. If, for example, a company is late in paying a very large tax bill because, wrongly and in breach of its customer's instructions, the bank on which the company's cheque is drawn fails to honour it, the breach should be treated as minor and technical even though, from an accountant's point of view, the sum involved was large and not minor.
- It seems to me that this approach is consistent with the contents of Inland Revenue Leaflet IR40. That explains the types of defaults which the Revenue considers are unlikely to meet the compliance tests. Among them is failure to keep to an instalment agreement. On the other hand, late payment of tax in compliance with an instalment agreement would not result in the refusal of a CIS Certificate. Mr Eicke accepts that such an agreement might involve the late payment of substantial sums yet, because it is done with the agreement of the revenue, the sums would still be regarded as minor. Similarly IR40 states:
'We will bear in mind the size of the business. If it is reliant on one person, and that person falls ill for a period of weeks or months, we will take that into account.'
No reason to doubt compliance in future
Failure to exercise discretion
JOHN F. AVERY JONES
RELEASE DATE: 30 August 2005
Authorities referred to in skeletons and not referred to in the decision:
Kirvell v Guy52 TC 445
Phelps v Moore 53 TC 433
Kington v Reilly 54 TC 707
Jones v Lonnen 54 TC 714
Gorge Fabrications v Wilson  STC (SCD) 293
T & C (Haulage) v Gleig  STC (SCD) 64
R v Sampson ex p. Lansing Bagnall 61 TC 112
British Oxygen Co Ltd v Minister of Technology  AC 610
Williams v Trustees of WW Grundy 18 TC 271
Marson v Morton 59 TC 381
Lupton v FA & AB Ltd 47 TC 580
Ross Marks v McNally  STC (SCD) 503
J&R O'Kane & Co v IRC 12 TC 303
Woods v Lightpower  All ER (D) 234 (Jun)