England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		26/03/2004

Mr Justice Lightman:

INTRODUCTION

1. This is an appeal by way of case stated by the Inland Revenue ("the Revenue") under section 56(6) of the Taxes Management Act 1970 ("TMA 1970") and Regulation 20 of the General Commissioners (Jurisdiction and Procedure) Rules 1994 (SI 1994/1812) from the decision ("the Decision") of the General Commissioners for the Division of Rochford in the County of Essex ("the Commissioners") recorded in the Case Stated, which was received by the Inland Revenue on 9 October 2003. The Commissioners allowed the appeal by the respondent JDC Services Limited ("JDC") against the refusal of the Inspector of Taxes ("the Inspector") in a letter dated the 28^th February 2003 to issue to JDC a statutory Construction Industry Scheme Certificate ("a CIS Certificate").
2. At issue on this appeal is the true construction of section 565, which forms part of Chapter IV ("Chapter IV") of Part XIII, of the Income and Corporation Taxes Act 1988 ("the 1988 Act") and in particular of the conditions which that section requires to be satisfied by companies applying for the issue to them of CIS Certificates under section 561 of the same Act. In this judgment, unless otherwise indicated references to sections are to sections in the 1988 Act.
3. Chapter IV is concerned with sub-contractors in the construction industry. A special regime is laid down governing payments to such sub-contractors (as therein defined) which originated in sections 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 to 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.

STATUTORY SCHEME

4. Section 565 sets out the conditions that must be satisfied by companies so that they may obtain a CIS Certificate under section 561. Section 565(3) provides:

"The company must, subject to sub-section (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 a qualifying period and with all requests supply to an inspector accounts of, or other information about, the business of the company in periods so ending."

5. For the purposes of that subsection: (1) the "Tax Acts" are defined by section 831(2) as the 1988 Act and "all provisions of the Income Tax Acts and the Corporation Tax Acts"; (2) the "Income Tax Acts" are defined by section 831(1) as the "enactments relating to income tax, including any provision of the Corporation Tax Acts which relate to income tax;" (3) the "Corporation Tax Acts" are defined by section 831(1) as the "enactments relating to the taxation of income and chargeable gains of companies and company distributions (including provisions relating also to income tax);" (4) the "Management Act" is defined by section 831(3) as the TMA 1970; and (5) the "qualifying period" is defined by s.565(9) as the period of three years ending with the date of the company's application for a CIS Certificate under section 561.
6. Section 565(4) provides a limited exception to the requirement of section 565(3), affording a let-out from the consequences of non-compliance in a strictly limited class of case:

"A company which has failed to comply with such an obligation or request is referred to in sub-section (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 sub-section (8) below will be satisfied."

7. Section 565(8) lays down a condition to be satisfied by all applicants:

"(8) There must be reason to expect that the company will, in respect of the periods ending after the end of the qualifying period, comply with all such obligations as are referred to in sub-sections (2) to (7) above and with such requests as are referred to in sub-section (3) above."

8. Section 561(9) confers on a disappointed applicant a right of appeal:

"(9) A person aggrieved by the refusal of an application for certificate under this section or the cancellation of such a certificate may, by notice given to the Board within thirty days after refusal or, as the case may be, cancellation, appeal to the General Commissioners or, if so elects in the notice, to the Special Commissioners; and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section."

RELEVANT FACTS

9. The relevant facts are set out in paragraphs 5 of the Statement of Case:

i) "There were 31 late payments of PAYE and CIS deductions within the qualifying period of the 13th February 2002 to the 12th February 2003, 25 of which were 14 or more days late;

ii) Corporation tax due on the 1st March 2001 remained outstanding until the 31st July 2002. Corporation tax due on the 1st March 2002 remained outstanding until the 11th October 2002;

iii) [JDC] was consistently late in filing returns. The Corporation Tax Return due to be filed on the 31st May 2002 was received on the 11th June 2002. The P35 and CIS 36 returns due on the 19th May 2000 were received on the 1st June 2000. The P35 and CIS 36 returns due on the 19th May 2001 were filed on the 15th June 2001. The P35 and CIS 36 due on the 19th May 2002 were filed on the 31st May 2002. [JDC] was charged a penalty for late filing of PAYE 35 and CIS 36 in each of these years."

10. Furthermore, at paragraph 6(vii) of the Case Stated, the Commissioners found as a fact that, when following a successful appeal to the Basildon General Commissioners in 2001 a previous CIS Certificate had been granted to JDC, JDC had been in arrears with PAYE and CIS deductions in the sum of £100,000, which was paid off over a period of two and a half years on an instalment basis.

DECISION

11. The relevant part of the Decision reads as follows:

"We, the Commissioners found the non compliance not to be of a minor and technical nature as a matter of law, however the company has made considerable and sustained efforts to bring its tax affairs up to date during the life of the certificate granted on the 10^th August 2000 by The Basildon Commissioners who were aware at that time of the companies arrears of tax amounting to £100K. We believe that this is a well run company whose Directors have made every positive efforts to overcome their indebtedness. The Company with the help of the Collector of Taxes, who agreed that the arrears of tax be paid on an instalment basis, has now cleared its outstanding tax situation, and with the benefit of large contracts which are now being awarded to it, the Directors and their accountants have assured us that within three months the company going forward will be in a position to pay all its future taxation on the due date. We believe that the company have done there [sic] very best to maintain its tax affairs over the last few years given the exceptional circumstances the company has encountered. The Company have demonstrated that it is professional, and have taken significant and determined measures to ensure that its tax affairs are put into order, thereby fulfilling its agreement with the Inland Revenue. JDC Services Ltd is on the brink of success, and we consider that with its proven commitment, and the large contracts they are now being awarded, it will be able to comply with all their future tax obligations."

ISSUES

12. Four issues are raised on this appeal. I consider each of them in turn.

(a) Requirement that failure is minor and technical

13. The first issue is whether (as contended by the Revenue) in section 565(3) there are laid down two requirements, namely that the failure is minor and technical and that the failure does not give rise to a doubt whether the conditions mentioned in section 565(8) will be satisfied or whether (as contended by JDC in its skeleton argument) "the subsection posits a composite test of whether the failures in question are minor and technical so as to give reason to doubt that the taxpayer will comply with all his obligations".
14. It seems to me quite plain that the two requirements are laid down as contended by the Revenue. The already strict test for entitlement to a CIS Certificate laid down in section 565(8) is deliberately raised where there have been failures in the past and there are imposed two further hurdles to be surmounted.
15. I do not follow how on the alternative formulation of the test proposed by JDC in its skeleton argument and propounded at the hearing the hurdle that the past failures have been minor and technical is obviated. The formulation maintains it. In oral argument JDC went on to argue that in effect the only requirement was whether the past failures gave reason to doubt that the conditions laid down in section 565(8) would be satisfied and that the reference in the earlier part of the subsection to the failures being minor or technical was merely an example of circumstances where the past failures would or might not give rise to a doubt as to future compliance. Any such reading requires (in effect) running a blue pencil through the words in section 565(4) "is minor and technical and". This involves rewriting the subsection and is not merely an untenable approach to construction, but an approach which contravenes the clear policy of the legislation to require the holder of a CIS Certificate to have a good record of compliance with no failure in the past of any significance.
16. The Commissioners in the Decision expressly held that JDC's failures were not minor or technical but did not expressly address this question of construction. They appear to have assumed to be correct or adopted the argument put forward by JDC that the fact that past failures were not minor and technical was not fatal to the application. For otherwise they must have dismissed the appeal. The Decision is accordingly fatally flawed by error of law on this ground.

(b) Requirement of absence of reason to doubt

17. The second issue relates to the second requirement laid down in section 565(3). The past failure must not give reason to doubt that the conditions mentioned in section 565(8) will be satisfied. The language of section 565(3) and 565(8) in this regard are to be contrasted. In the ordinary case of an application for a CIS Certificate, section 565(8) requires the applicant to satisfy the Revenue merely that it will comply with the statutory obligations referred to. But under section 565(4), in the case of a company which has failed in the past to comply with such obligations, beyond establishing that the past failures were minor and technical, the applicant must establish that the past failure "does not give reason to doubt" that there will be compliance in the future. In the case of applications falling to be determined both under section 565(4) and 565(8) the full circumstances at the date of the application so far as they relate to the applicant must be taken into account, but a much higher hurdle lies in the way of a company with a "past". If consideration of the full circumstances give reason to expect compliance in the future though leaving a lingering reason to as to due compliance in the future, the conditions set out in section 565(8) will be satisfied, but under section 565(4) the application will fail.
18. The Commissioners in the Decision have failed to recognise or address this distinction. They have simply applied the test in section 565(8) without addressing the question whether there is "reason to doubt" future compliance. On this ground also the Decision cannot stand.

(c) Jurisdiction of Commissioners to review

19. The third issue raised is the nature of the jurisdiction of the Commissioners on an appeal from a refusal by the Revenue of the CIS Certificate. In short the question is whether (as contended by JDC) under section 561(9) the Commissioners can determine afresh the decision of the Revenue to refuse a CIS Certificate (giving due weight to the decision of the Revenue to refuse) and are free to substitute their judgment for that of the Revenue or whether (as contended by the Revenue) the Commissioners are limited to determining whether the Revenue's decision is flawed by illegality. This question was left open by Ferris J in Shaw v. Vicky [2002] STC 1544 at 1551 paragraphs 24 and 25.
20. The word "review" means a rehearing which may pronounce anew the rights of the parties: see Colpitt v. Australian Communications (1986) 9 FCR 52 at 63 per Burchett J. In the appropriate context the word "review" may properly indicate either of the two appellate jurisdictions contended for by the parties. It is necessary to examine the context in which the word is here used.
21. I turn first to the historical context, and in particular consider the history of section 561(9) and the final provision in section 561(9) which reads:

" and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section."

The sub-contractor's scheme was first enacted by the 1971 Act. Section 30(5) of the 1971 Act conferred a right of appeal in identical terms to those which now appear in section 561(9). Sections 68-70 of the Finance (No 2) Act 1975 ("the 1975 Act") replaced the scheme under sections 29 and 30 of the 1971 Act and in section 70(6) limited the jurisdiction of the Commissioners to review the exercise of the Revenue's functions by the express exclusion from their power of review of decisions on compliances with the conditions now contained in section 565. Accordingly the opinion of the Revenue on entitlement to CIS Certificates was final and conclusive subject only to the supervisory jurisdiction of the court on an application for judicial review. This limitation imposed by the 1975 Act was removed by the Schedule 8(2) of the Finance Act 1980, and the resultant position was continued by the 1988 Act. The question now raised is whether the removal of the limitation was intended to confer on the Commissioners merely an equivalent jurisdiction to that exercisable by the court on judicial review or whether it was intended to confer a full appellate jurisdiction entitling the Commissioners (whilst giving full weight to the views expressed by the Revenue) to substitute their own judgment. In my judgment it is unlikely that the amendment was merely intended to vest a power of supervision in the Commissioners equivalent to that exercisable by the court on judicial review as an alternative forum to the court: consider Dart Harbour and Navigation Authority v. Secretary of State for Transport Local Government and the Regions [2003] 2 Lloyd's Rep 607 paragraphs 28 and 29 at 614.

22. I turn next to the statutory context which, in my judgment, also supports the conferment on the Commissioners of a full appellate jurisdiction entitling them to substitute their judgment as to the entitlement of an applicant for a CIS Certificate for that of the Revenue. My reasons are as follows: (a) the statutory context is a subsection conferring full appellate jurisdiction on the Commissioners, which is to "include" jurisdiction to review a decision on entitlement to a CIS Certificate; (b) the decision of the Revenue under appeal does not involve any exercise of discretion. Statutory rules regulate how the power to grant CIS Certificates is to be exercised. What is required of the Revenue is to apply the statutory criterion. There is no reason why the Commissioners should not on appeal undertake the same exercises; (c) the decision of the Revenue, an administrative body, to refuse the grant has far reaching implications for the applicant. The ordinary expectation would be that the appellate or reviewing body should be entitled to consider afresh whether the applicant is or is not entitled to the CIS Certificate; and (d) the conclusion which I have reached accords with the approach taken by Goulding J in Lothbury Investment Corp. Ltd v. CIR (1979) 53 TC 223.
23. I therefore hold that the Decision could not successfully be challenged on the ground that it proceeded on the basis that the Commissioners were not free to substitute their own judgment. The Decision is however open to challenge on the two other grounds which I have given.

(d) Quashing of Certificate

24. Upon the Decision being given, unless and until any reversal of the Decision, the Revenue were legally obliged to issue the CIS Certificate. I have held today that the Decision was wrong and the CIS Certificate ought never to have been issued. The question has arisen whether I have jurisdiction, at the same time as I allow the appeal, to quash the CIS Certificate. As a matter of common sense, if it is clear that in the circumstances of this case the 1988 Act proscribed the issue of the CIS Certificate to JDC, at the same time as I give judgment to this effect I should quash the CIS Certificate. The issue however is raised whether I have jurisdiction to do so.
25. The answer to this question is to be found in section 56(6) of the TMA 1970 which reads as follows:

"(6) The High Court shall hear and determine any question or questions of law arising on a Case Stated and transmitted to the High Court under Regulation 22 of the General Commissioners' Regulations, and shall reverse, affirm, or amend the determination in respect of which the case has been stated, or shall remit the matters to the Commissioners with the opinion of the Court theron or make such other order in relation to the matter as the Court may seem fit."

26. The power conferred by the concluding words "or make any such other order in relation to the matter as the court may think fit" in my judgment must embrace the power to make consequential order for cancellation of CIS Certificates erroneously granted. The Revenue does have a power under section 561(8)(b) to cancel a CIS Certificate which it has granted in the past if it is clear at the time of intended exercise of the power of cancellation that it would refuse an application then made for such a certificate. But I see no advantage or reason why recourse should be required to this procedure. The matter is before the court, no reason is put forward why the court should not (if it possesses the power) exercise this jurisdiction and I hold that in the circumstances I can and should exercise the statutory power to quash.

CONCLUSION

27. I accordingly allow the appeal and quash the CIS Certificate.