England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST)

		Royal Courts of Justice Strand. London. WC2A 2LL
		23 June 2005

Mr Justice Laddie:

Introduction

1. CBL Cable Contractors Limited ("CBL") carries on a substantial construction business. It acts as a sub-contractor on large projects. I am told by its Counsel, Mr Giles Goodfellow QC, that it currently has some 125 employees. At all material times it has held a Construction Industry Scheme 5 Certificate ("CIS Certificate"). In 1999, the Revenue objected successfully to the grant of the CBL's previous CIS Certificate but subsequently it relented and the certificate was granted. CBL operated under the latter certificate until its expiry in 2002. A further certificate was refused by the Inspector of Taxes but that refusal was overturned by the General Commissioners for the Division of Hartlepool ("the Commissioners"). This is an appeal by HM Inspector of Taxes (''the Revenue") by way of Case Stated, under s. 56(6) Taxes Management Act 1970 ("TMA 1970") and Regulation 20 of the General Commissioners (Jurisdiction and Procedure) Rules 1994 (SI 1994/1812), against the latter determination of the Commissioners.
2. The purpose of a CIS Certificate was explained by Ferris J in Shaw (Inspector of Taxes) v Vicky Construction Ltd [2002] STC 1544:

"[3] 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.

[4] In order to remedy this abuse Parliament has enacted legislation, which goes back to the early 1970s, under which a contractor is obliged, except in the case of a subs-contractor who holds a relevant certificate, to deduct and pay over to the Revenue a proportion of all payments made to the subcontractor in respect of the labour content of any sub-contract. The amount so deducted and paid over is, in due course, allowed as a credit against the sub-contractor's liability to the Revenue.

[5] The need to make and pay over such deductions can be an irritation to the contractor obliged to carry out this exercise. It also adversely affects the cash flow of the sub-contractor. Accordingly it is advantageous to a sub-contractor to have a statutory certificate rendering such a deduction unnecessary. The provision of such a certificate tends to make the subcontractor holding the certificate a more attractive party for the contractor to deal with and, by enabling the sub-contractor to receive the contract price without deduction, improves the subcontractor's cash flow."

3. In other words, to avoid the loss to the Revenue caused by sub-contractors defaulting on their tax liabilities, the contractor is obliged to pay the sub-contractor's likely tax liability in advance. The existence of a CIS Certificate enables the sub-contractor to be treated like any other trader both by the Revenue and by the contractors for whom it works. It will be appreciated from this that a CIS Certificate is very valuable to the sub-contractor. The ability to control the grant of these certificates is also of importance to the Revenue. In substance, the statutory scheme is designed to ensure that they are only granted to sub-contractors who are likely to comply with their tax obligations.
4. Past compliance or lack of it is a major factor to be taken into account in determining whether an application for a CIS Certificate should be granted or refused. Because of this, in this case the Inspector of Taxes and the Commissioners considered the compliance records of CBL. Furthermore, at some point, I believe during 2000, 90% of CBL's issued share capital was acquired by a company called BMS Limited which was controlled by Mr Bernard Goodchild. He also acquired the other 10% of the issued share capital. Because of this change of control, the Revenue was entitled to, and did, make a direction under s.561(6) & (7) Income and Corporation Taxes Act 1988 ("ICTA 1988") so that the compliance records of Mr Goodchild could also be examined when considering the renewal of CBL's CIS Certificate.
5. The Revenue refused to renew the CIS Certificate and CBL appealed to the Commissioners. Before them the Revenue relied upon three categories of alleged failures to justify its decision pursuant to ICT A 1988 Section 561(2):

i) Late payment by CBL of corporation tax for the accounting period allegedly ending on 31 March 2001.

ii) Late payment by CBL of P A YE/NIC/CIS 25 payments during the three year 'qualifying period' prior to the date of the application for renewal.

iii) Late submission of Self Assessment Returns for Mr Goodchild.

6. At the hearing, which lasted about a day, the Commissioners received written and oral evidence giving inter alia detailed explanations of the nature of and reasons for the failures and the steps taken to ensure future compliance. The oral evidence was given by Mr Goodchild and two other directors and managers of CBL, all of whom were available for cross-examination by the Revenue and questions from the Commissioners. The Revenue called no evidence of its own. Having listened to the evidence and considered the documents drawn to their attention, the Commissioners made various findings of fact to which I will refer below. Based upon them, the Commissioners came to the following conclusions:

"9 . We the Commissioners having heard the various

representations and contentions consider that:

9.1 Taking into account the circumstances of the issue of the previous certificate, the size and complexity of the taxpayer's obligations and the relative actions and inaction by the Revenue contemporaneously, the failures by the taxpayer and Mr. Goodchild now identified by, and relied upon by, the Revenue were minor and technical ones and the Revenue was unreasonable in its decision to refuse to issue to the taxpayer a CIS 5 Certificate.

9.2 The compliance test is not an absolute test in that the sub-contractor will be treated as satisfying the requirements of the test if any failure within the Qualifying Period is minor and technical (and the list of such is not limited to those set out in the Inland Revenue leaflet IR40) and does not give reason to doubt that the sub-contractor will meet its obligations in future and that we consider that to be the case. "

The Legislative Framework

7. The legislative framework in which this dispute has to be considered is as follows. S 565 ICT A 1988 sets out the conditions to be satisfied by companies in order that they may obtain a CIS Certificate under s.561 ICTA 1988. Of particular relevance is the obligation under s.565(3):

"(3) 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."

8. The expression "Tax Acts" is defined widely to include all provisions of the Income Tax Acts and the enactments relating to the taxation of income and chargeable gains of companies and company distributions (including provisions relating also to income tax). The expression "Management Act" is defined as meaning the TMA 1970. 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 certificate under s.561 ICTA 1988.
9. S 565(4) and (8) ICTA 1988 provide respectively:

"(4) A company which has failed to comply with such an obligation or request as 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.

(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."

10. There are essentially identical provisions relating to individuals in s. 562 (8), (10) and (12).
11. S 561 (9) ICT A 1988 provides:

"(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 he 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."

12. Furthermore s 561(2) provides:

"If the Board are satisfied, on the application of an individual or a company, that-

...

(c) where the application is for the issue of a certificate to a company, the company satisfies the conditions set out in section 565 and, if the Board have given a direction under [section (6)] below, each of the persons to whom any of the conditions set out in section 56 2 applies in accordance with the direction satisfies the conditions which so apply to him,

the Board shall issue to that individual or company a certificate excepting that individual or company ... from section 559."

13. The combined effect of these provisions is that Inspector of Taxes only has a power to issue a CIS Certificate if the statutory requirements are complied with by the company (and, where appropriate, one or more ~individuals or firms). There is no general discretion to issue Certificates. On the other hand, if the statutory requirements are met, a CIS Certificate must be issued. Further, as a result of the provisions of s 561 (9), when there is an appeal to the Commissioners, they can review the case de novo. The statutory requirements for the grant of a certificate are those contained in s 565 (and section 562 for individuals like Mr Goodchild and s 564 for firms). In particular it is a condition that company has complied with all obligations imposed on it by relevant tax legislation. But failure to do so will be ignored, and a relevant CIS Certificate will be granted, if "the Board" (meaning the Inspector of Taxes or, on appeal, the Commissioners) are of the opinion that "the failure is minor and technical and does not give reason to doubt" that the company will comply with the wide range of obligations imposed by various pieces of legislation, including the various tax statutes covered by the expressions "Tax Acts" and "Management Acts".
14. The provisions of section 565(4) were considered by Lightman J in Hudson (HMIT) v. JDC Services Ltd [2004] EWHC 602 (Ch), [2004] STC 834. In that case the Inspector of Taxes had refused the CIS Certificate. The company appealed. The Commissioners found that the company's non-compliance with its tax obligations was not minor and of a technical nature. However, because it had made considerable and sustained efforts to bring its tax affairs up to date, was a well run company and would comply with all future tax obligations, they allowed the appeal. This decision was reversed by the Judge.
15. The company argued that s 565(4) created a single composite test. All that was necessary was to show that there were no doubts as to future compliance with its tax obligations. The reference in the section to failures being minor and technical were merely examples of circumstances which would not give rise to such a doubt. The Judge rejected this submission. He held that the legislation laid down two requirements, both of which had to be met by the applicant for the CIS Certificate. First it had to demonstrate that past failures were minor and technical. Second, such failures must not give rise to a doubt whether the conditions set out in section 565(8) will be satisfied. Since the Commissioners had found that the prior failures were not minor and technical, it followed that the appeal had to be allowed.
16. In addition Lightman J considered what was meant by the words "does not give reason to doubt" in the section. He held:

"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 [doubt] 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."

The circumstances in this case

17. There is no dispute that, in the past, both CBL and Mr Goodchild have failed to comply with some of their relevant tax obligations. Mr Eicke, who appears for the Revenue, argues that I should hold that there was a lengthy history of systematic non-compliance which could not be regarded as minor and technical nor regarded as so insignificant as not to give reason to doubt as to future compliance. He says that it follows that the Commissioners failed to apply the requirements of s 565(4) and (8) of the Act correctly or that there is an error of law in the sense explained by Lord Radcliffe in Edwards v Bairstow [1956] AC 14.
18. The latter case explains the approach that the courts should adopt to an appeal from a decision by Commissioners. Lord Radcliffe expressed it as follows:

"When the case comes before the court it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts funds are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. So there, too, there has been error in point of law. I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur.

If I apply what I regard as the accepted test to the facts found in the present case, I am bound to say, with all respect to the judgments under appeal, that I can see only one true and reasonable conclusion." (p 36)

19. and

"As I see it, the reason why the courts do not interfere with commissioners' findings or determinations when they really do involve nothing but questions of fact is not any supposed advantage in the commissioners of greater experience in matters of business or any other matters. The reason is simply that by the system that has been set up the commissioners are the first tribunal to try any appeal, and in the interests of the efficient administration of justice their decisions can only be upset on appeal if they have been positively wrong in law. The court is not a second opinion, where there is reasonable ground for the first. But there is no reason to make a mystery about the subjects that commissioners deal with or to invite the courts to impose any exceptional restraints upon themselves because they are dealing with cases that arise out of facts found by commissioners. Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado." (pp 38 -39)

20. Thus unless there is some basis upon which to impugn the findings of fact, and that is not suggested here, the court's task is to take those findings as correct and then to determine whether, applying the law properly, the conclusions arrived at by the Commissioners were ones which it was possible to come to. As Lord Radcliffe said, it is only when the true and only reasonable conclusion contradicts the determination, that one can say that the Commissioners must have erred in law. As I understand it, Mr Eicke accepts that this is the hurdle he faces. It seems to me that it must also follow from Edwards v Bairstow that it is not open to the court to make new findings of fact, particularly where they would conflict with the Commissioners' determination. If an Appellant needs further findings in order to make good his submission that the determination is erroneous in point of law, he may request such further findings at the time when the Case Stated is provided to the parties in draft. Although The Revenue made such a request in the present case, this was rejected by the Commissioners.
21. The findings of fact made by the Commissioners are as follows:

"5.7 Strictly speaking, there had been compliance failures by the taxpayer in the Qualifying Period. Notwithstanding, the Revenue had not raised any contemporaneous objections to the failures now referred and as a matter of fact had acquiesced in the arrangement for late payments of P A YE. Payments of substantial sums to the Revenue had been made within the Qualifying Period and there was no evidence of any loss to the Revenue having occurred.

5.8 There had also been compliance failures by Mr. Goodchild with regard to his personal tax affairs during the Qualifying Period, but these are consequent upon poor service provided by former professional advisers who Mr. Goodchild has replaced as a consequence and there is no evidence of any loss to the Revenue having occurred."

22. Mr Eicke does not challenge any of this, although I sensed that he was not entirely happy with some of it. He does not dispute that there was acquiescence by the Revenue in late payments by CBL. However he says that, even though there was acquiescence, the late payments were too substantial and frequent to be properly regarded as minor and technical. That was the only possible true determination. It follows that the Commissioners must have erred in law on this issue. Similarly, in regard to Mr Goodchild, Mr Eicke says that his prior failings were substantial in amount and were repeated. The fact that they were caused by his former professional advisers could not justify a finding that they were minor and technical. Once again the Commissioners' conclusion was contrary to the only possible true determination.
23. In support of these submissions, Mr Eicke produced a schedule setting out which payments were made late and by how much. As he noted, some of them were more than 14 days late. He asked me to look at them as a whole and find that they must have been more than minor and technical. In response, Mr Goodfellow told me that the evidence produced before the Commissioners was to the effect that the late payments were all due to the fact that an informal cheque-collection system was operated by the local tax office and sometimes, for example because the collector was on holiday, the Revenue failed to pick up the cheque on time.
24. In my view it is not legitimate to ask the court to resolve these sorts of issues on an appeal. Indeed it seems to me that Mr Eicke is, in substance, asking me to make supplementary findings of fact and, in response, Mr Goodfellow is doing likewise. I have to proceed with the findings of fact made by the Commissioners, no more and no less.
25. It follows that I must proceed on the basis that there was acquiescence by the Revenue, as Mr Eicke accepts, and that Mr Goodchild's past failures of compliance were due to the defaults not of Mr Goodchild but of his professional advisers. I also bear in mind that the Commissioners do not come to the conclusion that the defaults were lengthy and systematic, nor do they conclude that the failures in compliance were due to recklessness or negligence by CBL or Mr Goodchild. On the findings they did make, is it possible to say that the only true conclusion is that the defaults were other than minor and technical?
26. Mr Eicke accepts that some types of acquiescence would be sufficient to render the CBL's defaults minor and technical, but not all would do so. I am not sure where he draws the line between them. In the end I think his argument keeps returning to the size and frequency of the defaults. He says that one should follow the approach adopted by Ferris J in Vicky. If the sums involved in the defaults were large, as he asserts they were here, then they cannot be regarded as minor and technical, no matter how much the Revenue may have acquiesced. Underlying this is the suggestion that the words "minor and technical" are quantitative. Repeated tax defaults in large sums cannot be minor, no matter what the circumstances. If this is right then it must follow that, even were the Revenue expressly to agree to late payment of tax, if the sums involved are large or more than a once-off the taxpayer must be refused a CIS Certificate.
27. I do not accept this argument. 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 1'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.
28. 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."

29. This must be because the Revenue understands, correctly in my view, that the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not.
30. If this is the correct approach, then it seems to me possible for the Commissioners to have held that, because of the acquiescence by the Revenue in late payment by CBL, the latter's defaults could be properly regarded as minor and technical. Whether I would have come to the same conclusion had I been in the Commissioners' position, is irrelevant. Applying the guidance from Edwards v Bairstow, I am not persuaded that the true and only reasonable conclusion based on the facts found by the Commissioners relating to CBL's defaults contradicts their determination.
31. I have come to the same conclusion in relation to the defaults by Mr Goodchild. Mr Eicke argues that if a default is sizeable in money terms, it is no answer to say that the default was caused by a professional adviser. During the course of argument I put to him the following hypothetical case. A highly respectable company with a large subcontracting business employing a large number of employees employs a book keeper. The book keeper is a fraudster. There is no reason to suspect that to be so. The company has in place reasonable safeguards against internal fraud but the book keeper is astute enough to avoid them. The book keeper, over a period of months diverts a number of large company cheques made out for various tax liabilities into his own accounts. He hides his tracks, inter alia, by destroying incoming letters from the Revenue complaining of non payment of tax. Eventually the company, by its own devices, discovers the fraud, reports it to the Revenue and immediately pays the outstanding tax. If Mr Eicke's arguments are correct, the company could not qualify for a CIS Certificate. This may, in practice, destroy its business. It would be responsible for the deliberate wrongdoing of its employee even though that wrongdoing throws no light on the employer's determination to honour its tax obligations. I do not accept that such an outcome could have been intended by the legislature. In relation to the issue of whether the company is fit to be granted a Certificate, the past non-compliance is of little significance and, in that sense, can be regarded as being minor and technical.
32. These statutory provisions are intended to impose a strict discipline on those in the sub-contracting industry. But, for the reasons set out above, the question of whether a default has been more than minor or technical has to be assessed qualitatively in the light of all the circumstances. The conclusions arrived at by the Commissioners on this issue in the light of their findings of fact seem to be to be ones which were open to them.
33. 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 (see paragraph 1 above). 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.
34. Mr Eicke also argues that, in the light of the Commissioners' findings of fact, the "natural inference" is that CBL and Mr Goodchild would carryon as before, paying tax late. If that is so, there must be reason to doubt that they will comply with their obligations under tax legislation.
35. I do not accept this argument either. The fact that something is a natural inference does not make it the only possible inference. Furthermore I do not accept that future failure to comply with tax obligations is a natural inference. For better or worse the Commissioners have found as a fact that CBL' s past late payments were acquiesced in by the Revenue. Since, apparently, the Revenue has now made it clear that it is not prepared to continue to accept, without complaint, late payments, there is nothing to suggest that CBL will continue to pay late. Similarly the Commissioners have accepted that Mr Goodchild's past failures were due to the inadequacies of professional advisers. The latter have now been replaced. It was open to the Commissioners to conclude, having considered all the matters brought to their attention and having seen Mr Goodchild give evidence, that there is no reason to doubt that, with new advisers, in the future Mr Goodchild will comply with his tax obligations.
36. It follows that the Revenue has not succeeded in showing that the Commissioners erred in law and this appeal fails accordingly. In the circumstances it is not necessary to consider a number of other arguments advanced by Mr Goodfellow on behalf of CBL.