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
		15 July 2005

Mr. Justice Hart:

1. This is an appeal, by way of case stated under s 56(6) Taxes Management Act 1970 and Regulation 20 of the General Commissioners (Jurisdiction and Procedure) Rules 1994 from the decision of the General Commissioners for the Division of Birmingham North dated 1^st December 2004.
2. The proceedings before the Commissioners were an appeal by the respondent, under s 561(9) of the Income and Corporation Taxes Act 1988 ("ICTA"), against the Inspector of Taxes' refusal to issue a statutory Construction Industry Scheme ("CIS") certificate to it. Section 561(9) ICTA is in the following terms:

"9) A person aggrieved by the refusal of an application for a certificate under this section or the cancellation of such a certificate may, by notice given to the Board within 30 days after the 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. "

3. In broad outline the CIS provides that a "contractor" in the construction industry must make a deduction from payments made by it to a sub-contractor in respect of the labour content of any sub-contract. This provision does not apply if the sub-contractor holds an appropriate CIS certificate: s 561(1) ICTA. In order to qualify for such a certificate, a company such as the respondent has to satisfy the Board of Inland Revenue (in practice the inspector) of a number of conditions which are set out in s 565. The only conditions material to the present appeal are those contained in the following sub-sections of s 565, namely

"(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.

(8A) Subject to subsection (4) above, a company shall not be taken for the purposes of this section to have complied with any such obligation or request as is referred to in subsections (3) to (7) above if there has been a contravention of a requirement as to the time at which, or the period within which, the obligation or request was to be complied with.

(9) In this section "qualifying period" means the period of three years ending with the date of the company's application for a certificate under section 561."

4. In the present case the Inspector had refused to issue a certificate to the respondent having taken the view that failures by the respondent to comply with its obligations in respect of PAYE during the qualifying period were not "minor and technical" and gave reason to doubt future compliance under s 565(8).
5. The General Commissioners' findings of primary fact were expressed in paragraphs 5 and 6 of the Case in the following terms:

"5b The schedule of PAYE payments provided by the Inland Revenue was not disputed. The qualifying period ran from 16 March 2001 to 15 March 2004 and the schedule recorded the Company's payments of PAYE from the beginning of the 2001/2002 tax year. The Company had not paid its PAYE liabilities on time in any of the 34 months within the qualifying period that were recorded in the schedule. Of those 34 late payments, the Company was more than 14 days late in paying on ten occasions. No pressure or any action had been taken by the Inland Revenue to obtain payment of the PAYE tax on time during the qualifying period and, taking into account the regularity of the payment dates and the fact that no tax was outstanding, we found that an informal arrangement regarding such payment was accepted by the Inland Revenue."

6 Evidence was given on behalf of the Company that it had a turnover of over five million pounds but without a certificate it would be impossible to increase this figure and the Company may be in danger of going into liquidation. Evidence was also given that Mr Nunn, the Director had remortgaged his house to keep the Company going. Ms Finnieston said that the Company had never been contacted by the Inland Revenue regarding their payment pattern and if they had any contact or warning from the Inland Revenue that they were jeopardising the renewal of the certificate then action would have been taken to comply fully with the Inland Revenue's requirements. (This evidence was accepted)".

6. After setting out the inspector's contentions, the Commissioners then concluded:

"We the Commissioners who heard the appeal decided in this case that the failure of the Inland Revenue to take any action regarding collection of the PAYE tax or to issue a warning letter to the Company and the fact that no tax had been lost to the Revenue an informal arrangement regarding payment existed and therefore we allow the Company's appeal."

7. Before me the appellant, represented by Mr Mario Angiolini of counsel, has contended that the Commissioners' reasoning is fundamentally flawed. He accepted (as was held by Lightman J in Hudson v JDC Services Ltd [2004] EWHC 602 (Ch), [2004] STC 834) that the Commissioners were free, on an appeal under s 561(9), to substitute their own judgement for that of the inspector. But, he submitted, the Commissioners had failed to address themselves to either of the questions posed by s 565(4), namely

i) Was the failure of the respondent to comply with its obligations "minor and technical"?

ii) Could they be satisfied that the failure "does not give reason to doubt that the conditions mentioned in sub-section (8) will be satisfied".

Mr Angiolini submitted that had they addressed themselves to these questions the only conclusion to which the Commissioners could have come was a negative answer to both. He further submitted that it was wrong for the Commissioners to have taken into account the fact that the Inland Revenue had not taken any action with regard to the collection of the PAYE, the fact that no warning letter had been issued to the respondent, the fact that no tax had been lost to the Revenue or the fact (which was in any case denied) that an informal arrangement regarding payment of tax had been accepted by the Inland Revenue.

8. On the first question ("minor and technical") Mr Angiolini pointed out that the provisions of section 565(8A), which had been introduced in 1999, made it clear that a failure to pay on time could amount to a non-compliance which was neither minor nor technical, and that it was therefore clear that, where the failure in question was a failure of that kind, the consideration whether tax had been lost as a result of the non-compliance could not be relevant. He further took me to the Revenue's own published guidance (IR40 (CIS) July 2003) on its approach to the application of the conditions. That guidance (which takes the form of a 21 page document) contains the following relevant passages:

"[page 14] It would be impossible to define every combination of compliance failure. These guidelines set out what is, in isolation, a minor and technical failure and what is not. Inspectors will apply their judgement to failures, or combinations of failures, which fall into the middle ground. As a general principle you should be aware that a failure we regard as minor and technical if it happens only once, may not be regarded as minor and technical if it is repeated a number of times.

We take a very strict view where we believe the failures are not minor and technical and will always refuse your application in these circumstances."

"..[page 16] PAYE and any deductions from subcontractors are due to be paid over to us on a monthly basis…Generally, we would regard one or two late payments of these deductions made within fourteen days of the due date as a minor and technical matter.

"[page 17, under the heading "What sort of failure would NOT be minor and technical" includes]

PAYE or subcontractors' deductions (other than trivial amounts) are paid more than fourteen days late three or more times"

"[page 18] ..We will be more likely to overlook isolated and clearly separate incidents, but will not overlook persistent failures, particularly those involving late payments of tax or the late submission of vouchers."

9. The respondent was represented before me by one of its directors, Mr Nunn. He sought to put before me material which was not referred to in the Case and which it is not clear was before the Commissioners. In essence this went to show that over the last 18 months of the qualifying period the respondent had been subject to financial stress as the result of a dispute with one particular client, and sought to make the case that, whatever had been the position prior to the refusal of the certificate, the respondent had since then fully complied with its obligations. Mr Angiolini objected to the introduction of this evidence, partly upon the ground that, if it were admitted, he would wish to challenge it, particularly in the latter respect. That objection appeared to me to be well-founded. Mr Nunn's general point was, however, that, while he did not challenge the fact that the PAYE payments were made late during the qualifying period, its failure to comply should be seen in the context of a company which had successfully traded for 17 years (having been founded in 1987), had consistently paid PAYE throughout that period in the same way as it had during the qualifying period, and which had never previously been in any way warned by the Inland Revenue that that pattern of payment was in any way objectionable. No doubt those points were made to the General Commissioners. He pointed out that an element of discretion was involved in deciding whether a failure to comply with obligations could be regarded as minor and technical. He contrasted the position of the respondent with that of the taxpayer in Shaw v Vicky Construction Ltd [2002] EWHC 2659 (Ch), [2002] STC 1544: in that case the taxpayer's PAYE record had not only been demonstrably worse than the respondent's but had persisted despite an unequivocal warning by the Revenue that such repeated non-compliance would lead to a refusal to issue a certificate on the next occasion on which it was sought.
10. Mr Nunn also emphasised to me the seriousness of the consequences of a refusal of a CIS certificate. It was likely to result in a catastrophic reduction in the respondent's turnover, and an inability to continue to provide employment for its 40 odd employees.
11. On the second question (whether the respondent's failure did not give reason to doubt its compliance in the future), Mr Angiolini drew my attention to the analysis of this requirement contained in the judgment of Lightman J in Hudson (see paragraph 7 above). In that case Lightman J drew attention to the distinction between satisfying the conditions under section 565(8) and satisfying the second limb of section 565(4). He said (at para 17 of his judgment):

"If consideration of the full circumstances [at the date of the application] give reason to expect compliance in the future though leaving a lingering reason to [sc doubt] as to due compliance in the future, the conditions set out in s. 565(8) will be satisfied, but under s 565(4) the application will fail."

12. It was submitted that no reasonable body of Commissioners could have concluded, on the basis of the respondent's past failures, that there was no reason to doubt that it would fail to comply with its statutory obligations.
13. Mr Nunn submitted that, given the explanation which the Commissioners had been given for why the respondent had failed to comply, they were entitled to conclude that there was no reason to doubt that there would be compliance in the future.

Conclusions

14. 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 of "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. The touchstone of "minor and technical" will require the court on Edwards v Bairstow principles on occasions to decide that a conclusion of the Commissioners in a particular case was so wide of the mark as to justify the court in substituting its own view: the decision of Ferris J in Vicky Construction (see paragraph 9 above) is an example of such a case. The recent decisions of Mann J in Arnold v G Con Ltd 4^th April 2005 (unreported save for a short note in the Times Law Reports) and Lewison J in Barnes v Hilton Main Construction, 15^th April 2005 (unreported save for an even shorter note in Taxation 5^th May 2005) provide further examples of cases where, on appeal from the Commissioners on a point of law, the court has felt able to say that the failures in question could not, as a matter of law, be characterised as minor and technical.
15. I have not been persuaded that this is such a case. Had the inspector himself in this case decided that, having regard to the relationship which had existed between the respondent and its local PAYE collection office, the non-compliance, although persistent, could be regarded as minor and technical in the context of the momentous decision which he was charged with making, I do not think that his decision to grant the certificate could have been regarded as a breach of his statutory duty or Wednesbury unreasonable. It is of course unlikely that his decision would ever have been challenged, although even that, in a world increasingly open to ingenious litigation, cannot be safely said: a more tax compliant competitor of the respondent might, I suppose, have been interested in exploring the possibility. If the grant of a certificate was a possible course open to the inspector it must follow (if Hudson is right) that it was also a possible course for the Commissioners on appeal. If that is correct, then there is no basis for my substituting my own view on the question.
16. There remains the question whether the Case demonstrates that the Commissioners have failed to address the correct questions. As to that the Commissioners identified the question which they were addressing as

"whether the Inspector had applied the law correctly when he refused to issue a certificate to the company because in his view the company had not met the compliance requirement at s 565(3), as there had been compliance failures which were not "minor and technical" within the meaning of s 565(4) and gave reason to doubt future compliance under s565(8)."

17. Criticism can undoubtedly be advanced, in the light of Hudson, about the way in which this question is formulated. The formulation suggests that the Commissioners were asking themselves whether the Inspector's decision was a legally possible one. To the extent that they answered that question in the negative, their decision seems to me to have been wrong. In my judgment it was perfectly possible as a matter of law for the inspector to have reached the decision which he did. The true question, if Hudson is correct, is whether, even if the inspector's decision was a legally possible one, it was legally possible for the Commissioners to disagree with it and if so whether they did so disagree. As to that, I have already indicated my conclusion that the facts of this case viewed in their full context put it on a borderline on which more than one possible view might be taken. It is clear that the Commissioners did in fact take a different view from that of the inspector. Although criticisms can be made of the way in which they expressed their final conclusions, it seems to me tolerably clear that in paragraph 5b of the Case the Commissioners were addressing themselves to the first limb of s 565(4), and expressing a conclusion that having regard to the regularity of the late payments which were in fact made by the respondent and the Revenue's acquiescence over the whole period in the lateness of those payments, the non-compliance could be regarded as minor and technical. It seems to me also clear that in paragraph 6 they were accepting the respondent's evidence that had it appreciated the absolute need for strict compliance the history of failure to comply would not have existed, and that there was no reason therefore to have doubt as to its willingness or ability to comply in the future.
18. Since for the reasons indicated I do not think that these were impossible conclusions for a reasonable body of Commissioners to have reached, no useful purpose would be served by my remitting the case to the Commissioners.
19. I would therefore dismiss the appeal.