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Cite as: [2004] ScotCS 239

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Hojgaard v. Forth Estuary Transport Authority [2004] ScotCS 239 (03 November 2004)

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD EASSIE

in the cause

M T HØJGAARD A/S

Pursuers;

against

FORTH ESTUARY TRANSPORT AUTHORITY

Defenders;

________________

Pursuers: Mrs Wolffe; Dundas & Wilson

Defenders: Reid QC; DLA

3 November 2004

[1] The defenders are the statutory successors to the Forth Road Bridge Joint Board, in terms of the Forth Estuary Transport Authority Order 2002 [SSI 2002/178]. In March 1998 the Joint Board entered into a contract with the pursuers, M T Højgaard A/S, for the execution by the pursuers of certain construction work on the Forth Road Bridge. The works were duly carried out but a dispute arose as to the amount payable to the pursuers under the contract. The dispute was referred to arbitration pursuant to the arbitration clause contained in the contract. During the course of the arbitration proceedings a settlement of the pursuers' claims under the contract was reached. The terms of the settlement were recorded in a letter from the pursuers' solicitors to the defenders' solicitors dated 25 November 2003, a fax reply from the defenders' solicitors of 28 November 2003 and a further fax from the pursuers' solicitors to the defenders' solicitors dated 1 December 2003.

[2] The settlement thus agreed was to the effect that the defenders would pay £1,500,000 in settlement of all the pursuers' claims, together with VAT were the pursuers able to provide a valid VAT invoice. (There were also certain provisions regarding the expenses of the arbitration and the fees of the arbiter and his clerk.) On 5 December 2003 a VAT invoice was sent to the defenders' solicitor. However, the defenders did not make payment at that stage. They took the view that the fiscal legislation affecting construction contracts in the United Kingdom required them to withhold payment until either a current "sub-contractor's tax certificate" or a current "registration card", issued in terms of that legislation, had been exhibited to them.

[3] In December 2003 the pursuers held neither a sub-contractor's tax certificate nor a registration card. During the currency of the works the pursuers had held a sub-contractor's tax certificate but it had expired in November of the preceding year. I was informed by counsel for the defenders that when this difficulty regarding the absence of tax documentation emerged, the defenders offered to place the agreed sums on deposit receipt in joint names pending the pursuers obtaining the appropriate documentation but this offer was declined. Instead the pursuers raised this action in which they concluded for payment of the sum of £1,500,000 with interest at 8% per annum from the date of citation until payment; and for payment of £262,500 being the amount of the VAT payable on a chargeable supply of the value of £1.5 million. The pursuers also applied to the Inland Revenue for a new sub-contractor's tax certificate. When the new certificate was obtained, the pursuers' solicitors exhibited it to the defenders' solicitors on 13 May 2004 whereupon payment of the two principal sums claimed in this action was made by transfer into the pursuers' bank account on 19 May 2004. Payment of the principal sums having thus been made in May 2004 the remaining issue in the action is the pursuers' claim for interest upon the sum of £1.5 million at the judicial rate for the period between the date of citation of the defenders and the date of payment and it is upon that issue that debate was allowed.

[4] The fiscal legislation in question is contained in Chapter IV - "Subcontractors in the Construction Industry" - of the Income and Corporation Taxes Act 1988, as amended ["ICTA"] and the subordinate legislation made pursuant to the rule-making power given by section 566 of ICTA, namely the Income Tax (Subcontractors in the Construction Industry) Regulations 1993, as amended ["the 1993 Regulations"]. The legislation is concerned with payments made under a contract relating to construction operations and it is not in dispute that the contract whereunder the pursuers carried out work on the Forth Road Bridge was such a contract. It is also a matter of agreement that, for the purposes of this legislation, the pursuers are a "subcontractor" and the defenders are a "contractor". So any payment which falls to be made under the contract between the pursuers and the Joint Board, the defenders statutory predecessors, is one within the ambit of the legislation.

[5] For a general description of the scheme and rationale of the legislation, counsel for the defenders referred to what was said by Ferris J in Shaw (Inspector of Taxes) v Vicky Construction Ltd [2002] EWHC 2659 (ch); [2002] STC 1544, paras [3] to [8]. Put very shortly, the reason for enacting the legislation was the existence in the construction industry of small sub-contractors who failed to settle their tax liabilities. The basic provision is section 559(4) of ICTA which requires a contractor who makes a payment to his sub-contractor in settlement of his contractual liability to deduct a percentage (in December 2003 the relevant percentage was 18%) from the sum due and payable. The contractor requires then to account to the Inland Revenue for the amount deducted which is treated as a payment towards the sub-contractor's tax liability. However, by virtue of section 559(2) of ICTA the requirement to make that deduction does not apply where the sub-contractor is one to whom a certificate has been issued by the Inland Revenue under section 561 and the certificate is in force at the time of the payment. In order to get such a "sub-contractor's tax certificate" the sub-contractor must satisfy the Board of Inland Revenue that he meets certain conditions respecting the standing of his business. With a view to more detailed provisions for the operation of the scheme the Board has power under section 566 of ICTA to make regulations. In particular subsection (2A) of section 566 empowers the Board to make regulations for the issue of "registration cards" to sub-contractors and in paragraph (g) of subsection (2A) for requiring any contractor making a payment to which section 559 applies to ensure that the sub-contractor to whom the payment is to be made produces a valid registration card. Subsection (2B) of section 566 provides that a person who fails to comply with that obligation imposed by virtue of subsection (2A)(g) shall be liable to a penalty not exceeding £3,000.

[6] As already indicated, the power to make such secondary legislation was exercised in the 1993 Regulations. The principal provision of the 1993 Regulations pertinent to the present dispute is Regulation 7F which provides -

"(1) Before making any payment to which section 559 applies to a sub-contractor, and unless the circumstances specified in paragraph (3) apply, a contractor shall-

(a) ensure that the sub-contractor's registration card is produced to him, and

(b) satisfy himself by inspection of the registration card that the person producing it is the user of that registration card.

(2) For the purposes of paragraph (1), the user of the registration card shall, whenever required to do so, produce the registration card for inspection by the contractor or the contractor's authorised representative".

Paragraph 3 of Regulation 7F is not relevant to the circumstances of the present case. Regulation 33 contains provisions relating to the production of a sub-contractor's tax certificate. Put shortly, where a sub-contractor has a current sub-contractor's tax certificate the contractor must ensure that the certificate is produced when he makes payment to the sub-contractor. Regulation 33 also provides that if the requirements respecting production by the sub-contractor of the certificate are not satisfied then section 559 applies to any payment as though the sub-contractor were not excepted from it.

[7] The position of the defenders is relatively straightforward. In view of the terms of the legislation, particularly Regulation 7F and Regulation 33 of the 1993 Regulations, they were obliged not to pay any sum due under the contract between their statutory predecessors and the pursuers until the pursuers provided them with either (i) a "registration card", which would enable payment to be made under deduction of the relevant percentage, or (ii) a current "sub-contractor's tax certificate", which would enable payment to be made gross. The legislation imposed what counsel for the defenders described as a "statutory condition precedent" to the contractual obligation to pay, namely the possession and production of one or other of the documents stipulated by the legislative provisions. When the action was raised the pursuers held neither form of documentation. Counsel for the defenders submitted that the action was thus premature, since to enforce payment at that point would put the defenders in breach of the legislation and render them liable to the penalty provided for by subsection (2B) of section 566 of ICTA. When the sub-contractor's tax certificate was exhibited in May 2004 payment was made immediately. Since the action was thus raised prematurely interest could not run, the principal sum not being wrongfully withheld.

[8] The argument for the pursuers was less readily to be followed. The principal submission advanced by counsel for the pursuers was to the effect that the statutory provisions are "free-standing" and overlie, but do not affect or qualify, the subjacent contractual relationship. However, towards the end of her submissions counsel for the pursuers advanced an alternative submission, namely that the sum payable to the pursuers was not affected by the legislation at all because it was not a payment under the contraction contract entered into by the pursuers and the defenders' predecessors but was a payment made in terms of the compromise reached in the course of the arbitration. Counsel sought to characterise the latter as a separate agreement.

[9] This alternative submission, which perhaps ought to come first, is not advanced in the Note of Argument. Nor has it any foundation in the written pleadings for the pursuers which make clear that the compromise related to the amount of the sum payable to the pursuers under the construction contract with the defenders' predecessors, that being the matter which was referred to arbitration in terms of the arbitration clause in the contract. In any event, as counsel for the defenders pointed out, even if the settlement of the disputes submitted to arbitration were somehow to be seen as independent of the basic construction contract which founded the arbitration (which I do not accept) it would still come within the statutory concept of a contract "relating to" construction operations. In my view the sum which the defenders agreed to pay to the pursuers is manifestly a sum payable under the construction contract. I therefore reject this alternative submission.

[10] Proceeding on the basis that the payment to the pursuers was one to which the fiscal legislation applied, counsel for the pursuers submitted that the legislation was a "free-standing" arrangement which addressed the mischief of possible sub-contractor default in meeting tax debts by creating a system of independent obligations owed by the contractor to the Inland Revenue. The obligation was on the contractor to account to the Revenue for the amount which ought to be deducted. There were provisions for the ultimate adjustment of the tax liability and for repayment of overpaid amounts, with interest. The right of Inland Revenue to recover from a contractor sums which ought to have been, but were not, deducted sufficiently met the purposes of the Revenue and it was submitted by counsel that therefore the statutory provisions did not alter the separate contractual liability between the contractor and the sub-contractor. The contractor was bound to pay in terms of the contract at the moment when the sum became due in terms of the contract. Accordingly, said counsel, the defenders had various options on achievement of the settlement in the arbitration. They could, she said, (a) have made payment under deduction of 18%; or (b) have paid the full amount on the view that it was likely that the pursuers' certificate would be renewed; or (c) have made full payment and, if need be, account additionally to the Inland Revenue for the sum which ought to have been deducted were there no sub-contractor's tax certificate.

[11] In my view the submission for the pursuers that the legislation is "free-standing" and does not have any impact on the sub-contractor's entitlement to payment is plainly unsound. The "options" canvassed by counsel for the pursuers demonstrate that unsoundness. All of the options involve the defenders rendering themselves liable to a penalty of up to £3,000. Moreover, the second and third options involve the defenders voluntarily standing as cautioners for the pursuers' tax liability which is plainly not the requirement or intention of the legislation. In my view it is clear that the statutory provisions in question do qualify and are intended to qualify contractual arrangements respecting payment of sums due under construction contracts between a contractor and a sub-contractor by subjecting the sub-contractor's contractual entitlement to the additional statutory requirement of his obtaining and exhibiting either a registration card or a sub-contractor's tax certificate. The responsibility for obtaining the appropriate documentation lay with the pursuers. Since the absence of the necessary documentation in December 2003 was thus attributable to the pursuers, the defenders cannot be said to have wrongfully withheld payment at that stage - or indeed at any other stage, since payment was instantly effected when there was produced the requisite documentation necessary for the defenders' protection from possible liability for some or all of the pursuers' tax bill.

[12] For completeness, I would record that in the course of her submissions, counsel for the pursuers also suggested that since the exchange of letters and faxes at the end of November and the beginning of December refer to production of a VAT invoice, the omission in that exchange to production of the documentation required by the tax legislation meant that the defenders could not found on the legislative provisions. In my view this suggestion is also unsound. There was no requirement on the defenders to remind the pursuers of their responsibilities under the legislation and the lack of any reference to the legislation in the settlement cannot have the effect of displacing that legislation.

[13] For all the foregoing reasons I am satisfied that the claim for interest is unsound in law. That being the only matter outstanding I shall accede to the defenders' motion for dismissal of the action by upholding the defenders first plea in law.