DECISION
1. This
is an appeal against the cancellation of registration for gross payment in
respect of the Construction Industry Scheme ("CIS"). We first heard
this appeal on 14 July 2010. We adjourned the appeal for further argument on
the meaning of section 66 Finance Act 2004. This decision relates to the issues
considered at that adjourned appeal.
Background
2. HMRC
wrote to the Appellant, Mr Scofield, on 29 January 2010 notifying him that his
gross payment status under the CIS was being cancelled pursuant to section 66
Finance Act 2004. That letter identified ten compliance failures. By the time
of the hearing on 14 July 2010, HMRC had accepted that eight of those were, in
fact, problems relating to allocation of those payments by HMRC and were not
compliance failures at all. HMRC also accepted that, as regards one other
compliance failure, Mr Scofield had a reasonable excuse for that failure and
that it should, therefore, be disregarded.
3. At
the time of the first hearing there was, therefore, one compliance failure
which formed the basis for the cancellation of gross payment status. This
related to the late payment of income tax (self-assessment second payment on
account) of £10,094.65 which was due on the 31 July 2009 but was not paid until
4 September 2009. The fact that this payment of income tax was made over 30
days late was accepted by both parties.
4. When
we first heard this appeal on 14 July 2010 we decided ([2010] UKFTT 377 (TC))
that Mr Scofield did not have a reasonable excuse within the meaning of
paragraph 4 (4) Schedule 11 Finance Act.
5. In
the course of the hearing we observed to Mr Shea, who represented HMRC at the
first hearing, that section 66 (1) Finance Act 2004 appeared to give HMRC a
discretion whether to cancel Mr Scofield's registration for gross payment. In
particular, we drew attention to the words in section 66 (1) which provided:
"The Board of Inland Revenue may at any time
make a determination cancelling a person's registration for gross payment if it
appears to them that –
(a) if an application to register the person for
gross payment were to be made at that time the Board would refuse so to
register him...."
6. Mr
Shea submitted that HMRC had no discretion under section 66 (1). As we recorded
in our decision, he confirmed that (at paragraph 37):
" once the computerised records indicated that
there had been one or more compliance failures, HMRC's role was limited to
determining whether there had in fact been a compliance failure within the
meaning of the statutory provisions and whether there had been a reasonable
excuse for any failures. In practice, usually because of lack of information at
that stage, it was often difficult for HMRC to decide the question of
'reasonable excuse'."
7. We
should perhaps, at this stage, explain that if a taxpayer has a
"reasonable excuse" for a compliance failure paragraph 4 (4) of
Schedule 11 Finance Act 2004 allows the failure to be disregarded.
8. Mr
Shea applied for the hearing to be adjourned for further legal argument on this
point. We granted Mr Shea's application, adjourned the hearing for further
argument on this and other related points. Our directions were as follows:
"The appeal will be listed for further argument
on the questions whether:
(a) HMRC have a discretion whether to cancel
registration for gross payment under s. 66 (1) Finance Act 2004; and
(b) if we conclude that such a discretion exists:
(i) whether HMRC failed to exercise any such
discretion;
(ii) the consequences of a failure to exercise any
such discretion; and
(iii) the nature of the Tribunal's jurisdiction
under s.67(4) Finance Act 2004 to review a determination of HMRC under s.66(1)
Finance Act 2004."
Statutory provisions
9. The
CIS was originally introduced in the 1970s to counteract perceived evasion of
tax by self-employed workers in the building industry. Under the CIS a person
making payments to a subcontractor is obliged to deduct an amount (effectively
on account of tax) from the payment. The Scheme has been revised on several
occasions and the relevant provisions are now contained in the Finance Act 2004
and regulations enacted thereunder. These provisions came into effect on 6
April 2007. In short, the requirement to deduct on account of tax is removed if
the subcontractor is registered for gross payment with HMRC.
10. The relevant
statutory provisions are set out below. We have set these provisions out more
extensively than would usually be the case because we consider it important
that the provisions of section 66 (1) which are in dispute should be seen in
their statutory context. The relevant provisions are as follows:
57 Introduction
(1) This
Chapter provides for certain payments (see section 60) under construction
contracts to be made under deduction of sums on account of tax (see sections 61
and 62).
(2) In this
Chapter “construction contract” means a contract relating to construction
operations (see section 74) which is not a contract of employment but where—
(a) one
party to the contract is a sub-contractor (see section 58); and
(b) another
party to the contract (“the contractor”) either—
(i) is a
sub-contractor under another such contract relating to all or any of the
construction operations, or
(ii) is a
person to whom section 59 applies.
(3) In
sections 60 and 61 “the contractor” has the meaning given by this section.
(4) In this
Chapter—
(a)
references to registration for gross payment are to registration under section
63(2),
(b)
references to registration for payment under deduction are to registration
under section 63(3), and
(c)
references to registration under section 63 are to registration for gross
payment or registration for payment under deduction.
(5) To the
extent that any provision of this Chapter would not, apart from this
subsection, form part of the Tax Acts, it shall be taken to form part of those
Acts.
58 Sub-contractors
For the purposes of this Chapter a
party to a contract relating to construction operations is a sub-contractor if,
under the contract—
(a) he is
under a duty to the contractor to carry out the operations, or to furnish his
own labour (in the case of a company, the labour of employees or officers of
the company) or the labour of others in the carrying out of the operations or
to arrange for the labour of others to be furnished in the carrying out of the
operations; or
(b) he is
answerable to the contractor for the carrying out of the operations by others,
whether under a contract or under other arrangements made or to be made by him.
59 Contractors
(1) This
section applies to the following bodies or persons—
(a) any
person carrying on a business which includes construction operations;
60 Contract payments
(1) In this Chapter
“contract payment” means any payment which is made under a construction
contract and is so made by the contractor (see section 57(3)) to—
(a) the sub-contractor,
(b) a person nominated by
the sub-contractor or the contractor, or
(c) a person nominated by a
person who is a sub-contractor under another such contract relating to all or
any of the construction operations.
(2) But a payment made under
a construction contract is not a contract payment if any of the following
exceptions applies in relation to it.
(3) This exception applies
if the payment is treated as earnings from an employment by virtue of Chapter 7
of Part 2 of the Income Tax (Earnings and Pensions) Act
2003 (c 1) (agency workers).
(4) This exception applies
if the person to whom the payment is made or, in the case of a payment made to
a nominee, each of the following persons—
(a) the nominee,
(b) the person who nominated
him, and
(c) the person for whose
labour (or, where that person is a company, for whose employees' or officers'
labour) the payment is made,
is registered for gross payment when the payment is
made.
But this is subject to subsections (5) and (6).
(5) Where a person is
registered for gross payment as a partner in a firm (see section 64),
subsection (4) applies only in relation to payments made under contracts under
which—
(a) the firm is a sub-contractor,
or
(b) where a person has
nominated the firm to receive payments, the person who has nominated the firm
is a sub-contractor.
(6) Where a person is
registered for gross payment otherwise than as a partner in a firm but he is or
becomes a partner in a firm, subsection (4) does not apply in relation to
payments made under contracts under which—
(a) the firm is a
sub-contractor, or
(b) where a person has
nominated the firm to receive payments, the person who has nominated the firm
is a sub-contractor.
(7) This exception applies
if such conditions as may be prescribed in regulations made by the Board of
Inland Revenue for the purposes of this subsection are satisfied; and those
conditions may relate to any one or more of the following—
(a) the payment,
(b) the person making it,
and
(c) the person receiving it.
(8) For the purposes of this
Chapter a payment (including a payment by way of loan) that has the effect of
discharging an obligation under a contract relating to construction operations
is to be taken to be made under the contract; and if—
(a) the obligation is to
make a payment to a person (“A”) within paragraph (a) to (c) of subsection (1),
but
(b) the payment discharging
that obligation is made to a person (“B”) not within those paragraphs,
the payment is for those purposes to be taken to be
made to A.
61 Deductions on
account of tax from contract payments
(1) On
making a contract payment the contractor (see section 57(3)) must deduct from
it a sum equal to the relevant percentage of so much of the payment as is not
shown to represent the direct cost to any other person of materials used or to
be used in carrying out the construction operations to which the contract under
which the payment is to be made relates.
(2) In
subsection (1) “the relevant percentage” means such percentage as the Treasury
may by order determine.
(3) That
percentage must not exceed—
(a) if the
person for whose labour (or for whose employees' or officers' labour) the payment
in question is made is registered for payment under deduction, the percentage
which is the basic rate for the year of assessment in which the payment is
made, or
(b) if that
person is not so registered, the percentage which is the higher rate for that
year of assessment.
62 Treatment of sums
deducted
(1) A sum
deducted under section 61 from a payment made by a contractor—
(a) must be
paid to the Board of Inland Revenue, and
(b) is to
be treated for the purposes of income tax or, as the case may be, corporation
tax as not diminishing the amount of the payment.
(2) If the
sub-contractor is not a company a sum deducted under section 61 and paid to the
Board is to be treated as being income tax paid in respect of the
sub-contractor's relevant profits.
If the sum is more than sufficient
to discharge his liability to income tax in respect of those profits, so much
of the excess as is required to discharge any liability of his for Class 4
contributions is to be treated as being Class 4 contributions paid in respect
of those profits.
(3) – (7)....
11. Section 63 Finance Act 2004 deals with the provisions
relating to registration of subcontractors. Section 63 provides as follows:
“(1) If the
Board of Inland Revenue are satisfied, on the application of an individual or a
company, that the applicant has provided—
(a) such
documents, records and information as may be required by or in accordance with
regulations made by the Board, and
(b) such
additional documents, records and information as may be required by the Inland
Revenue in connection with the application,
the Board must register the
individual or company under this section.
(2) If the
Board are satisfied that the requirements of subsection (2), (3) or (4) of
section 64 are met, the Board must register—
(a) the
individual or company, or
(b) in a
case falling within subsection (3) of that section, the individual or company
as a partner in the firm in question,
for gross payment.
(3) In any
other case, the Board must register the individual or company for payment under
deduction.”
64 Requirements
for registration for gross payment
(1) This section sets out
the requirements (in addition to that in subsection (1) of section 63) for an
applicant to be registered for gross payment.
(2) Where the application is
for the registration for gross payment of an individual (otherwise than as a
partner in a firm), he must satisfy the conditions in Part 1 of Schedule 11 to
this Act.
(3) Where the application is
for the registration for gross payment of an individual or a company as a
partner in a firm—
(a) the applicant must
satisfy the conditions in Part 1 of Schedule 11 to this Act (if an individual)
or Part 3 of that Schedule (if a company), and
(b) in either case, the firm
itself must satisfy the conditions in Part 2 of that Schedule.
(4) Where the application is
for the registration for gross payment of a company (otherwise than as a
partner in a firm)—
(a) the company must satisfy
the conditions in Part 3 of Schedule 11 to this Act, and
(b) if the Board of Inland
Revenue have given a direction under subsection (5), each of the persons to
whom any of the conditions in Part 1 of that Schedule applies in accordance
with the direction must satisfy the conditions which so apply to him.
(5) Where the applicant is a
company, the Board may direct that the conditions in Part 1 of Schedule 11 to
this Act or such of them as are specified in the direction shall apply to—
(a) the directors of the
company,
(b) if the company is a
close company, the persons who are the beneficial owners of shares in the
company, or
(c) such of those directors
or persons as are so specified,
as if each of them were an applicant for
registration for gross payment.
(6) See also section 65(1)
(power of Board to make direction under subsection (5) on change in control of
company applying for registration etc).
(7) In subsection (5)
“director” has the meaning given by section 67 of
the Income Tax (Earnings and Pensions) Act 2003 (c 1).
65 Change in
control of company registered for gross payment
(1) Where it appears to the
Board of Inland Revenue that there has been a change in the control of a
company—
(a) registered for gross
payment, or
(b) applying to be so registered,
the Board may make a direction under section 64(5).
(2) The Board may make
regulations requiring the furnishing of information with respect to changes in
the control of a company—
(a) registered for gross
payment, or
(b) applying to be so
registered.
[(3) In this section
references to a change in the control of a company are references to such a
change determined in accordance with section
995 of the Income Tax Act 2007.]
12. Section 66
Finance Act 2004 permits HMRC to cancel a person's registration for gross
payment. It will be seen that section 66(1)(a) allows HMRC to cancel gross
payment status if an application for gross payment status would have been
refused at that time.
13. Section 66
provides, so far as is relevant :
66 Cancellation of
registration for gross payment
(1) The
Board of Inland Revenue may at any time make a determination cancelling a
person's registration for gross payment if it appears to them that—
(a) if an
application to register the person for gross payment were to be made at that
time, the Board would refuse so to register him,
(b) he has
made an incorrect return or provided incorrect information (whether as a
contractor or as a sub-contractor) under any provision of this Chapter or of
regulations made under it, or
(c) he has
failed to comply (whether as a contractor or as a sub-contractor) with any such
provision.
(2) Where
the Board make a determination under subsection (1), the person's registration
for gross payment is cancelled with effect from the end of a prescribed period
after the making of the determination (but see section 67(5)).
(3) The
Board of Inland Revenue may at any time make a determination cancelling a
person's registration for gross payment if they have reasonable grounds to
suspect that the person—
(a) became
registered for gross payment on the basis of information which was false,
(b) has
fraudulently made an incorrect return or provided incorrect information
(whether as a contractor or as a sub-contractor) under any provision of this
Chapter or of regulations made under it, or
(c) has
knowingly failed to comply (whether as a contractor or as a sub-contractor)
with any such provision.
(4) Where
the Board make a determination under subsection (3), the person's registration
for gross payment is cancelled with immediate effect.
(5) On
making a determination under this section cancelling a person's registration
for gross payment, the Board must without delay give the person notice stating
the reasons for the cancellation.
(6) Where a
person's registration for gross payment is cancelled by virtue of a
determination under subsection (1), the person must be registered for payment
under deduction.
(7) Where a
person's registration for gross payment is cancelled by virtue of a
determination under subsection (3), the person may, if the Board thinks fit, be
registered for payment under deduction.
(8) A
person whose registration for gross payment is cancelled under this section may
not, within the period of one year after the cancellation takes effect (see
subsections (2) and (4) and section 67(5)), apply for registration for gross
payment.
(9) In this
section “a prescribed period” means a period prescribed by regulations made by
the Board.
14. Section 67 Finance
Act 2004 provides an appeal mechanism in respect of the cancellation of gross
payment status and describes the jurisdiction of the Tribunal in subsection
(4). Section 67 provides:
67 Registration for
gross payment: appeals
(1) A
person aggrieved by—
(a) the
refusal of an application for registration for gross payment, or
(b) the
cancellation of his registration for gross payment,
may by notice appeal
. . ..
(2) The
notice must be given to the Board of Inland Revenue within 30 days after the
refusal or cancellation.
(3) The
notice must state the person's reasons for believing that—
(a) the
application should not have been refused, or
(b) his
registration for gross payment should not have been cancelled.
(4) The
jurisdiction of the [tribunal] on such an appeal [that is notified to the
tribunal] shall include jurisdiction to review any relevant decision taken by
the Board of Inland Revenue in the exercise of their functions under section
63, 64, 65 or 66.
(5) Where a
person appeals against the cancellation of his registration for gross payment
by virtue of a determination under section 66(1), the cancellation of his
registration does not take effect until whichever is the latest of the
following—
(a) the
abandonment of the appeal,
(b) the
determination of the appeal by the [tribunal], or
(c) the
determination of the appeal by the [Upper Tribunal or a court].
(6)
. . .
15. Section 64
Finance Act 2004, above, sets out the requirements that have to be met by an applicant
seeking registration for gross payment. Section 64 (4) provides that where an
individual applies for gross payment registration, it must satisfy the
conditions in Part 1 of Schedule 11 of Finance Act 2004. Part 1 of Schedule 11
provides for three tests which the subcontractor must satisfy, as follows:
-- paragraph 2: "the business test"
-- paragraph 3: "the turnover test"
-- paragraph 4: "the compliance test"
It was common ground that the "business test"
and the "turnover test" were satisfied in this case. However, HMRC
considered that the “compliance test” in paragraph 4, while satisfied on
initial registration, was not satisfied at the date of a subsequent review.
16. The relevant
provisions of Part 1 of Schedule 11 are as follows:
1 (1) In the case of an
application for an individual to be registered for gross payment, the following
conditions must be satisfied by the individual.
(2) ...
The business test
2 The applicant must satisfy the
Inland Revenue, by such evidence as may be prescribed in regulations made by
the Board of Inland Revenue, that he is carrying on a business in the United
Kingdom which—
(a)
consists of or includes the carrying out of construction operations or the
furnishing or arranging for the furnishing of labour in carrying out
construction operations, and
(b) is, to
a substantial extent, carried on by means of an account with a bank.
The turnover test
3 (1) The
applicant must satisfy the Inland Revenue, by such evidence as may be
prescribed in regulations made by the Board of Inland Revenue, that the
carrying on of the business mentioned in paragraph 2 is likely to involve the
receipt in the year following the making of the application of an aggregate
amount by way of relevant payments which is not less than the amount specified
in regulations made by the Board as the minimum turnover for the purposes of
this sub-paragraph.
(2) In
sub-paragraph (1) “relevant payments” means payments under contracts relating
to, or to the work of individuals participating in the carrying out of, any
operations which—
(a) are of
a description specified in subsection (2) of section 74; but
(b) are not
of a description specified in subsection (3) of that section,
other than so much of the payments
as represents the direct cost to the person receiving the payments of materials
used or to be used in carrying out the operations in question.
(3) The
Board may make regulations for the purpose of enabling a person who does not
satisfy the condition in sub-paragraph (1) to be treated as satisfying that
condition in such circumstances as may be prescribed.
The
compliance test
4 (1) The applicant must,
subject to sub-paragraphs (3) and (4), have complied with—
(a)
all obligations imposed on him in the qualifying period (see paragraph 14) by
or under the Tax Acts or the Taxes
Management Act 1970 (c 9), and
(b)
all requests made in the qualifying period to supply to the Inland Revenue
accounts of, or other information about, any business of his.
(3) An applicant or company
that has failed to comply with such an obligation or request as—
(a)
is referred to in sub-paragraph (1), and
(b)
is of a kind prescribed by regulations made by the Board of Inland Revenue,
is, in such circumstances as may be prescribed by
the regulations, to be treated as satisfying the condition in that
sub-paragraph as regards that obligation or request.
(4) An applicant or company
that has failed to comply with such an obligation or request as is referred to
in sub-paragraph (1) is to be treated as satisfying the condition in that
sub-paragraph as regards that obligation or request if the Board of Inland
Revenue are of the opinion that—
(a)
the applicant or company had a reasonable excuse for the failure to comply, and
(b)
if the excuse ceased, he or it complied with the obligation or request without
unreasonable delay after the excuse had ceased.
(7) There must be reason
to expect that the applicant will, in respect of periods after the qualifying
period, comply with—
(a)
such obligations as are referred to in sub-paragraphs (1) to (6), and
(b)
such requests as are referred to in sub-paragraph (1).
(8) Subject to
sub-paragraphs (3) and (4), a person is not to be taken for the purposes of
this paragraph to have complied with any such obligation or request as is
referred to in sub-paragraphs (1) to (5) if there has been a contravention of a
requirement as to—
(a)
the time at which, or
(b)
the period within which,
the obligation or request was to be complied with.
17.
It will be noted that paragraph 4(3) allows certain defaults to
be ignored as specified in regulations. The regulations referred to in
paragraph 4(3) above are contained in the Income Tax (Construction Industry
Scheme) Regulations 2005 (SI 2045) ("the Regulations"). Paragraph 32
(Table 3) of these Regulations states that a failure to pay income tax by the
due date is ignored for the purposes of the compliance test, providing payment
is made within 28 days. Only one such disregard is allowed in a twelve month
period.
18. Paragraph 14
Schedule 11 Finance Act 2004 defines the "qualifying period" as a
period of 12 months ending with the date of the application in question.
Legal principles -the discretion issue
19. This appeal
gives rise to a question of statutory interpretation. The issue is whether the
words used in section 66 (1) allow HMRC to exercise a discretion when making a
determination cancelling a registration for gross payment or whether, in making
that determination, no discretion exists and the cancellation is automatic. Mr
Gordon, appearing for Mr Scofield, favours the former interpretation and Mrs
Parslow, appearing for HMRC, favours the latter.
20. It may be
helpful at the outset to review some basic rules of statutory interpretation.
21. First, an Act of
Parliament must be read as a whole. Sometimes, if there is an ambiguity, the
scheme of the Act (or, if there is a discrete part of the Act, that part) may
resolve the meaning of the statutory words: see e.g. per Lord Halsbury in IRC
v Priestly [1901] AC 208 at 213.
22. Secondly, the
statutory words under consideration must be construed in context: see Viscount Simonds in A-G v Prince Ernest Augustus of Hanover [1957] AC 436 at 463.
23. Thirdly,
legislation should be construed purposively. In Barclays Mercantile Business
Finance Ltd v Mawson [2005] STC 1 Lord Nicholls, delivering the judgment of
the judicial committee, said (at 11):
"As Lord Steyn explained in IRC
v McGuckian [1997] STC 908 at 915, [1997] 1 WLR 991 at 999, the modern approach to
statutory construction is to have regard to the purpose of a particular
provision and interpret its language, so far as possible, in a way which best
gives effect to that purpose. Until the Ramsay case,
however, revenue statutes were 'remarkably resistant to the new non-formalist
methods of interpretation'.
The Ramsay case
([1981] STC 174, [1982] AC 300) liberated the construction of revenue statutes from being both
literal and blinkered."
24. His Lordship
continued by quoting with approval the "influential speech"of Lord
Wilberforce. First ([1981] STC 174 at 179, [1982] AC 300 at 323), on the general approach to construction:
"A subject is only to be taxed on clear words,
not on 'intendment' or on the 'equity' of an Act. Any taxing Act of Parliament
is to be construed in accordance with this principle. What are 'clear words' is
to be ascertained on normal principles; these do not confine the courts to
literal interpretation. There may, indeed should, be considered the context and
scheme of the relevant Act as a whole, and its purpose may, indeed should, be
regarded: see Inland Revenue Comrs v Wesleyan and General Assurance
Society [1946] 2
All ER 749 at 751, 30 Tax Cas 11 at 16 per Lord Greene MR and: Mangin v Inland Revenue Comrs [1971] 1 All ER 179 at 182, [1971] AC 739 at 746 per Lord Donovan)."
25. Fourthly, the
statutory history of the provision may be used as an aid in construing a later
version of the statutory provisions: see Baylis (HMIT) v Roberts [1989]
STC 693 and the decision of Peter Gibson J and the
Court of Appeal in R v HM Inspector of Taxes, ex p Lansing Bagnall Ltd [1986] STC
117 and 453 respectively.
26. Fifthly,
statutory provisions must be read and given effect in a way that is compatible
with the provisions of the Convention for the Protection of Human Rights: section 3 Human Rights Act 1998.
27. Finally, in Pepper
v Hart [1992] STC 898 at 923 Lord Browne-Wilkinson, allowing the taxpayer
to refer to Hansard in construing a taxing statute, said:
"I therefore reach the
conclusion, subject to any question of parliamentary privilege, that the
exclusionary rule should be relaxed so as to permit reference to parliamentary
materials where:
(a) legislation is ambiguous or
obscure, or leads to an absurdity;
(b) the material relied on consists
of one or more statements by a minister or other promoter of the Bill together
if necessary with such other parliamentary material as is necessary to
understand such statements and their effect;
(c) the statements relied on are
clear.
Further than this, I would not at
present go."
28. Section 66 (1) uses the word "may". A quick glance at
Stroud's Judicial Dictionary of Words and Phrases or Halsbury’s Laws of England
will disclose many authorities which discuss whether "may" is
permissive or whether it imposes an obligation. We hope it is not disrespectful
to the learning displayed in these cases if we summarise them as follows. The
word "may" is usually permissive, conferring a power and a discretion
and not imposing an obligation. However, the statutory context or the
legislative history of the provision in question can, exceptionally, mean that
the word "may" is mandatory -- in other words it imposes a duty upon
the authority in question to take the specified action.
29. The learned author of Stroud's Judicial Dictionary of Words and
Phrases (fifth edition) has summarised the position as follows:
"MAY (1) Though dicta of
eminent judges may be cited to the contrary, it seems a plain conclusion that
"may," "it shall be lawful," "it shall and may be
lawful," "empowered," "shall hereby have power,"
"shall think proper," and such like and phrases, give, in their
ordinary meaning, and enabling and discretionary power. "
30. In the leading case of Julius v Lord Bishop of Oxford (1880)
5 App Cas 214 at 222 - 223 Earl Cairns LC said:
"The words “it
shall be lawful” are not equivocal. They are plain and unambiguous. They are
words merely making that legal and possible which there would otherwise be no
right or authority to do. They confer a faculty or power, and they do not of
themselves do more than confer a faculty or power. But there may be something
in the nature of the thing empowered to be done, something
in the object for which it is to be done, something in the conditions under
which it is to be done, something in the title of the person or persons for
whose benefit the power is to be exercised, which may couple the power with a
duty, and make it the duty of the person in whom the power is reposed, to
exercise that power when called upon to do so. Whether the power is one coupled
with a duty such as I have described is a question which, according to our
system of law, speaking generally, it falls to the Court of Queen's Bench to
decide, on an application for a mandamus. And the words “it shall be lawful”
being according to their natural meaning permissive or enabling words only, it
lies upon those, as it seems to me, who contend that an obligation exists to
exercise this power, to shew in the circumstances of the case something which,
according to the principles I have mentioned, creates this obligation."
31. These words were quoted or referred to with approval by Peter Gibson
J and the Court of Appeal in R v HM Inspector
of Taxes, ex p Lansing Bagnall Ltd (above) and by Knox J in Baylis
(HMIT) v Roberts (above) and the expression "it shall be lawful"
was regarded as having the same meaning as the word "may".
32. In ex p Lansing Bagnall Ltd the words "... there
may be apportioned..." were held to confer a general discretion to
apportion income of a close company and that they did not impose an obligation
on the Inland Revenue to exercise the powers of apportionment. Accordingly, the
notices of apportionment issued by the Inland Revenue, on the basis that they
had no discretion in the matter, were invalid and were quashed. In that case,
Peter Gibson J and the Court of Appeal considered earlier versions of the
legislation in dispute.
33. In Baylis
(HMIT) v Roberts Knox J held that the legislative history of the provision
in question indicated that the words "he may be charged" did not
confer a general discretion on the Inland Revenue. In addition, in that case,
Knox J considered the statutory provision to be a quantification provision with
the primary liability being imposed under another provision.
Submissions of the parties -- the discretion issue
34. Mr Gordon
submitted that the words used in section 66 (1) ("may at any time make a
determination") were clear. They were clearly permissive words that
granted HMRC a discretion whether to cancel gross payment status. Mr Gordon
noted the way in which the drafting of the CIS provisions in the Finance Act
distinguished between the word "may" and "must".
35. During the
previous hearing, HMRC had argued that the word "may" in section 66
(1) might, in some way, be limited to the phrase "at any time". Mr
Gordon argued that this submission in fact suggested that a discretion did in
fact exist. If cancellation of gross payment status was, as HMRC argued,
automatic it seemed odd that HMRC would then have a discretion as to when it
should implement the cancellation. It was to be expected that a compulsory
deregistration would be effected as soon as possible. The words "at any
time", Mr Gordon submitted, simply allowed HMRC to revisit a contractor's
file at any time of the compliance failure came to light.
36. In the present
case, Mr Gordon noted that in the present case eight out of ten of the alleged
failures were in fact allocation failures and were not compliance failures that
all. Section 66 (1) only requires that it should "appear" to HMRC
that there had been a compliance failure. If cancellation of the registration
were automatic HMRC would be obliged to deregister a subcontractor without
regard to the actual facts. This appeared to have been a problem in the present
case.
37. The provisions
of section 67 also, in Mr Gordon's view, indicated that cancellation of
registration was discretionary. Section 67 (3) provided that the notice of
appeal shall state the reasons why the appellant believes the registration
should not be cancelled. Mr Gordon contrasted that this with other cases where
the jurisdiction of the Tribunal is circumscribed (e.g. regulation 72B Income
Tax (Pay As You Earn) Regulations 2003 SI 2003/2682). Mr Gordon submitted that
this permitted arguments to be advanced on reasons other than whether or not
the alleged compliance failures occurred.
38. Mr Gordon
pointed out section 67 (4) allows the Tribunal "to review any relevant
decision" taken by HMRC in the course of their functions, including their
decision to cancel registration for gross payment status. Without this
extension, it could be argued that the Tribunal's jurisdiction was limited to
considering the grounds of appeal raised by the taxpayer. However, the extended
wording expressly provided that the Tribunal may judicially review the
decision-making process (as well as the decision itself). Mr Gordon submitted
that this was a further indication that the legislation conferred a discretion
on HMRC and that it is amenable to review by the Tribunal.
39. Mrs Parslow
submitted that the legislation should be given its ordinary meaning construed
as a whole and the individual words within section should be read in context.
Since there was doubt as to the plain meaning of the words ("may at any
time make a determination"), it was permissible to look at Hansard. In
this case, however, there were no Hansard entries. In addition, since there was
doubt as to the plain literal meaning of the words, it was permissible to apply
a purposive construction to support HMRC's interpretation that the words did
not confer a discretion. Mrs Parslow referred to HM Inspector of Taxes v
Transform Shop Office and Bar Fitters Ltd (2005) EWHC 1558 (CH) where Hart
J said at paragraph 14:
“The purpose which Parliament plainly had in mind in
the legislation was to procure a strict compliance with tax obligations by
making such compliance the price of obtaining a certificate”.
40. It should be
noted that in these comments Hart J was addressing the provisions of section
565 (4) Income and Corporation Taxes Act 1988, in relation to a previous
version of the CIS legislation. Immediately after the sentence quoted above,
Hart J continued saying:
"Parliament also recognised that failures to
achieve such strict compliance might be, in the context of the grant of such
certificates, venial."
41. Mrs Parslow also
referred to the decision of this Tribunal in Ductaire Fabrications Ltd v
HMRC [2009] UKFTT 350 (Judge Green and Mr Cherry) where the tribunal said
at paragraph 18:
“The Tribunal did also consider the Appellant’s
submission that withdrawal of the gross status would have an adverse effect on
the business. However, the purpose of Parliament in creating the legislation
was to procure strict compliance with tax obligations by making such compliance
the price of obtaining a certificate and there could be an unfair competitive
advantage to allow the gross payment status to continue despite clear failures."
42. Mrs Parslow
accepted that in both cases the question whether a discretion existed under
section 66 (1) was not under consideration.
43. Mrs Parslow
cited the judgment of Lewison J in Barnes v Hilton Main Contractors
[2005] STC 1532, referring to Ferris J in Shaw v Vicky Construction Ltd, where
Lewison J said (at 1544 - 45) in the context of discussing the issue of
proportionality:
" Ferris J in the Vicky case
came to the conclusion that the package of measures has an objectively
justifiable aim, namely to recover tax from those engaged in the construction
industry. One possible solution to the problem would have been
to require all contractors to submit to tax deductions when being paid by an
employer. That might have been legislative overkill. Another might have been to
require all sub-contractors to submit to deduction, but Parliament did not do
that. Instead it provided a route by which sub-contractors who could
demonstrate a good track record would be permitted to receive payment in gross.
Even then Parliament did not say that any failure to comply with obligations
would prevent the sub-contractor from receiving payment in gross. Minor and
technical failures do not count if the taxpayer can also show that minor and
technical failures give rise to no doubt about future compliance."
44. Whilst this case
concerns the exception for minor and technical failures contained in an earlier
version of the CIS legislation, Mrs Parslow submitted that the same principle
should be applied to the current legislation. The purpose of the legislation
was to limit registration for gross payment to those subcontractors who had
demonstrated compliance with their tax obligations. Nonetheless, Mrs Parslow
noted that it had been provided that some compliance failures could be
disregarded (e.g. Regulation 32 of the Income Tax (Construction Industry
Scheme) Regulations SI 2005/2045 and Regulation 2 of the Income Tax
(Construction Industry Scheme) (Amendment No 2) Regulations SI 2008/1282).
45. As regards the
disputed words in section 66 (1) ("may at any time make a
determination"), Mrs Parslow submitted that the words must be taken
together. In her submission the word "may" qualified, or had to be
read as applying to, the phrase "at any time". The correct way to
read the legislation was that the word "may" permitted the Board, as
the custodian/guardian of the legislation (in accordance with Section 1 Taxes
Management Act 1970, as amended by the Commissioners for Revenue and Customs
Act 2005), "at any time" to review the behavioural compliance of a
subcontractor.
46. Mrs Parslow said
that a compliance test would usually be run in relation to each subcontractor
every 12 months (although the compliance test could be run on other occasions
if information in the hands of HMRC so required). The normal practice was not to
review an earlier decision within 12 months. This was the way that HMRC's
computer was programmed. In her submission section 66 (1) afforded the Board a
wide discretion as to, first, whether it exercises its right to run a
compliance test and, secondly, the time at which it chooses to run the test.
HMRC's computer program generated determinations cancelling registration for
gross payment status automatically.
47. The
determination would be triggered by the number and type of defaults in the 12
month test period (which had a five-day grace period built-in as a safety net).
An officer of the Board would review the case if there was an appeal. In short,
Mrs Parslow submitted that, to the extent that section 66 (1) permitted HMRC to
exercise a discretion, that discretion was exercised by virtue of the way in
which HMRC’s computer program had been written.
48. In addition, The
Board could alter the parameters of the program. Mrs Parslow noted that the
Income Tax (Construction Industry Scheme) (Amendment No 2) Regulations SI
2008/1282, Regulation 2, allowed HMRC to disregard outstanding amounts of less
than £100. This Regulation came into force on 3 June 2008, after the 6 April
2007 commencement date of the primary CIS legislation in the Finance Act 2004.
Mrs Parslow submitted, as we understood it, that the making of these
Regulations (and presumably their incorporation into HMRC’s computer program)
constituted an exercise of discretion by HMRC, albeit through delegated
legislation.
49. Section 66 (3)
also contains identical wording ("may at any time make a determination
cancelling a person's registration for gross payment"). In this case, the
provision deals with a situation in which HMRC has reasonable grounds to
suspect that a person obtained registration on the basis of false information,
or has fraudulently provided an incorrect return or provided incorrect
information or has knowingly failed to comply with any provision. Mrs Parslow
argued that one would not expect HMRC to have a discretion in such serious
situations. She contrasted the mandatory obligation on HMRC to register a
person for gross payment status where the conditions had been met (section 63).
50. At the original
hearing, Mrs Parslow noted that the Tribunal had contrasted the language of
section 66 (1) with section 65 (1). The latter section, which allows HMRC to
make a direction in the case of a change control of a company registered for
gross payment, also uses the word "may". Mrs Parslow noted, however,
that the phrase "at any time" was not used in conjunction with the
word "may".
51. Mrs Parslow
repeated her submission that the CIS provisions in the Finance Act 2004
distinguish between provisions which simply used the word "may" (e.g.
section 65 (1)) and those which use the expression "may at any time"
(e.g. section 66 (1) and (3)). In its decision in relation to the earlier
hearing, where this argument was also raised, Mrs Parslow noted that the
Tribunal observed that the natural reading of the modal verb "may"
would be that it qualified the words " make a determination" rather
than the adverbial phrase "at any time". If the Tribunal was correct
that, as a grammatical matter, "may" qualified the verb
"make", then on a plain and literal meaning "may" could
mean that "HMRC has permission to/is empowered to" make a determination,
but not as a matter of discretion.
52. An alternative
way of looking at this grammatical argument, according to Mrs Parslow, was that
the adverbial phrase "at any time" might in fact qualify the main
verb ie "make". In that case, the sentence could be rephrased as
follows: "HMRC may make the determination at any time". Mrs Parslow
submitted that, in this case, "may" should be read as meaning
"must" and "at any time" should be taken to mean that the
determination can, as a matter of fact, be made at any time.
53. Mrs Parslow
referred to Words and Phrases Legally Defined (third edition) where it
is stated that "may" is a permissive or enabling expression, but that
there are cases in which, for various reasons, as soon as the person who is
within the statute is entrusted with the power it becomes his duty to exercise
it. She referred to the Australian case of Johnson's Tyne Foundry Pty Ltd v
Shire of Maffra [1949] ALR 89 at 101 per Williams J:
" 'May', unlike 'shall', is not a mandatory but
a permissive word although it may acquire a mandatory meaning from the context
in which it is used, just as 'shall' which is a mandatory word may be deprived
of the obligatory force and become permissive in the context in which it
appears."
54. Mrs Parslow also
referred to Re Eyre & Leicester Corporation [1892] 1 QB 136 at 142
-- 143 and R v Barlow (1693) 2 Salk 609 at 609, where it was held that
the word "may" was construed as imposing an obligation.
55. Furthermore, it
was not axiomatic, Mrs Parslow said, that "may" means "discretion"
or "discretionary". According to the Concise Oxford Dictionary the
second meaning given to "may" is "permission". Permission,
in plain English, could mean "allow" in the sense of
"enable" or "give power to".
56. Finally, Mrs
Parslow accepted that the Tribunal has full appellate jurisdiction in this
appeal pursuant to section 67 (4) Finance Act 2004
Discussion -- the discretion issue
The ordinary and natural meaning of the words
57. We consider
that, in the first place, the disputed words in section 66 (1) should be given
that ordinary and natural meaning. The words "the Board may at any time
make a determination" seem to us, on their face, to be permissive. There
is a requirement that it must appear to the Board that the requirements of
sub-paragraphs (a)-(c) of subsection (1) must be satisfied, but we construe
those requirements as a condition to the exercise by the Board of its power to
make a determination.
58. In particular,
we reject Mrs Parslow's submission that "may" refers principally to
the phrase "at any time". This is not, in our view, the natural way
of reading the introductory wording of section 66 (1). Mrs Parslow was
essentially submitting, in relation to this linguistic point, that those
introductory words should read as follows:
"the Board of Inland Revenue must make a
determination (and may make such determination at any time) cancelling a
person's registration for gross payment ...."
59. It seems to us
that if the disputed introductory words of section 66 (1) are given their
natural meaning, the modal auxiliary verb "may" should be taken to
qualify both the verb "make" and the adverbial phrase "at any
time". This has result that those words make perfect sense, in accordance
with accepted principles of English grammar, without the need to rewrite or manipulate,
or to impose any gloss on, the language used by Parliament.
The statutory context
60. The statutory
context is an important aid to the construction of any statutory provision. The
context may, in some cases, suggest that a word may have a different meaning
from its ordinary and natural meaning. For present purposes, the words of Earl
Cairns LC in Julius v Lord Bishop of Oxford, quoted earlier in this decision, articulate the principle
very clearly.
61. The CIS
provisions are contained in Part 3 Chapter 3 of the Finance Act 2004. There
were previous versions of the CIS, but in response to complaints from the
construction industry the Government published a consultation document entitled
"The Inland Revenue and the Construction Industry: Working together for
a New Scheme" in November 2002. The CIS provisions in the Finance Act
2004 represented the Government's response to the consultation process. These
provisions were regarded as a new scheme, although in a number of respects some
of the provisions were clearly based on the earlier legislative versions of the
scheme. We shall examine the legislative history of section 66 (1) later in
this decision. The important point, for present purposes, is that the Finance
Act 2004 provisions represent a self-contained code. It is to this code that we
now turn in order to examine the statutory context of section 66 (1).
62. Even a cursory
review of Part 3 Chapter 3 of the Finance Act 2004 will reveal that the
drafting of the CIS provisions distinguishes carefully between the use of the
word "may" and the word "must".
63. Some examples
may make the picture clearer.
64. Section 62 deals
with the treatment of sums deducted by contractors. Section 62 (7) provides the
regulations under this section "may contain such supplementary, incidental
or consequential provision as appears to the Board to be appropriate." The
use of the word "may", in such circumstances, would hardly seem, at
first sight, to merit a mention. It is a commonplace piece of drafting which is
repeated in countless numbers of statutes. A public body is empowered to make
appropriate provision in regulations pursuant to a piece of primary
legislation. It is particularly common in tax statutes. But there is no
obligation on the public body to make regulations in a particular way, other
than that they must be supplementary, incidental or consequential. It is simply
an enabling power.
65. More
significantly, however, section 62 (3) (b) and (d), in the context of dealing
with how sums deducted under section 61 from payments made by contractor are to
be treated, specify in both cases that "regulations must
provide" (emphasis added) for sums deducted to be treated in a particular
way if the sub-contractor is a company. It is plain that the draftsman intended
that there should be an obligation on the Board in making regulations on this
topic to ensure that the regulations have a particular effect. This was made
clear by using the word "must provide" in contrast to the normal
formula "may contain such ... provision as appears to the Board to be
appropriate."
66. In addition,
section 62 (1) provides that a sum deducted from a payment by contractor ...
"must be paid" to the Board (emphasis added). This is plainly
(and understandably) intended to place an obligation on the contractor to
account to HMRC for sums deducted (effectively on account of tax) and the sense
of obligation is conveyed by the word "must".
67. Section 63 deals
with registration for gross payment or for payment under deduction. Section 63
(1) provides that if the Border are satisfied that the applicant has provided
the relevant documents, records and information "the board must
register the individual or company" (emphasis added).
68. Furthermore
section 63 (2) provides that if the requirements of subsections (2), (3) or (4)
of section 64 are met, "the Board must register" (emphasis
added) the individual or company for gross payment.
69. Section 63 (3)
states that the Board "must register" (emphasis added) the
applicant for payment under deduction in any other case.
70. Once again, the
mandatory requirement of registration (provided any necessary conditions have
been fulfilled) is expressed by the word "must". This is particularly
important because the conditions referred to in section 63 (2) include, inter
alia, the compliance test contained in Part 1 of Schedule 11 of the Finance Act
2004. It is the failure of the compliance test which enables HMRC to cancel
registration for gross payment under section 66 (1). The contrast in wording
between section 63 (2) and section 66 (1) is to be noted.
71. Section 64
specifies the requirements that have to be satisfied for registration for gross
payment in the case of an individual, a company (and a company or an individual
which is a partner in a firm). In each case (in five places) the statute says
that the applicant "must satisfy" (emphasis added) certain
conditions set out in Schedule 11. It is plain that it is a mandatory
requirement that an applicant for gross payment status should satisfy the
requirements of Schedule 11. The mandatory nature of is expressed by the word
"must".
72. In addition,
section 64 continues, in subsection (6), by referring to section 65 (1) which
it describes as a "power of Board to make direction under section 64
(5)". Section 65 (1) states that the Board "may make a
direction" under section 64 (5). In this provision, therefore, the
reference to a "power" of the Board specifically recognises that the
word "may", at least in this provision, is intended not to impose an
obligation but to confer a power. Thus, within the same section the draftsman
has carefully and unmistakably distinguished between an obligation and the
power by the respective use of the word "must" and "may".
73. The words of
section 66 (1) have already been recited in this decision and there is no need
to repeat them here. Nonetheless, section 66 (3) uses exactly the same
introductory wording as section 66 (1) ("The Board of Inland Revenue may at
any time make a determination cancelling a person's registration for gross
payment"). The provision continues to require that the Board must have
reasonable grounds to suspect that the person has been registered for gross
payment on the basis of false information, has fraudulently made an incorrect
return or provided incorrect information, or has knowingly fail to comply with
certain provisions. Where the Board make a determination under section 66 (3)
the cancellation of registration for gross payment status is effective
immediately.
74. Section 66 (5)
provides that:
"On making a determination under this section
cancelling a person's registration for gross payment, the Board must
without delay give the person notice stating the reasons for the
cancellation." (Emphasis added)
75. The requirement
that the Board must without delay give notice stating the reasons for the
cancellation is a mandatory requirement (see Radford and Robinson v HMRC
[2010] UKFTT 31 (TC)) and a failure to comply with the requirement renders the
determination ineffective. Once again, the mandatory nature of the obligation
is expressed by the word "must".
76. Section 66 continues,
in subsection (6), by providing that where a person's registration for gross
payment is cancelled by virtue of a determination made under subsection (1),
the person "must be registered for payment under deduction"
(emphasis added). The requirement is plainly mandatory and once more the
obligatory requirement is conveyed by the word "must".
77. In contrast,
section 66 (7) provides that where a person's registration for gross payment is
cancelled by virtue of a determination under subsection (3) (ie for false
information, fraudulent returns etc) the person "may, if the Board
thinks fit, be registered for payment under deduction." In this case the
Board is clearly under no obligation to register a person for payment under
deduction. Instead, the Board is given a power to register the person. The
Board may choose to exercise this power or it may refrain from doing so. The
discretionary nature of this power is expressed by the word "may". It
seems to us particularly telling that, in the same section as one in dispute,
Parliament has carefully distinguished between a mandatory obligation and the
discretionary power by using respectively the words "must" and
"may". This can hardly be an accident.
78. We should note
for completeness that section 66 (8) provides that a person whose registration
progress payments is cancelled "may not" reapply for registration for
gross payment within a year of cancellation. In this context, "may not"
means that there is no permission to reapply for registration. We consider that
the use of the word "may" in subsection (8) is consistent with its
use in subsection (1).
79. Moreover, as
explained above, in section 66 the drafter has used the word "may"
four times and the word "must" twice. HMRC’s submissions would ask us
to believe that the word "may" was intended to mean "must" (or,
at least, a power with an obligation to use that power) in section 66 (1) (and,
according to Mrs Parslow's submissions, subsection (2)) but to have a different
meaning elsewhere in the same section. This would be a strange conclusion,
which of itself suggests that it cannot be right.
80. The appeal
provisions of section 67 provide in subsection (1) a person who was refused
registration progress payment or whose registration progress payment is
cancelled "may by notice" (emphasis added) appeal. In this
case, "may" is clearly permissive because there is obviously no
obligation to appeal. Section 67 (2) specifies that the notice of appeal "must
be given to the Board" (emphasis added) within 30 days after the refusal
of cancellation. This is clearly a mandatory requirement because failure to
appeal within the relevant time limit would require permission for an appeal to
be brought out of time.
81. Finally, Schedule
11 Part 1 paragraphs 1 (1), 2, 3 (1), 4 (1) and (5) (a) and (b) (6) all place
mandatory requirements on an individual applicant using the word
"must". Parts 2 and 3 contain similar mandatory requirements for
firms and companies.
82. The conclusion
that we draw from this detailed study of 3 Chapter 3 of the Finance Act 2004 is
that Parliament has taken considerable care when using "must" and
"may" to distinguish between the two words. The former is invariably
used to impose a mandatory obligation. The latter is invariably used to confer
a power or permission. Importantly, the two words are sometimes used in
contrast to each other. We therefore take the view that the context
overwhelmingly points to the conclusion that the words "may at any time
make a determination" in section 66 (1) confer a power and do not impose
an obligation.
83. In reaching this
conclusion we have considered the contextual argument put forward by Mrs
Parslow in relation to section 66 (3). Once again the introductory words of
this provision state that the Board "...may at any time make a
determination cancelling a person's registration for gross payment".
Section 66 (3) then continues to require that the Board should "have
reasonable grounds to suspect that the person" became registered on the
basis of false information, has fraudulently made an incorrect return or
provided incorrect information, or has knowingly fail to comply with certain
provisions. Mrs Parslow submitted that in such circumstances it would not be
expected that HMRC should have a discretion, but rather that they should be
under an obligation to cancel the person's registration.
84. We do not
consider this a compelling argument. Quite apart from the reluctance to
construe a statutory provision by reference to other anomalies, it is to be
noted that where a registration is cancelled under section 66 (3) such
cancellation has immediate effect (section 66 (4)). The cancellation of a
registration under section 66 (1) takes effect after 90 days. Moreover, where a
registration is cancelled under section 66 (3) HMRC has a discretion whether to
register the person for payment under deduction, whereas someone deregistered
under section 66 (1) has a right to be registered for payment under deduction. Clearly,
the sanction under section 66 (3) is a more severe one. It is not
inconceivable, given the severity of the consequences, that Parliament might
have wished HMRC to use its discretion to consider whether, on the facts of an
individual case, such consequences were merited.
85. Moreover, when
we review the legislative history of section 66 later in this decision, it
becomes clear that both subsections (1) and (3) were originally derived from
the same statutory provision. In our view, this explains why the same
introductory wording was used for both subsections.
Purposive interpretation
86. Mrs Parslow
submitted that in cases of ambiguity purposive interpretation of the relevant
statutory language was permitted. We see things rather differently. We consider
that a purposive interpretation of statutory language is simply one of the
normal canons of statutory interpretation. It is not limited to cases of
ambiguity but it is intended to identify the clear meaning of the statutory
provision. As Lord Wilberforce said in Ramsay [1981] STC 174 at 179:
"There may, indeed should, be considered the
context of the scheme of the relevant Act as a whole, and its purpose may,
indeed should, be regarded."
87. There is no
doubt that the purpose of the CIS legislation is to prevent evasion of tax. The
default rule whereby contractors make payments to subcontractors is that
payments must be made under deduction. CIS registration for gross payment is
granted in cases where the applicant can show a good compliance record. We
would not, however, go further than that. Hart J, in HM Inspector of Taxes v
Transform Shop Office and Bar Fitters Ltd (2005) EWHC 1558 (CH) referred (at
paragraph 14) to "strict compliance with tax obligations" when
considering the "minor and technical" exception under a previous
version of the CIS legislation. In Barnes v Hilton Main Construction
[2005] STC 1532 Lewison J said (at 1544 -- 45):
"[Parliament] provided a
route by which sub-contractors who could demonstrate a good track record would be permitted to receive payment
in gross. Even then Parliament did not say that any failure to comply with
obligations would prevent the sub-contractor from receiving payment in gross.
Minor and technical failures do not count if the taxpayer can also show that
minor and technical failures give rise to no doubt about future compliance."
88. It is important
when approaching guidance given by these authorities as to the purpose of
statutory provisions not to fall into the trap of treating the guidance as a
substitute for the statutory language which we have to interpret. Whilst Hart J
refers to "strict compliance" and Lewison J refers to "a good
track record" they are fundamentally making the same point. Gross payment
registration is confined to compliant taxpayers. However, there are always
different degrees of non-compliance with tax obligations. There can be repeated
failure to make either a return or a tax payment on time and such failures can
be the result of negligence or can be intentional. There can be a failure which
is an isolated or one-off occurrence. Perhaps the failure can be the result of
an honest mistake which did not amount to a reasonable excuse (within the
meaning of paragraph 4 (4) Schedule 11 Finance Act 2004).
89. The general
purpose of statutory provision can be easily enough identified. However, we do
not think that that purpose can be so finely calibrated to assist us in this
case. Certainly, registration for gross payment is a reward for compliance, yet
it does not seem inconsistent with this general objective for HMRC to be given
some discretion to take into account the type of non-compliance involved in a
particular case (and perhaps its consequences).
90. For these
reasons, we do not consider that interpreting purposively the opening words of
section 66 (1) leads to a different conclusion from the one suggested by the
plain words used by the statute when considered in their statutory context.
Hansard
91. We were in some
doubt whether it was permissible, in this case, to refer to Hansard. Mr
Gordon's primary submission was that the wording of section 66 (1) was clear
and unambiguous. The word "may" was, in accordance with its normal
meaning, permissive and not obligatory. However, Mr Gordon accepted that in
some circumstances "may" could have a mandatory meaning and, in such
circumstances, it may be appropriate to refer to Hansard.
92. Mrs Parslow
initially accepted that the word "may" in section 66 (1) was
ambiguous. Indeed, her submission in relation to purposive construction
suggested that purpose of construction was required where there was ambiguity -
a submission with which, as indicated above, we disagree. There was, however,
she said, nothing in Hansard which was relevant.
93. On this basis,
we considered that we could refer to Hansard. We had previously examined
Hansard and found a relevant extract. We handed this extract to the parties. On
examining the extract Mrs Parslow, rather too late in our view, changed her
submission and instead argued that the word "may" was unambiguous and
in the relevant statutory context had to be construed as imposing a mandatory
requirement on the Board to make a determination.
94. The final
position, therefore, was that the primary submission of both parties was that
the language of section 66 (1) was unambiguous, but both parties argued for
completely different meanings. In those circumstances, we considered that our
original decision that we could refer to Hansard, as a guide to the
interpretation of the statutory provision, remained correct.
95. In referring to
Hansard we have borne in mind the three requirements set out in Pepper v
Hart [1992] STC 898 at 923 by Lord Browne-Wilkinson which we have quoted
earlier in this decision.
96. In columns
856-858 of the debate of 27 April 2004 in relation to the Finance Bill 2004 an
amendment was moved to Clause 66 of the Bill ("Cancellation of
Registration for Gross Payment"). This was the provision which was
eventually enacted as section 66 (1) Finance Act 2004. The proposed amendment
related to what is now section 66 (1) (b) which allows the Board to cancel a
person's registration for gross payment if he has made an incorrect return or
provided incorrect information for the purposes of the CIS legislation or
regulations made under it. The amendment (number 40) proposed to add at the end
of section 66 (1) (b) the words: "twice within a period of five
years." In other words, there had to be two incorrect returns in a five
year period before the Board were entitled to cancel a person's registration.
97. The amendment
was moved by Mr Laws who said as follows:
"The aim of the amendment is to clarify one
small aspect of the construction industry scheme, and clause 66 in particular.
The concern is that subsection (1) (b) appears to be quite draconian, as just
one error could lose a subcontractor his certificate. The preferable
alternative suggested in the amendment is that an error in two returns in a
five year period would trigger the loss of the certificate. Another alternative
is to introduce the concept of some type of serious error, although that
introduces subjectivity and presumably the Government would need to define
"seriousness" in terms of the amount of money lost.
Subsection (8) provides that, if the gross payment
registration is cancelled, the person may not reapply for gross payment status
within one year of the cancellation taking effect. The subcontractor must,
however, be registered for payment under deduction. I hope that the Paymaster
General will clarify whether the draconian interpretation of subsection (1) (b)
is merited, or whether we are missing something that will satisfy us that our
concerns are not justified."
98. The Paymaster
General (Ms Dawn Primarolo) replied:
"The hon. Gentleman asks for reassurance about
the regulations-making powers. I think that he interprets in an unnecessarily
draconian fashion the conditions under which registration would be withdrawn.
The clause provides for regulation-making powers.
The regulations, which are subject to discussion, will require the return to
contain a declaration to the Inland Revenue. Without wishing to anticipate
exactly what the industry may say, I think that I can assure the Committee that
the declaration will be subject to the ‘two strikes’ point that the hon.
Gentleman made. It will require the contractor to confirm that he has properly
considered employment status.
Therefore, I do not think that the hon. Gentleman
need worry. I wonder whether he will consider looking at the regulations when
the consultation has been completed. I will happily forward them to him, so
that you will be able to reassure himself and those outside the Committee, who
clearly have a concern."
99. Mr Laws then
withdrew the amendment. However, he then tabled a further amendment in relation
to periodic returns by contractors. Mr Laws said:
"I seek clarification about the intention of
the clause, in particular the requirement to say that a contract was not a
contract of employment. The Paymaster General will understand why people are
concerned about having to sign up to that requirement and the uncertainty that
there may be in some circumstances. The Amendment invites her and the
Government to make a judgement about the intention and the information available,
rather than pursue a particularly draconian approach. I hope that she can
reassure us that this provision will be interpreted sensibly, too."
100. Ms
Primarolo replied:
"Again, as with the gross payments to which
amendment number 40 referred, what is important on the question of the
declaration is that we have a workable scheme. On both the gross payment and a
declaration, we are seeking, in conjunction with the industry, to ensure that
we have regulations and rules that are achievable and carry a disincentive for
those who seek deliberately not to comply but that, equally, are sensitive
enough to recognise that sometimes errors are genuinely made. It will be
important to ensure that in the operation of the scheme and the regulations --
this applies to the declaration as well is to gross payments -- that balance is
correctly achieved."
101. This final
comment by the Paymaster General recognised that "in the operation of the
scheme" and the regulations it would be important to ensure the correct
balance between providing a disincentive for those who deliberately seek not to
comply, on the one hand, and sensitivity to recognise that "sometimes
errors are genuinely made", on the other hand.
102. As noted
above paragraph 32 of the Regulations does provide some relaxation of the
compliance test. Nonetheless, the Paymaster General was plainly envisaging the
correct balance being struck not just by the Regulations but also "in the
operation of the scheme". It is plain that these comments - indeed the
Paymaster General made the point specifically in her reference to amendment
number 40 - refer not just to the concern relating to the periodic returns made
by contractors but also to the concern expressed about the potentially
draconian effect of section 66 (1) (b). It should also be noted that there is
no statutory defence in respect of genuine errors. A genuine error, without
more, would not constitute a "reasonable excuse" within the meaning
of paragraph 4 (4) of Schedule 11.
103. Overall,
these comments by the Paymaster General are clear enough to suggest that some
element of discretion ("sensitive enough") was envisaged in relation
to the operation of the provisions permitting the Board to cancel registration
for gross payment. We do not consider these extracts from Hansard to be
determinative (certainly not in the way that the debates in Hansard influenced
the outcome in Pepper v Hart) and we do not base our decision upon them.
We consider instead that these comments are at least consistent (and certainly
not inconsistent) with the ordinary and natural meaning of the introductory
words of section 66 (1), as read in their statutory context, viz that they
confer a discretion on HMRC.
104. In
addition, we have also considered the Explanatory Notes published by HM
Treasury to accompany the Finance Bill 2004. The relevant extract in relation
to Clause 66 (1) reads as follows:
"Sub-section (1) allows the Board to
cancel registration for gross payment where the person's application for gross
status would fail, if made at that time. That means that gross status can be
cancelled where the person fails either the compliance or turnover test, at any
time, once registered. The Board may also cancel the registration where the
person has made an incorrect return or provided incorrect information under the
scheme, or where he has failed to comply with any provision of the
scheme." (Emphasis added)
105. It will be
noted that the Exclamatory Note states that the provision "allows"
the Board to cancel registration for gross payment. This is clearly permissive.
It does not suggest that the Board is required or obliged to cancel
registration. As to the propriety of having recourse to Explanatory Notes,
see: Westminster City Council v National Asylum Support Service [2002] UKHL 38 where Lord Steyn said at paragraph 5:
“Insofar as the Explanatory Notes cast light on the
objective setting or contextual scene of the statute, and the mischief at which
it is aimed, such materials are therefore always admissible aids to
construction.”
The legislative history
106. As with
Hansard, we have some doubts about the propriety of construing the relevant
provisions of the Finance Act 2004 by reference to earlier legislation. It
seems to us that Part 3 Chapter 3 Finance Act 2004 was a complete revision of
the earlier legislation. It is true that some of its provisions were reproduced
in almost identical terms from the provisions found in the Income and
Corporation Taxes Act 1988 ("ICTA 1988"), but other provisions were
considerably changed. The correct approach, in our view, should be that put
forward by the House of Lords in Inland Revenue Commissioners v Joiner [1975] STC 657 in relation to
consolidation Acts. We appreciate that the CIS provisions of the Finance Act
2004 were not strictly a consolidation or even a codification. Nonetheless,
because a number of the statutory provisions contained in the Finance Act 2004
are plainly derived from earlier versions of the CIS legislation, we consider
that the appropriate principles can apply by analogy. In Joiner Viscount
Dilhorne said (at 664):
"The process of
consolidation would lose much of its point if, whenever a question as to its
construction arose, reference had to be made to the individual Acts
consolidated. Only when the consolidation Act itself gives no guidance as to
its proper interpretation, should it be permissible in my opinion to refer to
the earlier Acts. Here in my view the consolidation Act did give such guidance,
but we were referred to and we did consider the Acts consolidated and in my
view their provisions indicate that the opinion I have formed on consideration
of the 1970 Act alone is correct."
107. Lord
Diplock approached the question in a slightly different manner (at 666-667):
"The modern practice of
parliamentary draftsmen in preparing for adoption by Parliament legislation to
effect a change in the existing law, particularly when the subject-matter of
the law is one, such as taxation, in which legislative changes are frequent, is
to express the changes to be effected in the form of amendments to the language
of particular provisions in earlier statutes dealing with the same subject
matter. This method of drafting becomes progressively more cryptic as
amendments to previous amendments follow one another in successive statutes.
The need to refer to and fro and back and forth between ever-increasing numbers
of different statutes in order to discover what a particular provision of any
of those statutes means reaches a point at which the difficulty of finding out
what the law is may have the practical consequence of depriving the citizen of
his right to know, in advance of a decision of your Lordships' House which must
needs be ex post facto, what the legal consequences will be of a course of
conduct which he contemplates adopting.
The purpose of a consolidation Act
is to remove this difficulty by bringing together in a single statute all the
existing statute law dealing with the same subject-matter which forms the
general context in which the particular provisions of the Act fall to be
construed, so that it will no longer be necessary to seek that context in a
whole series of amended and re-amended provisions appearing piecemeal in
earlier statutes.
This is the only purpose of a
consolidation Act; this is the only 'mischief' it is designed to cure. It is true
that a consolidation Act is not intended to alter the law as it existed
immediately before the Act was passed, but to treat this absence of intention
as justifying recourse to the previous legislation repealed by the
consolidation Act in order to ascribe to any of the provisions of that Act a
meaning different from that which it would naturally bear when read only in the
context of the other provisions of the consolidation Act itself, would be to
defeat the whole purpose of this type of legislation—to allow the absence of a
tail to wag the dog.
So the primary rule of construction
of a consolidation Act is to examine the actual language used in the Act itself
without reference to any of the statutes which it has repealed. If this
examination leads to the conclusion that, when read in the context of the other
provisions of the Act, the language in which a general description of some
factual situation is expressed is more apt to include than to exclude the
particular factual situation found to exist in the case for decision or vice
versa, the duty of the court is to ascribe to that language the more apt
meaning and to give effect to it accordingly. It is only where such an
examination of the actual language of the general description has led to the
conclusion that it is no more apt to include than to exclude the particular
factual situation, that it is permissible for a court of construction to have
recourse to the repealed legislation in order to see if its meaning was
clearer, and, if it was, to ascribe to the corresponding provision of the
consolidation Act a meaning which would not involve an alteration in the
previous law."
108. The CIS provisions were, as we understand it, introduced in the
Finance Act 1971. The relevant provisions in section 30 of that Act were as
follows:
"30(2) Where the Board are satisfied, on the
application of any person, that he is carrying on a business which consists of
or includes the carrying out of construction operations and that he has a
permanent place of business in the United Kingdom and either
(a) that, in respect of any period ending within
the three years preceding his application, he has been required to make a
return of his income or requested to supply to the inspector accounts of, or
other information about, his business and that in respect of all such periods
he has complied with any obligation imposed on him under the Taxes Acts and
with any such request ; or
(b) if no such obligation was imposed on him and no
such request was made in respect of any such period, that there is reason to
expect that he will comply with any such obligation or request in respect of
other periods;
they shall issue to him a certificate
excepting him from section 29 of this Act.
(3) An application under subsection (2) of this
section may be made on behalf of a firm and a certificate issued on such an
application shall be in the name of the firm.
(4) The Board may, at any time, cancel a certificate
under this section if it appears to them that it was issued on information
which was false or that by reason of a change of circumstances they would
refuse an application for such a certificate if made by the person to whom, or
on behalf of the firm to which, the certificate was issued or that that person
or firm has permitted it to be misused ; and may by notice in writing require
that person or firm to deliver it to the Board within the time specified in the
notice." (Emphasis added)
109. It will be
seen that section 30 (4) is the forerunner of section 66 (1) and (3) Finance
Act 2004. It will also be noted that section 30 (2) is the provision from which
section 63 (1) Finance Act 2004 is derived. We observe that section 30 (2)
appears to impose a mandatory obligation ("shall issue") on the Board
to issue a certificate to an applicant if the relevant conditions are
satisfied. In contrast, however, section 30 (4) provides that the Board
"may, at any time, cancel a certificate". Once again, the drafter of
the provision seems consciously to be distinguishing between the mandatory
"shall" in relation to the issue of a certificate and the permissive
"may" in relation to its cancellation. We shall see how, in later
versions of the CIS legislation, "shall" is changed to
"must" in accordance with modern drafting techniques.
110. In
addition, it is perhaps worth observing that the drafter used the phrase
"at any time" in commas. This suggests to us that Mrs Parslow's
submission that "may" qualified "at any time" in section 66
(1) was incorrect or at least in this earlier version the drafting was intended
to mean that the auxiliary verb qualified the main verb "cancel".
111. It will be observed that, to some extent, section 30 (4) contains
elements of what is now section 66 (1) and section 66 (3). This may well
explain why, in the Finance Act 2004, the introductory language of both those
provisions is the same, thus answering Mrs Parslow's submission in relation to
the interaction of those two subsections of section 66. In any event, so far as
relates to section 60 (1), the introductory language of section 30 (4) is for all
material purposes the same.
112.The CIS provisions were then re-enacted in the Finance (No 2) Act
1975. Section 70 of the Act provided:
"70.(1) A person is excepted from section 69 of
this Act in relation to payments made under a contract if a certificate from section
under this section has been issued to that person and is in force when the payment
is made, but
(a) where the certificate has been issued to a person
who becomes a partner in a firm, that person is not excepted in relation to payments
made under contracts under which the firm or, where a person has nominated the
firm to receive payments, the person who has nominated the firm, is a
sub-contractor (as defined in section 69(2) of this Act) ; and
(b) where a certificate has been issued to a person
as a partner in a firm, that person is excepted in relation only to payments
made under contracts under which the firm or, where a person has nominated the firm
to receive payments, the person who has nominated the firm, is a sub-contractor
(as so defined).
(2) If the Board are satisfied, on the application
of an individual or a company, that−
(a) where the application is for the issue of a certificate
to an individual (otherwise than as a partner in a firm), he satisfies the conditions
set out in Part I of Schedule 12 to this Act;
(b) where the application is for the issue of a certificate
to a person as a partner in a firm, that person satisfies the conditions set
out in Part II of that Schedule if he is an individual or, if a company, the
conditions set out in Part IV of that Schedule and, in either case, the firm
itself satisfies the conditions set out in Part III of that Schedule;
(c) where the application is for the issue of a certificate
to a company, the company satisfies the conditions set out in Part IV of that
Schedule and, if the Board have given a direction under subsection (4) below, each
of the persons to whom any of the conditions set out in Part I of that Schedule
applies by virtue of 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 (or, in a case falling
within paragraph (b) above, that individual or company as a partner in the firm
specified in the certificate) from section 69 of this Act.
(3) References in paragraphs (a), (b) and (c) of
subsection (2) above to an individual, a company or a firm satisfying conditions
set out in any Part of Schedule 12 to this Act include, in relation to a condition
which may, by virtue of a provision in that Part, be treated as being
satisfied, references to that individual, company or firm being treated as satisfying
that condition.
(4) Where it appears to the Board, on an application
made under subsection (2) above by a company, that the company−
(a) was incorporated on a date within the period of three
years ending with the date of the application; or
(b) has not carried on business continuously throughout
that period; or
(c) has carried on business continuously throughout that
period but the business has not at all times in that period consisted of or included
the carrying out of construction operations; or
(d) does not at the date of the application hold a
certificate which is then in force under this section; the Board may direct that
the conditions set out in Part 1 of Schedule 12 to this Act or such of them as are
specified in the direction shall apply to the directors of the company and, if
the company is a close company, to the persons who are the beneficial owners of
shares in the company or to such of those directors or persons as are so
specified as if each of them were an applicant for a certificate under this section.
(5) The Board may at any time cancel a certificate which
has been issued to a person and is in force under this section if it appears to
them that−
(a) it was issued on information which was false;
(b) if an application for the issue of a certificate
under this section to that person were made at that time, the Board would
refuse to issue a certificate; or
(c) that person has permitted the certificate to be
misused ; and may by notice in writing require that person to deliver the
certificate to the Board within the time specified in the notice.
(6) A person aggrieved by the refusal of an
application for a certificate under this section may, by notice in writing given
to the Board within thirty days after the refusal, 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 other than a decision that an individual, a company or a firm is or
is not to be treated as satisfying a condition set out in any Part of Schedule 12
to this Act." (Emphasis added)
113. Once again, it will be observed that, to some extent, section 70
(5) contains elements of what is now section 66 (1) and section 66 (3). The use
of the mandatory "shall" in section 70 (2) in relation to the issue
of a certificate will be noted. Again, section 70 (5) uses, in contrast, the
permissive words "may at any time cancel a certificate" (this time
without commas around the phrase "at any time") in the circumstances
therein provided.
114. There was, however, a significant provision enacted in paragraph 3
Schedule 12 Part 1. Paragraph 3 provided:
"(1) The applicant must, subject to
sub-paragraph (2) below, have complied with all obligations imposed on him by
or under the Income Tax Acts or the Taxes Management Act 1970 in respect of
periods ending within the qualifying period and with all requests to supply to
an inspector accounts of, or other information about, any business of his in
respect of periods so ending.
(2) An applicant who has failed to comply with such
an obligation or request as is referred to in sub-paragraph (1) above shall
nevertheless be treated as satisfying this condition as regards that obligation
or request if the Board are of the opinion that in all the circumstances the
failure ought to be disregarded for the purposes of his application for a
certificate under section 70 of this Act." (Emphasis added)
115. The
language in paragraph 3 (2) is significant because it shows that the Board had
a discretion to disregard certain compliance failures in an initial application
for a certificate under section 70. In considering whether to cancel a
certificate under section 70 (5) (b) it was provided that the Board may at any
time cancel a certificate if it appears to them that "if an application
for the issue of a certificate under the section to that person were made at
that time, the Board would refuse to issue a certificate ...." In other
words, the discretion contained in paragraph 3 (2) of Schedule 12 in relation
to an initial application for a certificate carried over, so to speak, to the
discretion whether to cancel the certificate. This, in our view, makes it clear
that section 70 (5), the forerunner of section 66 (1) Finance Act 2004,
permitted the Board to exercise a discretion.
116. Schedule 8
Finance Act 1980 amended paragraph 3 (2) Finance (No 2) Act 1975 as follows:
"3 (2) An applicant who has failed to comply
with such an obligation or request as is referred to in sub-paragraph (1) 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 paragraph (7) will be satisfied ...." (Emphasis added)
117. Thus,
paragraph 3 (2) was amended to substitute the "minor and technical"
test for the opinion of the Board. Section 70 (5) was not changed in any
material respect so that, if the analysis in paragraph 115 above is correct,
the Board's discretion in relation to the cancellation of a certificate
remained unchanged. It should be noted that the "minor and technical"
test was removed, and the reasonable excuse provisions were introduced in the paragraph
4 (4) Schedule 11 Finance Act 2004.
118. In 1988
the CIS legislation contained in the Finance (No 2) Act 1975, as amended, was
consolidated into ICTA 1988. Section 70 (5) became section 561 (8). There was
one change of note. The Finance Act 1982 had amended the CIS legislation in the
Finance (No 2) Act 1975 to include companies (see Schedule 8 paragraph 13). An
additional provision with added to what became section 561 (8) which allowed
the Board to cancel a certificate ("the Board may at any time cancel a
certificate... if it appears to them that") if:
"(d) in the case of a certificate issued to a
company, there has been a change in the control of the company and information
with respect to that change has not been furnished in accordance with
regulations under section 566 (2) ...."
119. Otherwise,
section 561 (8) did not materially amend the earlier provisions.
120. There is
one further point to note about the CIS provisions of the Finance (No 2) Act
1975 and ICTA 1988. In section 70 (2) of the former and section 561 (2) of the
latter, where an applicant for the issue of a certificate satisfied the various
conditions, the legislation provided that the Board "shall issue...
a certificate". When these provisions were re-enacted in the Finance Act
2004 (section 63) "shall" was changed to "must".
121. This change
reflects the modern approach to statutory drafting which tends to avoid the use
of the word "shall" as being ambiguous, preferring instead the word
"must". For present purposes, however, it is clear that in updating
the drafting of the previous enactments, the draftsman changed the wording of a
provision which was regarded as mandatory in order to make the mandatory
meaning clearer. There is no doubt that the word "shall" in section
561 (2) (and, we consider, in earlier enactments) was mandatory: see the judgment of Lightman J in Hudson v JDC Services Ltd [2004] STC 834 (at
842g). Conspicuously, the draftsman did not seek to change the wording of what
became section 66 (1) since it was presumably considered that its discretionary
meaning was clear and that it was not intended to have a mandatory meaning.
122. For the
above reasons, we consider that the legislative history of section 66 (1) makes
it very clear that it was intended to confer a discretion on the Board.
Certainly, there is nothing in the legislative history which suggests a
mandatory obligation being imposed on the Board.
123. Finally, we
noted Mrs Parslow’s argument that the word “may” did not necessarily mean
"discretion", but rather "permission”, which in turn means
"allow" in the sense of "enable" or "give power
to". We were unable to see a distinction between HMRC having the
"discretion" to decide a matter, and it having the power so to
decide. We are fortified in our view by the fact that the Oxford English
Dictionary defines "discretion" in this context as the "liberty
or power of deciding, or of acting according to one's own judgement".
Our conclusion on the interpretation of Section 66(1)
124. As we indicated at the outset, the primary question with which we
are faced is one of statutory interpretation. We have, therefore, considered
the correct statutory construction of the introductory words used in section 66
(1) at considerable, perhaps even tedious, length. In carrying out this review,
we have used the main relevant principles of statutory interpretation. Our
conclusion is that both the natural meaning of the words used in section 66 (1)
and the various principles and aids to statutory interpretation which we have
applied indicate that the words "The Board of Inland Revenue may at any
time make a determination cancelling a person's registration for gross
payment…" are permissive and confer a discretion on HMRC. There is no
compelling reason, in our view, why these words should be construed to impose a
mandatory requirement on HMRC.
125. Furthermore, as we shall see later in this decision, the cancellation
of registration for gross payment can have very serious adverse consequences
for a subcontractor. For many contractors it is very much easier to pay gross
to a subcontractor who is registered for gross payment than to deduct and
account for deductions to HMRC. Indeed, many contractors will only engage
subcontractors who are registered for gross payment. The cancellation of gross
payment status means, in many cases, a subcontractor will find it more
difficult to obtain work.
126. In addition, the deduction from contract payments made to a
subcontractor whose registration for gross payment is cancelled is likely to
have serious adverse cash flow consequences for the subcontractor.
127. It seems to us, therefore, quite understandable that Parliament
intended that, before a subcontractor faced such serious consequences, some
element of discretion might need to be applied. Indeed, we think that this is
the thrust of the comments made by the Paymaster General to which we have
already referred. At the very least, conferring a discretion on HMRC in these
circumstances does not lead to an absurd or perverse result. On the contrary,
as we have said, the result seems to us perfectly sensible. It does not reward
non-compliance. In exercising their discretion HMRC may perfectly properly
conclude that more serious or aggravated forms of non-compliance should lead to
a cancellation of the registration. A discretion, however, allows HMRC to
permit a subcontractor to retain the registration where the failure (assuming there
is no reasonable excuse) falls in a grey area which exists between the failures
permitted by Regulation 32 and the more serious forms of non-compliance.
128. We are not
oblivious to the desire for standardisation and computerisation which HMRC
understandably and commendably wish to achieve in administering our complex tax
system. The use of technology in, for example, monitoring compliance greatly
promotes efficiency. Nonetheless, when Parliament confers a discretion for the
purpose, we suggest, of protecting individual taxpayers from too insensitive an
application of black letter rules, that discretion must be exercised even
though it may require the necessary allocation of (more expensive) human
resources.
Did HMRC exercise its discretion in this case?
129. Mrs
Parslow, in her oral submissions, argued that by programming its computer in a
particular way and by making Regulations (such as amendments to Regulation 32)
HMRC had exercised its discretion under section 66 (1). We understood this to
be an alternative to her main submission that no discretion existed.
130. We find
this argument hard to understand. At the first hearing Mr Shea informed us that
the aim the review conducted was to establish whether the compliance failures
identified by the computer were, indeed, correctly identified.
131. Mrs Parslow
seemed to be suggesting that in some way HMRC's computer program provided some
further layer of discretion by virtue of it having been programmed in such a
way that additional latitude (above and beyond the tests contained in the
primary and secondary legislation) had been built in. She mentioned an
additional five day grace period but gave very little additional detail.
132. We do not
consider this argument to be correct. Where Parliament confers a discretion on
a public body that public body must exercise the discretion in accordance with
the normal rules of public law. A public body, such as HMRC, cannot fetter a
discretion bestowed by statute. The public body must give reasoned
consideration on an individual basis as to how the power or discretion should
be exercised (see eg R v LCC, ex p Corrie [1918] 1 KB 68). There is
nothing to prevent a public body adopting policies or practices which indicate
factors it may take into account in exercising its discretion, as long as these
policies or practices do not themselves become a rule preventing consideration
of individual circumstances: see e.g. R v Port of London Authority ex p
Kynoch Ltd [1919] 1 KB 176 at 184, British Oxygen Co Ltd v Minister of
Technology [1971] AC 610 and A-G (ex rel Tilley) v Wandsworth London
Borough Council [1981] 1 All ER 1162.
133. In our
view, nothing that Mrs Parslow said indicated that consideration was given
whether to exercise a discretion in Mr Scofield's individual circumstances. No
evidence has been brought forward by HMRC to indicate that any discretion has
been exercised. We therefore find that no discretion was exercised in his case.
134. For
completeness, we should also address a further point made by Mrs Parslow. In
argument, she suggested that because an HMRC official would routinely review an
appeal against a determination made under section 66 (1) and could accept the
appeal, this was in an example of HMRC exercising its discretion.
135. In our
view, it is no such thing. Our conclusion on the correct interpretation of
section 66 (1) is that HMRC have a discretion whether to make a determination
cancelling registration for gross payment. They must exercise that discretion
in deciding whether to make a determination. They cannot make a determination
without exercising the discretion. It is not enough that subsequently, once a
determination has been made and an appeal lodged, they may decide to rescind
the determination. By that stage the determination has already been made. By
accepting an appeal, HMRC is exercising a discretion to accept the appeal not
whether to make the determination in the first place.
136. In any
event, the determination will usually have been made because "it
appears" to HMRC (or at least to its computer) that an application for
registration for gross payment would be refused. At that stage, as Mr Shea
noted at the earlier hearing, HMRC will usually have little or no information
about whether or not the taxpayer had a "reasonable excuse"
(paragraph 4 (4) Schedule 11) for the compliance failure(s). This information
will usually only come after a determination has been made. The review will
often consider information, made available after the determination has been
made, concerning the question of "reasonable excuse". We return to
this point in paragraph 141 below because it seems to us that the current
procedure is unsatisfactory.
Consequences of failure to exercise the discretion in section 66 (1)
137. Mr Gordon
submitted that a failure to carry out the decision-making process correctly
renders the purported decision void. He therefore asked us to allow his
client's appeal on that basis.
138. We agree.
In order to make a determination under section 66 (1), HMRC must exercise its
discretion. If it does not exercise its discretion it has not made a
determination for the purposes of the statute. The determination is invalid and
has no effect. See also per Lord Reid in Anisminic Ltd v Foreign
Compensation Commission [1969] 2 ac 147 at 170 and per Lord Irvine LC in Boddington
v British Transport Police [1999] 2AC 143 at 158.
139. The CIS
code contained in the Finance Act 2004 requires a determination under section
66 to fulfil various requirements. Apart from the discretion issue, the
determination must be given to the subcontractor "without delay" and
it must give the subcontractor "notice stating the reasons for the
cancellation" (otherwise, presumably, the subcontractor, in appealing
against the cancellation, would not be able to state his reasons for believing
that his registration for gross payment should not have been cancelled in
accordance with section 67 (3)). Failure to comply with these requirements also
renders the determination invalid: see Radford and Robinson v HMRC
[2010] UKFTT 31 (TC). There is no reason why a failure to exercise discretion
in making a determination should be treated any differently.
140.
Accordingly, we conclude that because HMRC's determination in respect of Mr
Scofield was invalid we should allow this appeal.
141. We also
note that section 66(1) Finance Act states that the Board may make a
determination cancelling gross registration:
“if it appears to them that−
(a) if an application to register the person for
gross payment were to be made at that time, the Board would refuse so to
register them.”
142. The Board
would refuse to register an individual applying to be registered who failed the
compliance test (paragraph 4, Schedule 11, Finance Act 2004). The compliance
test is, however, not failed if the Board “are of the opinion that” the
applicant “had a reasonable excuse for failure to comply” (paragraph 4,
Schedule 11, Finance Act 2004). It is only when it appears to the Board that the
compliance test would have been failed, that HMRC may withdraw gross payment
status.
143. As we
understand the position (see paragraph 136 above), what happens in practice is
as follows. If HMRC record a compliance failure which falls outside the
tolerance limits given in the Regulations, they issue a determination
withdrawing gross payment status. At this stage they can have no information on
which to base an opinion as to whether or not the individual has a reasonable
excuse. It is only after the issue of the determination that they ask the
taxpayer for this information. If, having received the individual’s submission,
HMRC consider that it constitutes a reasonable excuse, the determination is
withdrawn.
144. This seems
to us to be procedurally flawed. The statute requires that the issue of reasonable
excuse is considered before the determination is issued and not afterwards. It
is not clear how HMRC can reasonably form an opinion that the compliance test
has been failed if it has made no enquiry about whether there was a reasonable
excuse for the compliance failure(s). However, this point was not argued before
us, and does not form the basis of our decision.
Unreasonableness and Proportionality
145. Mr Gordon
submitted, in the alternative, that the Tribunal should remake the original
decision and, in so doing, exercise the discretion that should have been
exercised by HMRC.
146. In the
light of our decision to allow the appeal on the basis that HMRC's
determination was invalid, it is not necessary to consider the submission in
detail. However, certain additional evidence was adduced which we consider
should be recorded in the context of the submissions made.
147. Mr Gordon
submitted that in Mr Scofield's case cancellation of registration for gross
payment would be excessive and disproportionate. It would be an unjust and
unreasonable outcome in the Wednesbury sense: see Associated
Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.
148. He drew
attention to the fact that the late payment of Mr Scofield's income tax (the
second payment on account of his 2008/09 liability) meant that he had suffered
an interest charge (at an annual rate of 2.5% over the Bank of England base
rate). He further submitted that in the case of Mr Scofield, quite apart from
the adverse cash flow effect of the loss of gross payment status, it would be
likely to lead to the loss of the taxpayer's business and, possibly, the loss
as well of the business of his own subcontractors.
149. Mr Gordon
accepted our earlier finding that Mr Scofield did not have a reasonable excuse
within the meaning of paragraph 4 (4) Schedule 11. Nonetheless, he submitted
the following facts should be taken into account in the exercise of the
Tribunal's discretion:
(a)
the payment of income tax was only four working days outside the
extended period permitted by Regulation 32;
(b)
this was one isolated failure out of a large number of compliance obligations
to which Mr Scofield was subject) monthly CIS obligations for his own workers,
quarterly VAT returns and payments, income tax returns and payments). There had
not been any other compliance failures before or after the one in issue;
(c)
in this case, HMRC's own record-keeping had also been defective - with
eight alleged failures being attributed to HMRC error. In addition, HMRC's
failure to exercise its discretion represented a further breach of a statutory
protection given to taxpayers; and
(d)
when Mr Scofield's compliance record was considered in the round it did
not suggest that he lacked the discipline to operate a business in a
professional manner. Mr Gordon referred to the Exclamatory Notes to Finance
Build 2004, clause 57 which stated that the purpose of the legislation was to
prevent "those who lack the discipline required to operate a business in a
professional manner from obtaining gross payment status".
Additional evidence
150. Mr
Scofield's accountant, Mr Bright K Amedoah, submitted a witness statement which
was accepted as his evidence in chief and gave oral evidence. The material part
of Mr Amedoah's evidence is set out below and we find the following facts.
151. He
confirmed that Mr Scofield was a subcontractor in the construction industry. He
is a decorator and general builder. Mr Scofield subcontracts his work from main
contractors who could give the contracts to any subcontractor if they can save
any costs in awarding such contracts. If Mr Scofield were to lose his gross
payment status it would mean more administrative work to the main contractors
in trying to do more work in deducting the 20% from payments made to Mr
Scofield. The main contractors would therefore prefer to give the contract to
other subcontractors who are registered for gross payment. Mr Scofield would
therefore lose most of his contracts and possibly have to close his business.
152. In
addition, Mr Amedoah confirmed that he had written to The William Pears Group,
a building contractor which subcontracts work to Mr Scofield and which supplies
Mr Scofield with a large proportion of his work. In a letter dated 14 January
2011 addressed to Mr Amedoah, The William Pears Group wrote as follows:
"We understand that your client, Mr Scofield,
is due to attend a Court Hearing next week to discuss his CIS payments.
Our Group only use CIS accredited contractors and,
as such, should Mr Scofield lose his CIS accreditation then we would no longer
be able to utilise his (or his subcontractors) services."
153. Plainly, Mr
Amedoah's evidence was mainly hearsay. To the extent that the evidence
consisted of hearsay, we evaluated it as such. However, we did not understand
HMRC to contest it. Mrs Parslow did, however, rightly object to such parts of
Mr Amedoah's evidence that constituted statements of law and we have
disregarded those parts of his evidence. We accept, however, and find as a fact
that the William Pears Group were likely no longer to use Mr Scofield if his
registration for gross payment was cancelled.
154. Mrs Parslow
drew attention, in cross examination, to a statement in Mr Amedoah's witness
statement to the effect that Mr Scofield's self-assessment return for the year
ended 5 April 2008 was filed online one 6 January 2009. She pointed out that Mr
Scofield would have then known that he had a liability to pay income tax on 31
July 2009. Mr Amedoah agreed that this would have been the case.
155. Mr Scofield
gave oral evidence. He confirmed that he worked in the construction industry.
His main clients, who provided most of his work, were The William Pears Group,
Hamways, Sinton-Andrews, Baileys and two others. About 70% of his work came
from The William Pears Group.
156. Mr Scofield
said that he did work under general maintenance contracts. He would do
everything from changing lightbulbs to installing new bathrooms. Most of his
work was in the private sector. When the tenants left a property he would go in
and make whatever repairs and renovations were required. He engaged six to
eight subcontractors.
157. He said
that if he lost his registration for gross payment he would lose his work from The
William Pears Group and most of his subcontractors would lose their jobs. The
William Pears Group provided about 70% of his work.
158. Under
cross-examination, Mr Scofield accepted that he was aware or should have been
aware when he filed his tax return on 6 January 2009 that the income he
returned on their return was set as tax payments for the next year. He accepted
that he knew that he would have a liability on 31 July 2009 and that, although
he had the funds on 4 August 2008, he paid late.
159. In re
examination, Mr Scofield considered that he would be unable to work if he lost
his registration for gross payment.
160. We accept
Mr Scofield's evidence. We considered him to be a reliable and honest witness.
We specifically find as a fact that, if Mr Scofield were to lose his
registration for gross payment, he would in all probability lose his livelihood
and that most of the subcontractors would lose their jobs.
161. Mrs Parslow
referred us to the decision of Lewison J in Barnes v Hilton Main
Construction Ltd [2005] STC 1532 in which Lewison J held that the CIS
scheme contained in ICTA 1988 was compliant with the Convention for the
Protection of Human Rights and Fundamental Freedoms 1950 and contained a
considerable measure of proportionality.
162. Mr Gordon
replied that in Barnes the Court was not considering the exercise of a
discretion by a public body.
163. The
application of the Convention and the Human Rights Act 1998 is a complex area.
The point was not fully argued before us and we are therefore reluctant to
decide this issue, particularly because of our decision, that the determination
made by HMRC on 29 January 2010 was invalid, makes it unnecessary for us to do
so. Nonetheless, as we have noted above, we thought it right to record the evidence
presented to us and our findings in relation thereto.
164. In
addition, it is also unnecessary for us to reach a conclusion on Mr Gordon's
submission that HMRC's determination was Wednesbury unreasonable.
Moreover, we would not wish, without further legal argument, to determine
whether as a matter of common law it was open to the Tribunal to consider
whether, in exercising a discretion under section 66 (1), HMRC, as a public
body, must exercise that discretion proportionately: see per Lord Steyn in R
(Daly) v Home Secretary [2001] 2 AC 532 at 547, Huang v Secretary of
State for the Home Department [2001] UKHL26 and De Freitas v Agriculture
Secretary [1999] 1 AC 69.
Jurisdiction of the Tribunal
165. HMRC
accepted, in accordance with the decision of Lightman J in Hudson v JDC
Services Ltd [2004] 834, that this Tribunal had full appellate jurisdiction
under section 67 Finance Act 2004.
166. We consider
that, in addition to being able to substitute our view for that of HMRC, we
also have a supervisory jurisdiction to review a decision taken by HMRC under
certain CIS provisions of Finance Act 2004: section 67 (4) expressly includes
"jurisdiction to review any relevant decision taken by the Board of Inland
Revenue in the exercise of their functions under section 63, 64, 65 or
66". Our powers are, however, limited to allowing or dismissing the
appeal.
Conclusion
167. For the
reasons given, we have decided that the determination of HMRC of 29 January
2010 was invalid because HMRC failed to exercise a discretion as required by
section 66 (1) Finance Act 2004. Accordingly, we allow this appeal.
168. This
document contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal not
later than 56 days after this decision is sent to that party. The parties are
referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax
Chamber)” which accompanies and forms part of this decision notice.
GUY BRANNAN
TRIBUNAL JUDGE
RELEASE DATE: 24 March 2011
