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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Scofield v Revenue & Customs [2011] UKFTT 199 (TC) (24 March 2011) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01068.html Cite as: [2011] UKFTT 199 (TC), [2011] STI 1779, [2011] SFTD 560 |
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[2011] UKFTT 199 (TC)
TC01068
Appeal number TC/2010/04709
Construction industry scheme -- withdrawal of gross payment status -- Finance Act 2004 - whether HMRC have discretion to withdraw gross payment status - whether discretion exercised - jurisdiction of Tribunal to review HMRC decision - appeal allowed
FIRST-TIER TRIBUNAL
TAX
JOHN SCOFIELD Appellant
- and -
TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE) ANNE REDSTON (TRIBUNAL MEMBER)
Sitting in public at 45 Bedford Square, London WC1 on 20 January 2011
Keith Gordon and Ximena Montes Manzano, Counsel, for the Appellant
Nicola Parslow, Appeals and Review Unit, HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2011
DECISION
"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...."
" 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'."
"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."
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)....
“(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.]
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.
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) . . .
-- 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.
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.
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.
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. "
"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."
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”.
"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."
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."
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.
" '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.
"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 ...."
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.
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".
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.
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."
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.
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."
"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."
"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."
"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.”
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."
"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)
"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)
"(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)
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)
"(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.
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".
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.
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.
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.
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.
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.
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.
“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.”
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.
(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".
"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."
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.
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.
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.