HM Inspector of Taxes v G-Con Ltd

SIR PETER GIBSON: This is an appeal by G-Con Limited (“G-Con”) from the order of Mann J on 4 March 2005. Thereby, the judge allowed the appeal of the Inspector of Taxes from the decision of the General Commissioners for the Flaxton Division in North Yorkshire, who had allowed G-Con’s appeal against the Inspector’s refusal of G-Con’s application for the renewal of a construction industry scheme (“CIS”) certificate. Chadwick LJ gave permission to G-Con to bring this second appeal because he thought there was some force in its submission that the approach of Laddie J in Cormack (HMIT) v CBL Cable Contractors Limited [2005] EWHC 1294 Ch (“CBL”) on 23 June 2005 was difficult to reconcile with that of Mann J, and because of the need for consistency of approach.

The CIS certificate scheme was introduced by section 29 of the Finance Act 1971 to prevent the loss of income tax payable by building workers claiming to be self-employed, commonly called the lump. If sub-contractors performing operations for, or supplying labour to, a contractor paid building workers gross on the basis of such a claim, but the workers were unknown to the Revenue, they could fail to account for tax on their earnings. To meet this mischief, the contractor was required to deduct tax from what it paid sub-contractors unless they could produce a CIS certificate issued by the Revenue.

The details of the CIS certificate scheme are now set out in sections 559 to 567 of the Income and Corporation Taxes Act 1988. The general rule requiring the contractor, on making a payment to the sub-contractor, to deduct tax is in section 559(4). But by section 561, if the sub-contractor holds a current valid CIS certificate the contractor can pay him gross. Section 561(2) provides:

The conditions in section 565 relevant to the present case are the following:

The reference to the Board in sections 561(2) and 565(4) are references to the Board of Inland Revenue, but the Board has delegated its functions under those provisions to Inspectors of Taxes. The Tax Acts are widely defined and include the 1988 Act. The Management Act is the Taxes Management Act 1970. The term “qualifying period” in section 565 means the period of three years ending with the date of the company’s application for a certificate under section 561 (see section 565(9)).

Section 561(9) allows a person aggrieved by the refusal of an application for, or the cancellation of, a certificate to appeal to the General or Special Commissioners, and on such an appeal the Commissioners can review any relevant decision taken by the Revenue under section 561.

By Regulation 40(1) of the Income Tax (Employment) Regulations 1993 (SI 1993/744) PAYE tax is due 14 days after the end of each income tax month and by Regulation 2(1), an income tax month ends on the fifth of each month. Similarly, National Insurance Contributions (“NIC”) are due 14 days after the end of each tax month ending on the fifth of the month (see paragraphs (1) and 10(1) of Schedule 4 to the Social Security (Contributions) Regulations 2001 (SI 2001/1004)). Accordingly, the sub-contractor is under a statutory obligation to pay PAYE tax and NIC on or before the 19 ^th of the month and any delay in making such payment in respect of a period ending within the qualifying period constitutes a failure to comply with obligations imposed on it under the Tax Acts or the Taxes Management Act.

The General Commissioners found, or referred to documents recording, the following facts:

G-Con had applied for, and on 28 March 2002 had been granted, a CIS certificate. The certificate had been renewed on 21 November 2002 and expired on 31 March 2004. G-Con, by an application dated 28 November 2003, applied for a further renewal of the certificate.

By a letter dated 11 December 2003 the Revenue informed G-Con that its application was refused. It enclosed a booklet, IR40, in which the conditions for obtaining a certificate were explained, and it drew particular attention to the paragraphs headed “Compliance Test” and to the sections on “minor and technical failures”. It said that the payments of PAYE tax and NIC had been made more than 14 days late on 15 occasions out of the 23 payments made, and that it did not consider those failures to be minor and technical. G-Con had therefore failed the Compliance Test.

By a letter dated 2 January 2004 G-Con notified the Revenue of its appeal.

The qualifiying period was the period of three years ended 10 December 2003. The PAYE tax and NIC payments made in that period were set out in a table as follows:

G-Con made a loss of £34,595 for the year ended 31 March 2003.

G-Con’s monthly accounts from April to November 2003 showed that its profitability had improved over that period from a loss of £8,754.69 to a profit of £7,676.05.

At the hearing before the General Commissioners, G-Con was represented by its sole director, Mrs Hervey. Among the contentions advanced by her and recorded by the General Commissioners in paragraph 6 of the Case Stated was this:

The General Commissioners were referred to the case of Shaw (H M Inspector of Taxes) v Vicky Construction Limited [2002] STC 1544. They said in paragraph 9:

The Commissioners expressed their decision in paragraph 10 in this way:

On the Inspector’s expression of dissatisfaction and request for a Case Stated, the Commissioners identified the following questions for the High Court:

On the Inspector’s appeal, heard by Mann J, Mrs Hervey again appeared for G-Con. As G-Con in this court accuses the judge of answering the wrong question, I must set out in some detail the judge’s reasoning in allowing the appeal.

In paragraph 20 of his judgment, the judge noted the argument for the Inspector as being that the General Commissioners reached a wrong decision on each of the two conditions in section 565(4) which G-Con had to satisfy if it was to obtain the renewal of the CIS certificate, that is to say that the delays in paying PAYE tax and NIC were merely minor and technical failures and that those failures did not give reason to doubt that G-Con would in future comply with all its obligations.

The judge reminded himself in paragraph 21 of the function of the court on such an appeal against what is in essence a finding of fact in relation to each condition. The judge referred to the observations of Viscount Simonds in Edwards v Bairstow [1956] AC 14 at 29 on a finding that a transaction was not in the nature of trade:

The judge explained in paragraph 22 that those observations, and similar remarks by Lord Radcliffe at pages 35 to 36, were relevant because the primary facts on which the Revenue relied in resisting the grant of the CIS certificate were not in dispute. He continued:

The judge then turned in paragraph 23 to the Revenue’s first ground of appeal, that is to say:

In paragraph 24 the judge analysed the primary facts shown by the table and commented that on no occasion were any payments made in time and that some of them were significantly late, that the amounts were significant and that the time lapses were all significant.

The judge posed the question in paragraph 25:

The judge answered that question in paragraph 27:

At paragraph 28, the judge then considered whether there was anything in the surrounding facts which would be capable of rendering those figures minor and technical if they otherwise did not seem to be so, but found nothing to do so nor to diminish the significance of the delays.

Next, in paragraph 29, the judge dealt with the reliance by the General Commissioners on the good record of G-Con in complying in all other tax matters. That was the submission of Mrs Hervey in paragraph 6(g), which they had accepted in paragraph 9(f). The judge found the General Commissioners to be guilty of faulty reasoning on this their only reason for saying that the breaches were minor and technical, because good behaviour in other areas was not capable, he said, of qualifying the nature of those particular breaches.

The judge then considered, but rejected as unhelpful to G-Con, Mrs Hervey’s attempted reliance on a Revenue publication dated December 1975 and containing a statement of policy on sub-contracting in the construction industry and on IR40. He also rejected attempts to rely on the fact that there had been a renewal of the CIS certificate in the past at a time when there had been late payments of PAYE tax and NIC and on the absence of a warning before the refusal of the certificate. He said in paragraph 35 that the fact that in paragraph 9(a) the General Commissioners had taken account of the absence of a warning by the Revenue to G-Con was an instance of their taking into account irrelevant considerations.

Finally, the judge dealt in paragraphs 36 and 37 with attempts by Mrs Hervey to contrast the instant case with the Vicky case. He noted in paragraph 37 her submission that the defaults in this case were not as bad as they were in Vicky . The judge commented:

The judge having decided that the General Commissioners, in holding that the defaults were minor and technical, reached a decision which they could not reasonably have reached did not have to consider their decision on future compliance. However, he expressed the view on that point that the Commissioners’ decision was sufficiently equivocal as to what was and what was not taken into account to lead him to the view that had that been the sole ground of appeal, the decision should be quashed and the case remitted back to them for their reconsideration on the basis of all the evidence available.

On the appeal by G-Con to this court, Mr David Southern and Mr Timothy Brown appear for G-Con. Mr Southern submitted to us that the judge erred for a number of reasons:

On Mr Southern’s first point, which he described as the main point in issue on the appeal, he gave four reasons why the judge was wrong. (1) There was no warrant in the statute for excluding the compliance record. (2) It would frustrate the purpose of the CIS certificate scheme because it would make the “minor and technical” test unduly restrictive”. (3) The term “minor and technical” derives its meaning from its context which requires consideration of the overall tax compliance record. (4) To exclude the tax compliance record was directly contrary to the Revenue’s own guidance on the meaning of that test as well as being contrary to what the Revenue did in practice.

I am unable to accept these reasons as a justification for Mr Southern’s submission, as it seems to me that the meaning of the statutory provisions on this point is entirely clear. A CIS certificate is a prize which sub-contractors are anxious to obtain, but to obtain it Parliament has required by section 565(3) strict compliance by the sub-contractor with all his tax obligations, subject only to the let-out in sub-section (4). The strictness of the compliance required is now emphasised by sub-section (8A) which makes clear that any failure to comply with a statutory time limit will be a breach, subject to sub-section (4). The reference in sub-section (3) to compliance with all tax obligations is to be contrasted with sub-section (4), which focuses on any breach which has occurred. It is the failure to comply with the tax obligations which must be found to be minor and technical in order that the first condition of sub-section (4) be satisfied. It must also not give rise to doubt as to future compliance in order that the section condition of sub-section (4) be satisfied. Although the “failure” is in the singular, no one suggests, nor can anyone sensibly suggest, that one looks only at each failure in isolation from other failures. All breaches in compliance with tax obligations can be taken into account in deciding whether the failure to comply with such tax obligations can be deemed minor and technical.

I cannot see how this interpretation can be said to frustrate the purpose of the CIS certificate scheme. In Templeton (HMIT) v Transform Shop Office and Bar Fitters Limited [2005] EWHC 1558 Ch at paragraph 14, Hart J said of the “minor and technical” test:

Mr Southern’s submission that the guidance given by the Revenue contradicts what the judge held does not, in my judgment, withstand scrutiny. Mr Southern relies on IR40 at pages 14 and 17. At page 14 in an appendix dealing with minor and technical failures, the Revenue said this:

Again on page 16, the Revenue say this under the heading “Payments”:

On page 17, in part B which is headed “What sort of failure would NOT be minor and technical?”, under “Late payments” the Revenue give as an example of such a failure:

It is therefore perfectly apparent that once there are repeated failures, they are taken into account by the Revenue in deciding what is not minor and technical.

The passage on page 17 on which Mr Southern would rely says this:

I turn to the judge’s second error alleged by Mr Southern, that it was not the function of the High Court to repeat the exercise carried out by the General Commissioners. For my part, I accept that proposition, but I do not see that it assists in the present case. The judge correctly directed himself by reference to Edwards v Bairstow . In that context, it is worth referring to the remarks of Lord Radcliffe at [1956] AC at pages 38 and 39, where that judge said this:

The nub of the argument on this point was the fourth error alleged by Mr Southern. He accused the judge of, in effect, answering the wrong question. He said that the judge, having correctly identified in paragraph 22 the limits of his ability to interfere with the General Commissioners’ factual finding that the defaults were minor and technical, went on in paragraph 37 to consider an entirely different question; that is to say whether G-Con’s defaults were as a matter of fact minor or technical. In support of that submission, he relied on the two sentences which I have already cited (in paragraph 24 above) from paragraph 37 of the judge’s judgment. He attaches “the question I have to decide” from the first of those two sentences to “whether the defaults in this case were merely minor and technical” from the second sentence.

I do not think that this is a fair way to characterise the judge’s reasoning. I have set out in some detail the judge’s approach, from which it can be seen that he was throughout considering whether the Edwards v Bairstow conditions were satisfied so as to allow him to interfere with the decision of the General Commissioners. In particular, he was considering the correctness of the Revenue’s first submission that the Commissioners reached a decision which they could not reasonably have reached. To that end, he posed the question in paragraph 25 whether a case could be made for saying that on the figures of the table the breaches were minor and technical. He answered that question in paragraph 27 by saying that the breaches could not reasonably be described as minor and technical taken by themselves. He then looked, in paragraph 28, to see whether the surrounding circumstances could have changed the position and held that they did not. Thus, by the end of paragraph 28, the judge has answered the relevant question in a way which cannot be faulted, subject to the further submission which Mr Southern makes about the judge taking into account irrelevant matters, that is to say, defaults by G-Con in making payments which were less than 14 days late. I will come to that shortly. The judge then went on to point to the error of reasoning by the Commissioners in accepting Mrs Hervey’s argument in paragraph 6(g), and he considered, only to dismiss, various submissions by her. One of those submissions was the attempted comparison with the facts of Vicky . This the judge rightly rejected in paragraph 37. It was Mrs Hervey who made the submission that the facts were not as bad as the facts in Vicky . The judge in paragraph 32 was pointing out that that was not helpful, as the statutory test was whether the defaults were minor and technical. I do not accept that the judge, in that paragraph, was posing a different test from that which he had correctly stated earlier, still less that anything said in that paragraph should be treated as infecting the whole of his decision on the appeal.

I turn then to the question whether the judge took into account irrelevant matters. When looking at the primary facts, he referred to all 23 of the late payments made by G-Con. Mr Southern submitted that the judge was imposing a stricter compliance standard than that which the Revenue itself had adopted in the case and upon which the General Commissioners had not been required to adjudicate.

Again I am not able to accept that submission. The Revenue in its letter of 11 December 2002 was not saying, nor could it say consistently with IR40, that all defaults of 14 days or less were minor and trivial no matter how often such defaults occurred. The fact that it chose in that letter to highlight the statistic that 15 of the 23 late payments were more than 14 days late does not mean that in its view the other 8 late payments were in context minor and technical failures. The General Commissioners did not say that they were proceeding on the footing that any late payments made within 14 days could be treated as minor and technical defaults.

Next, I turn to Mr Southern’s submission that the judge did not consider, as he ought to have done, the question of culpability. Mr Southern relies on what Laddie J said in CBL on this point. That judge referred to a passage in IR40 in which the Revenue had stated that it would bear in mind the size of a business, and that, if the business is reliant on one person who falls ill, that would be taken into account. Laddie J said in paragraph 29: “That must be because the Revenue understands, correctly in my view, that the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not”. Mr Southern submitted that Mann J clearly did not regard the non-compliance by G-Con as culpable, because of his comments on Mrs Hervey as a highly competent businesswoman and one who was entirely honest and straightforward.

For my part, I accept that culpability may be relevant in a particular case. An example was given in the course of argument that a payment might be delayed because of a failure of the Post Office to deliver the payment in a timely fashion. Another example might be if the sub-contractor’s bank, properly instructed to make a payment, had not carried out its instruction in a prompt fashion. But I do not see that culpability is a matter of relevance in this particular case. Certainly, I cannot see how the remarks made by the judge about Mrs Hervey could lead to the inference that G-Con was not culpable in its defaults. Indeed, the submission that G-Con, acting through Mrs Hervey, had done nothing wrong is manifestly incorrect. It is plain that G-Con did not comply with its obligations under the Tax Acts, with the result that it was consistently in default in every month of the qualifying period. Nor did the General Commissioners consider G-Con’s culpability. The point is simply not a relevant one.

I come to the question whether Laddie J’s approach was correct in relation to how the words “minor and technical” should be construed. In CBL , Laddie J said this in paragraph 27:

Before us, there was some debate as to whether or not the first condition in section 565(4), that the failure was minor and technical, should be construed in a way that it could be used to gauge whether there is a risk that the sub-contractor would default on his future tax obligations. In my judgment, Laddie J erred in principle in his approach. The first condition looks to the past. It looks to whether or not a company has failed to comply with an obligation or request such as is referred to in sub-section (3) of section 565. The first condition requires a judgment to be made in the first place by the Revenue, and in the second by the General or Special Commissioners if there is an appeal from the Revenue’s decision, as to whether the failure is minor and technical. The second condition looks to the future. The first condition should not in my judgment, be construed in such a way as to pre-empt the quite separate second condition. There is no justification that I can see for so doing. Accordingly, I do not accept that Mann J made any error on that point.

I have to say that the correctness of the decision in CBL therefore seems to me to be open to serious doubt. I would add that I have no less doubt as to the correctness of the decision of the General Commissioners as well. The facts of that case were somewhat striking. The Revenue had refused to renew a CIS certificate in circumstances where there had been late payment of corporation tax, late payment of substantial sums of PAYE tax and NIC in every month in the qualifying period, and late submission of tax returns by the individual with a controlling interest in the sub-contractor. Nevertheless, the Commissioners held that both conditions of section 565(4) were satisfied. The Commissioners referred to acquiescence by the Revenue, to the absence of contemporaneous objections to the failures which had been referred to, to finding no evidence of any loss to the Revenue and to an arrangement made with the Revenue. The findings of fact and reasoning seem to me quite inadequate. It is impossible to say what constituted the “matter of fact acquiescence”. It is impossible to say what constituted the arrangement which the Commissioners found to have been made, nor with whom it was made. They appeared to have treated as a relevant fact that there was no complete default but merely late payment. The decision records that in concluding that the defaults were minor and technical, they took into account the relevant actions and inaction by the Revenue contemporaneously. There may be many reasons other than that the defaults were minor and technical for the Revenue’s contemporaneous inaction. For these reasons, I have serious doubt as to whether the Commissioners did reach a correct conclusion and, as I have said, Laddie J’s decision seems to me to be open to question because of the way in which he approached the question of construction.

Like Mann J, I regard the primary facts shown in the table in the present case as leading to the true and only reasonable conclusion which contradicts the General Commissioners’ finding that the defaults were minor and technical. Like the judge, I regard the extent of the sub-contractor’s compliance with its other tax obligations as irrelevant. Like him, I regard the absence of a warning by the Revenue that the sub-contractor was at risk of jeopardising its certificate as not relevant to the question whether the defaults were minor and technical. Like the judge, I regard as irrelevant the fact that a CIS certificate has been granted or renewed where such grant or renewal might have been refused. That might arguably give rise to some sort of public law remedy if the facts were sufficient, but not, in my judgment, to a statutory appeal. Further, like the judge, I do not regard it as helpful to compare and contrast the facts of one case with the facts of another. Each case must be decided on its own facts.

For these reasons, I conclude that the judge did not err in deciding that the General Commissioners could not reasonably have found the defaults to be minor and technical, and I would therefore dismiss G-Con’s appeal. It is unnecessary to say anything on the further point as to future compliance which was considered by the judge.

LORD JUSTICE HUGHES: I agree. I add only this: I was concerned at first that, albeit there are two conditions in section 565(4), they might be sufficiently interrelated to enable the board, and thus the Commissioners, when addressing the question whether failures are or are not minor and technical, to have regard to the prospect of future compliance. That the general statutory purpose is clearly to prevent non-payment of tax might perhaps at first blush appear to offer some support for the proposition that it can. But I am persuaded, having heard full argument, that the way that the statute carries out its legislative purpose is to impose conditions which are separate rather than interdependent. It proceeds to its objective by making the price of a certificate strict compliance, subject only to dispensation in the case of failures which are both minor and technical and do not give reason to doubt future compliance.

For my part, I would have no difficulty in accepting that the board and the Commissioners are entitled, when deciding whether failures are or are not minor and technical, to have regard to the taxpayer’s culpability – or, as the case may be, lack of it – in relation to those failures. I would not, for myself, seek to anticipate the circumstances in which culpability might fall to be assessed. But it does not follow that the taxpayer’s general performance of its obligations to pay tax are relevant at the minor and technical stage, rather than at the future compliance stage, and when one is considering sub-section 8, and it seems to me that it is at those latter stages that general performance becomes material. For the reasons which my Lord has so clearly set out, I too would dismiss the appeal.

LORD JUSTICE JONATHAN PARKER: I agree with both judgments. The judge correctly identified the nature of his jurisdiction by reference to Edwards v Bairstow , and he proceeded to exercise that jurisdiction. I have no hesitation in rejecting Mr Southern’s submission that the judge fell into the error of evaluating for himself the matters before the General Commissioners and simply substituting his decision for theirs. As the judge said in paragraph 22 of his judgment:

I also reject Mr Southern’s submission, relying on the judgment of Laddie J in the CBL case, that compliance by the appellant with other obligations under the tax legislation is a relevant factor in considering whether the breaches in question were minor or technical. As the judge said in paragraph 29 of his judgment:

I agree with that. In so far as Laddie J’s approach in the CBL case differed from the approach of Mann J in this case, I respectfully agree that Laddie J’s approach was wrong in principle. I also consider that Laddie J erred in principle in so far as he conflated the two conditions in section 565(4). For the reasons that my Lords have given, these two conditions are, in my judgment, entirely separate.

I also agree that the judge’s answer to what I may call the Edwards v Bairstow question, viz. whether the breaches in question were capable of being characterised as minor and technical within the meaning of the sub-section, was plainly correct. For those reasons, which are the same as those of my Lords, I too would dismiss this appeal.