Beech Developments (Manchester) Limited & Ors., R (on the application of) v Commissioners for HMRC

This is a case about “directions” and “determinations” as they feature in the Construction Industry Scheme (the “CIS”). The CIS is governed by Part 3 Chapter 3 of the Finance Act 2004 (the “2004 Act”) enacted by Parliament and the Income Tax (Construction Industry Scheme) Regulations 2005 (“the Regulations”) made by HMRC. The central legal question is whether HMRC can lawfully issue a “direction” of ‘non-liability to pay’ an amount (a “Non-Liability Direction”: §10 below), in circumstances where there is an existing and prior HMRC “determination” of ‘liability to pay’ that same amount (a “Liability Determination”: §8 below). There is a line of relevant decisions of the First-Tier Tribunal (“FTT”) decided between April 2012 and July 2021 (§§18-21 below): Hoskins v HMRC [2012] UKFTT 84 (TC) (20.4.12); Barrett v HMRC [2015] UKFTT 0329 (TC) (7.7.15); Ormandi v HMRC [2019] UKFTT 0667 (TC) (5.11.19); and North Point (Pall Mall) Ltd v HMRC [2021] UKFTT 0259 (TC) (12.7.21).

Regulation 13(3) of the Regulations (the “Interrelationship Provision”) addresses the interface between Non-Liability Directions and Liability Determinations. Here it is, with square bracketed numbers to identify what I will be calling “Limb [i]” and “Limb [ii]”:

So far as relevant to the present case, the CIS is concerned with the following scenario. A Contractor (2004 Act s.59) makes a Contract Payment (s.60) to a Sub-Contractor (s.58). The Sub-Contractor has not been registered for gross payment (s.63(2)). The Contract Payment is a payment for construction services. From it are subtracted anything paid in respect of the direct costs to the Sub-Contractor of materials (s.61(1)). That leaves a payment which, in essence, relates to labour. The CIS regulates what is to happen in that scenario. I will be taking this as what I will call my “Basic Example”: the Contractor is making a Contract Payment (from which the costs of materials have already been deducted) of £100 to the Sub-Contractor; the £100 is being paid for construction services (provided by the Sub-Contractor and received by the Contractor).

In the context of making the Contract Payment to the Sub-Contractor, the Contractor comes under three key statutory duties:

The purpose of this framework is to promote effective tax collection in respect of the liabilities to HMRC of Sub-Contractors, avoiding risks which arise when tax collection has to be undertaken from the Sub-Contractors themselves. The “broad outline” given in HMRC’s published Construction Industry Scheme Reform (CISR) Manual describes the CIS (at §11020) as “aimed at preventing evasion of tax by subcontractors working in the industry and who are unknown to HMRC”. An ‘upstream’ mandatory retention of money paid to HMRC by the Contractor promotes the effective collection and discharge of ‘downstream’ tax liabilities of the Sub-Contractor. So, the deduction is described as being “on account of tax” and is referable to “tax periods” (reg.7(1)). The purpose can be seen from the “treatment” of the deduction when in the hands of HMRC.

In my Basic Example, the Contractor should pay the Sub-Contractor £70, with a deduction of £30 and a payment of that £30 to HMRC. The sums which are deducted by Contractors and paid to HMRC are then to be “treated” in a prescribed way. I will call this “Upstream-Treatment”. The key points are these:

Suppose the Contractor fails to make the deduction and fails to make the payment to HMRC. Taking my Basic Example, the Sub-Contractor has now received £100. They should have received £70. What happens in relation to the Sub-Contractor’s tax liabilities? The answer is that they have to be collected in the usual way, ‘downstream’. There is no “treatment” of a deducted sum. The Sub-Contractor has been paid with no deduction. The Sub-Contractor will now be duty-bound (under applicable tax legislation) to account for their income and profits, by reference to the receipt of the £100. They are duty-bound (under applicable tax legislation) to file a tax return, and to make a tax payment. When this happens, and everything is properly regularised, there is a situation where liabilities have been discharged. I am going to focus on the ‘narrow’ scenario where the tax on the £100 (the contract payment to which the s.61 deduction duty applied) has been accounted for and discharged by the Sub-Contractor. I will call this scenario “Downstream-Collection”. It is significant under the Regulations because it is the scenario described within regulation 9(4)(a)(ii), where:

A Liability Determination is a species of decision which an officer of Revenue and Customs (a “Revenue Officer”) is empowered to take, by “notice of … determination”. A Liability Determination is made pursuant to regulation 13(2) which provides:

Pursuant to regulation 13(5), a Liability Determination is due and payable within 14 days, but it is appealable by the Contractor “as if it were an assessment” and “as if the amount determined were income tax charged on the Contractor”. An appeal is governed by TMA Part 5. Steps include: the appeal (s.31); its notification to HMRC (s.31A); the expression of an HMRC “view” (s.49C(2)) with the offer of a “review” (s.49A); a review decision (s.49E(5)); then notification to the FTT (s.49G). The FTT’s jurisdiction includes provision for the appeal to succeed if the FTT concludes that the Contractor “is overcharged by” the Determination (treated as the assessment), in which case the FTT can “reduce … the amount” which is “taken to have been reduced ... accordingly.” This is seen in section 50(6) and (8) of the TMA:

A Non-Liability Direction is action which a Revenue Officer is empowered to make under regulation 9(5):

The prescribed Bases for a Non-Liability Direction – Condition A and Condition B – are described in Regulation 9(3) and (4), as follows:

The Carefulness Basis on which a Revenue Officer is empowered to make a Non-Liability Direction is where the Contractor took reasonable care to comply with the s.61 duty of deduction and they made the described good faith error or had the described genuine belief. This is Condition A (reg.9(3)). It is a sufficient basis for a Non-Liability Direction. It does not require a request (cf. reg.9(4)(b)) but it does require that the Contractor “satisfies” the Revenue Officer. Here it is again:

Where the Revenue Officer finds that the Carefulness-Basis for a Non-Liability Direction is not met, a “refusal notice” is generated (reg.9(6)) and the Carefulness-Basis constitutes grounds of appeal (reg.9(8)) on which the refusal notice is appealable to the FTT (reg.9(7)). I will call this a “Carefulness Appeal”. The appeal is pursuant to TMA s.48. If the FTT disagrees with the Revenue Officer and finds the Carefulness-Basis satisfied, the FTT is empowered to “direct” the Revenue Officer to make a Non-Liability Direction in an amount of the relevant excess for the relevant tax period or tax periods (reg.9(9)). It was common ground between Mr Coppel KC (who appeared with Charlotte Brown for the Claimants) and Mr Simpson KC (for HMRC) that such a ‘directed direction’ would take effect from the date when it was made, not from the date when the Non-Liability Direction had been refused. Here are regulations 9(6)-(9):

The Chargeability-Basis on which a Revenue Officer is empowered to make a Non-Liability Direction is this (reg.9(4)(a)(i) and (b)):

The Collection-Basis on which a Revenue Officer is empowered to make a Non-Liability Direction is this (reg.9(4)(a)(i) and (b)):

Taking my Basic Example and the £30 which was not deducted and paid to HMRC by the Contractor, this situation arises. The £30 is an “amount” and constitutes the “excess”. If there were a Non-Liability Direction (reg.9(5)) there would be an instrument issued by a Revenue Officer – a formal “direction” – which records that the Contractor is “not liable to pay” the £30. If there were a Liability Determination (reg.13(2)) there would be an instrument issued by a Revenue Officer – a formal “determination” – which records that the Contractor is “liable to pay” the £30. If both of these documentary instruments could be in existence at the same time in respect of the same amount, they would point in opposite directions and be mutually-contradictory. The Interrelationship Provision (§2 above) is plainly intended to assist with that problem.

It is Limb [ii] of the Interrelationship Provision which is at the heart of this case. But I will first address Limb [i], about which there is no material dispute. The following is common ground. Suppose there is no extant prior Liability Determination identifying an “excess” as an “amount which” the Contractor is “liable to pay under the Regulations” (reg.13(2)). Suppose, in that situation, a Revenue Officer has made a Non-Liability Direction: that the Contractor “is not liable to pay the excess” (reg.9(5)). Suppose that this Non-Liability Direction is ‘extant’: it has not been withdrawn. That is the existing state of affairs. Now, suppose a Revenue Officer is considering making a Liability Determination which identifies the “excess” as an “amount which” the Contractor is “liable to pay under the Regulations” (reg.13(2)). This is the situation which triggers Limb [i] of the Interrelationship Provision (§2 above):

Hoskins was a Collection-Basis and Carefulness-Basis case. In the tax years 2005/6 and 2006/7 Mr Hoskins was a Contractor who paid his Sub-Contractor (Mr Fletcher) Contract Payments of £6,340 and £4,100 respectively. Mr Hoskins failed to make the necessary deductions of the deductible amounts, with no amounts actually deducted (FTT judgment §25(6)(7)). He failed to make the necessary payments to HMRC, with no amounts actually paid. The deductible amounts were respectively £1,141.20 and £738 (§5). Mr Fletcher said he had accounted for and paid his relevant tax liabilities on the Contract Payments received (§6). If correct, that would constitute Downstream-Collection for the Collection-Basis. The Revenue Officer refused (25.2.10 and 4.11.10) to make a Non-Liability Direction (§25(11)(13)). Mr Hoskins appealed to the FTT (§25(15)). Mr Hoskins argued that he should not be liable under the Regulations, invoking the Collection-Basis (§§26-27) or alternatively the Carefulness-Basis because he said the non-deduction was a good faith error (§30). Dismissing the appeal, the FTT concluded as follows. No Carefulness Appeal against the refusal to make a Non-Liability Direction could succeed, because the reg.9(3)(b)(i) good faith error (§43) was not accompanied by the reg.9(3)(a) taking of reasonable care to comply (§41). The Collection-Basis was not appealable (§19), “unsatisfactory” though that appeared (§41). Observing that the Collection-Basis and Carefulness-Basis arguments of Mr Hoskins could not have succeeded on a reg.13(5) appeal against a Liability Determination, the FTT analysed Non-Liability Directions and Liability Determinations as “mutually exclusive” (§§21-22). In a nutshell, what Hoskins decided was this: that a refusal of a Non-Liability Direction is appealable only on Carefulness and not on Collection grounds.

Barrett was a Collection-Basis case. In the four tax years 2006/7 to 2009/10 Contractor Mr Barrett paid Sub-Contractor Mr Luke various Contract Payments (FTT judgment §24). But Mr Barrett failed to make the necessary deductions of the deductible amounts (totalling £1,894.55: §97), with no amounts actually deducted. He failed to make the necessary payments to HMRC, with no amounts actually paid. On 22 August 2012 the Revenue Officer refused Mr Barrett’s request to make a Non-Liability Direction on the Collection-Basis (§42). Mr Barrett’s position was that there had been Downstream-Collection: Mr Luke had accounted for and paid his own Sub-Contractor’s tax liability. On 2 October 2012 the Revenue Officer made a Liability Determination (£1,894.55), which was maintained on 29 January 2013 (§44). On 21 February 2013 Mr Barrett appealed to the FTT (§44). Mr Barrett argued that he should not be liable under the Regulations, on the Collection-Basis. Dismissing the appeal, the FTT concluded as follows. No Collection-Basis Appeal was available to Mr Barrett. So far as the Revenue Officer was concerned, once a Liability Determination had been made, no Non-Liability Direction could be effective to reduce or eliminate its effect (§§101, 105). That was the consequence of the true construction of Limb [ii] of the Interrelationship Provision. The reg.13(5) appeal against the Liability Determination could be allowed only within the FTT’s statutory jurisdiction (§78), meaning only if Mr Barrett was overcharged by reference to the legislation (§80), and the FTT was itself precluded by Limb [ii] from taking account of any subsequent Non-Liability Direction (§§107-109). There was no appeal from the refusal of a Non-Liability Direction on the Collection-Basis (§§115-117). In any event, the Collection-Basis was not satisfied, since Mr Luke’s tax returns had not been made in the prescribed period (§§102-104, 130-133). In a nutshell, what Barrett decided was that no Collection-Basis appeal could succeed (a) in the face of a Liability Determination or (b) at all.

Ormandi was another Collection-Basis case. In the five tax years 2013/14 to 2017/18 Contractor Mr Ormandi made Contract Payments to various Sub-Contractors (FTT judgment §§2, 9). But Mr Ormandi failed to make the next necessary deductions of the deductible amounts (§10); and failed to make payments to HMRC. His request for a Non-Liability Direction on the Collection-Basis (§13) succeeded in part on 10 October 2017 (§14) and 13 March 2018 (§18). Having given a “warning” on 19 January 2018 (§15) the Revenue Officer made Liability Determinations (in the aggregate sum of £22,424.20) on 22 March 2018 (§19). Subsequent communications suggested Downstream-Collection had taken place: that the Sub-Contractors had accounted for and paid their tax liabilities (§§21, 23). Mr Ormandi appealed (§25) on 10 July 2018 against the Liability Determinations (22.3.18) with an extension of time (§32). The FTT found as follows. There had been Downstream-Collection: the Sub-Contractors had accounted for and paid the tax liability, so that the Collection-Basis was made out (§28). But the appeal failed. On the correct interpretation of Limb [ii] of the Interrelationship Provision, once a Liability Determination was made – unless it was withdrawn – a subsequent Non-Liability Direction was precluded (§48(4)(6), §49) and the amounts reflected in the Liability Determination could not be excluded (§48). There was no appeal on the Collection-Basis against the refusal of a Non-Liability Direction (§48(5)) which is what success on appeal by Mr Ormandi would constitute. In a nutshell, what Ormandi decided was this: an extant – albeit appealed – Liability Determination precluded the coming into being of a Non-Liability Direction (which alone could excuse, on the Collection-Basis, liability to pay under the Regulations).

North Point was a Carefulness-Basis case. In the tax years 2015/16 and 2016/17 the Contractors North Point and China Town each made Contract Payments to various Sub-Contractors. But they failed to make the necessary deductions of the deductible amounts; and failed to make payments to HMRC. Their claims (2.2.17) for Non-Liability Directions on the Carefulness-Basis and Collection-Basis (FTT judgment §4(14)) were refused by a decision (28.2.17) communicated in decision notices (5.4.17) (§4(15) and (18)). They brought Carefulness Appeals (§2) against those refusals under regulation 9(7) on 3.5.17 (§4(19)). Then on 14 August 2017 Liability Determinations were made (§1), against which North Point and China Town also appealed (13.9.17) (§4(21)). The amounts of the Liability Determinations were reduced after an alternative-dispute resolution meeting (11.10.17) (§4(22)). The reduced amounts (§1) were: in respect of North Point, £663,776 (2015/16) and £667,046 (2016/17); and in respect of China Town, £98,638 (2015/16) and £293,565 (2016/17). The appeals came before the FTT as regulation 9(7) Carefulness Appeals against the refused Non-Liability Directions and regulation 13(5) appeals against the Liability Determinations. The FTT dismissed all of the appeals, reasoning as follows. On the correct interpretation of Limb [ii] of the Interrelationship Provision, the Liability Determinations (14.8.17) meant that it was no longer open to the FTT to consider the Carefulness Appeals against the refusals of the Non-Liability Directions (§§20 and 22). Limb [ii] meant that, once a Liability Determination had been made, neither HMRC nor the FTT had power to make a Non-Liability Direction (§§10, 12). Unless HMRC decided to hold a Liability Determination in abeyance pending an appeal (§13) or withdrew it (§48(6)), the Carefulness Appeals against the Non-Liability Direction refusals could not be entertained by the FTT. True, this position was open to “abuse” (§14), which public law principles enforced by judicial review were available to address, as where a Liability Determination were used by HMRC to deprive a person of a regulation 9 right of appeal (§18). Another aspect of protection against “abuse” was addressed in HMRC’s ‘compliance manual’ (§18) which provided that Non-Liability Direction issues should be ventilated and addressed first, before Liability Determinations. In any event, the Carefulness-Basis failed on the facts (§§30-31). In a nutshell, what North Point decided was this: a Liability Determination precluded the success of an extant Carefulness-Basis appeal (which would have failed anyway), brought against a prior refusal to make a Non-Liability Direction, because it precluded the coming into being of even an FTT-directed Non-Liability Direction (which alone could excuse, on the Carefulness-Basis, liability to pay under the Regulations).

This is a Carefulness-Basis and a Collection-Basis case. The Claimants are 6 companies who are members of the same corporate group. Each of them made Contract Payments to the same Sub-Contractor – Beech Construction Partnership Ltd (“BCPL”) – in 2017/18, without deducting the deductible amounts, and without making payments to HMRC. It is common ground that the position of the First Claimant – Beech Developments (Manchester) Ltd (“Beech”) – exemplifies the position of all of the Claimants and provides a suitable and sufficient reference point. The aggregate amounts at stake for the Claimants are said to be £2.4m. Here is what has happened.

In 2017/18, BCPL was registered for payment under deduction but not registered for gross payment (2004 Act s.62(3)). The latter registration (for gross payment) was subsequently applied for (10.8.18) and granted (13.8.18). Prior to that, in 2017/18, Beech as Contractor made Contract Payments in the aggregate sum of £1,806,391 to BCPL as Sub-Contractor. Beech did not deduct the deductible amounts (in the aggregate of £344,074.80) and there were no amounts actually deducted. Beech did not pay the deductible amounts to HMRC and there were no amounts actually paid. HMRC undertook an enquiry in May 2018, as a result of which it was discovered that the Contract Payments had been gross payments with no deductions. In October 2018 HMRC requested certain documents from Beech. A note of a telephone call on 9 October 2018 refers to a discussion about regulation 9(4) and the Collection-Basis.

On 18 January 2019 the Revenue Officer (David Mercer) wrote a letter entitled “Regulation 13(1) warning letter”. It stated his belief that Beech may have taken on Sub-Contractors and made Contract Payments without making the necessary deductions. It expressed the intention to raise a Liability Determination under Regulation 13(2) in the amount of £344,074.60. The “warning letter” then described the Carefulness Basis and the Collection-Basis for a Non-Liability Direction pursuant to regulation 9. It then said this:

By a letter dated 4 April 2019 – sent on 5 April 2019 – responding to “your recent notice of determination”, Williamson and Croft LLP (a firm of accountants then acting for Beech) asked that HMRC “review” the Liability Determination in light of the arguments that:

An HMRC letter dated 14 May 2019 communicated a view (TMA s.49C(2)) maintaining the Liability Determinations. The same letter offered a review (s.49A(2)(b)) which was taken up by Beech. An HMRC letter dated 9 July 2019 was the outcome of the review (s.49E(5)). It addressed the Carefulness-Basis points that had been raised in the letter of 4 April 2019 and said:

By a letter dated 12 October 2021 Freeths LLP (the firm of solicitors by now acting for Beech) made a “formal request that the matters reviewed under [Regulation] 9(4)”, relying squarely on the Collection-Basis in regulation 9(4). They wrote:

By a letter dated 13 December 2021 from the HMRC Investigator (Simon Jackson-Clark), HMRC responded, referring to the previous sequence of events and concluding:

After a judicial review letter before claim (10.1.22), the claim for judicial review was commenced on 1 March 2022. The ‘target’ for the claim is squarely the letter of 13 December 2021. The pleaded ground for judicial review is ‘material error of law’. The pleaded claim is that it was wrong in law for HMRC to treat the Non-Liability Directions sought by the Claimants as being precluded by HMRC’s prior and extant Liability Determinations. I granted permission for judicial review at an oral hearing on 15 July 2022 for the reasons I explained at [2022] EWHC 1849 (Admin).

Before I turn to deal with the pleaded claim (§33 below), I will address a new and distinct topic. In his oral submissions at the substantive hearing, Mr Coppel KC advanced a new line of analysis. His new contention was that Non-Liability Directions are unnecessary and their absence irrelevant. This contention focuses on the following underlined phrase within regulation 13(2):

This new argument strikes at the interrelationship between Non-Liability Directions and Liability Determinations. Its implications – presumably – are as follows. It would mean that the Liability Determination (19.3.19), and subsequent decisions to maintain it, would be said to be impeachable on grounds that the Carefulness-Basis (raised on 4.4.19) and the Collection-Basis (raised on 12.10.21) should directly have been addressed. It would mean that a Non-Liability Direction is not (as the Claimants’ pleaded case positively emphasises) necessary to “unlock the door” to the Claimants being able to raise the Carefulness-Basis and Collection-Basis in their regulation 13(5) FTT appeals. It would mean that the absence of an appeal (or right of appeal) against any refusal of a Non-Liability Direction is nothing to the point, because the three express Bases can directly be raised in the context of a Liability Determination and a regulation 13(5) FTT appeal. It would also mean that Limb [ii] of the Interrelationship Provision – whoever is right about it – does not much matter, because the Bases for a Non-Liability Direction are already, straightforwardly and directly, applicable to a Liability Determination and an appeal against a Liability Determination.

On this new topic, Mr Simpson KC for HMRC picked up the gauntlet. He did not seek to divert it, by taking a delay point or a pleading point. He simply submitted that the new argument – which engages a pure question of statutory interpretation – is wrong in law. I accept that submission. Here are the reasons why. Regulation 7(1) says “a Contractor must pay to” HMRC. It is a provision under which the Contractor is “liable to pay under the Regulations”. It would have been very easy for regulation 9 to have been framed as providing for exceptions, under which the Contractor is not “liable to pay”. But that is not how regulation 9 is designed. Regulation 9 is in nature a special mechanism for securing a direction in the nature of ‘relief’ – a disapplication – of what the Contractor would otherwise be liable to pay. Regulation 9 “applies if” the two statutory preconditions (§10 above) are met (reg.9(1)(b)). Then, where reg.9 “applies”, reg.9(5) gives the Revenue Officer the power to make the Non-Liability Direction. The Contractor is excused on the regulation 9(3)(4) Bases through and by – and only through and by – a Non-Liability Direction. A Contractor may or may not be able to satisfy a Revenue Officer in relation to the Carefulness-Basis or the Chargeability-Basis or the Collection-Basis, securing a Non-Liability Direction. But only by a Non-Liability Direction is there an operative excusability on the regulation 9(3)(4) Bases from liability to pay under the Regulations. Moreover, where there is a prior and extant Non-Liability Direction, the ‘relief’ for regulation 13(2) purposes, from what would otherwise be the ‘liability to pay under the Regulations’, is achieved by the operation of Limb [i] of the Interrelationship Provision. This is, rightly, common ground (§17 above). Unless excused by a Non-Liability Direction, as the FTT rightly explained in Ormandi (at §45): the amount which the Contractor is “liable to pay under these Regulations” is the regulation 7 amount which the Contractor was liable to deduct from Contract Payments made under section 61 (§48(2)). As the FTT also rightly explained in Ormandi (at §48(5)), if the Collection-Basis fell directly within the scope of regulation 13(2), there would effectively be a backdoor appeal on the Collection-Basis, inconsistently with the express design of regulation 9. For all these reasons, a Non-Liability Direction is a necessary precondition for a Contractor to be excused from the liability to pay under the Regulations on the regulation 9(3)(4) Carefulness-Basis, Chargeability-Basis or Collection-Basis. All of this is reinforced by the nature, content and indeed existence of both Limbs – Limb [i] and [ii] – of the Interrelationship Provision themselves.

I return then to the challenge raised in the pleaded claim for judicial review. As I have explained (§29 above) the ‘target’ for judicial review is squarely the decision of 13 December 2021 (§28 above). The ground for judicial review is ‘material error of law’, relating to the meaning and effect of Limb [ii]. It was HMRC’s position – as it has been throughout (see §§24-28 above) – that Limb [ii] means that the prior and extant Liability Determinations (March 2019) preclude the making of a Non-Liability Direction. As it is put in the ‘target’ decision letter, there can be no “consideration” under regulation 9(4) of “the representations made under” regulation 9. The question is whether that is correct in law.

What follows in this section of the Judgment (§§35-39 below) is my description of the essence of the Claimants’ arguments, as I saw them, regarding the legally correct interpretation of Limb [ii]. This, then, is how the Claimants’ arguments go:

The correct analysis is as follows:

The reasons why this analysis is correct are as follows, starting with the language and structure of the provision:

The reasons why a Non-Liability Direction – which does “include” an “amount” but does not “apply” to that “amount” – would have an important effect are as follows:

This analysis places things as they should be, in terms of policy and purpose of the CIS, and broader policy and purpose. It does this in several ways:

By way of elaboration on the “double taxation” and “double recovery” point (§37iii above), the analysis is as follows:

The arguments which I have articulated are sustained and comprehensive. But I agree with Mr Simpson KC that they are not correct. I will explain why I cannot accept them.

It is as well to begin the analysis by remembering some public law principles which stand as the backcloth to the CIS statutory scheme. The Revenue Officer is discharging statutory public functions when making decisions under regulation 9(5) (Non-Liability Directions) and when making decisions under regulation 13(2) (Liability Determinations). Such functions attract basic public law duties of lawfulness, reasonableness and fairness. Such functions are amenable to the common law supervisory jurisdiction of judicial review, by which those public law duties are enforced. It is right that HMRC’s general powers must extend to the power to withdraw a Liability Determination. That is another public function attracting those basic public law duties and amenable to that judicial review jurisdiction. This is important. It is a constitutional backcloth, against which Parliament enacted the 2004 Act and HMRC made the Regulations. Nothing in the statutory scheme regulating the CIS purports to restrict, still less exclude, these public law duties and this supervisory jurisdiction. The public law duties and the supervisory jurisdiction have been recognised by the FTT in the cases (Hoskins at §19; Ormandi at §49; North Point at §18). They are accepted by Mr Simpson KC for HMRC. The present case is of course an example of a claim for judicial review. But it raises a very particular issue.

It is also important to remember the nature of the claim made. There is no claim in the present case that Limb [ii] – a provision in an instrument of delegated legislation – is unlawful on public law grounds. There is no human rights-incompatibility claim. There is no challenge to the policy guidance in the CISR Manual. There is no challenge to the fairness, or reasonableness, of the decision-making adopted by HMRC in this case. The claim is squarely about the legally correct interpretation of Limb [ii] and whether, given that legally correct interpretation, the target decision involved a material error of law. That is the issue which I am determining.

The Claimants, rightly, recognise that Limb [i] – of the same provision – is preclusive in its effect. Limb [i] describes a situation in which a Liability Determination is precluded: it cannot lawfully be made. This preclusive (disempowering) consequence arises in the situation where there is a prior and extant Non-Liability Direction. But it is not achieved by the drafter using a phrase such as “may not be made”. It is achieved by using the words “must not include”. Once it is recognised that a phrase like “[a] determination under this regulation must not include amounts” is preclusive of a determination lawfully being made, that is fatal to the argument (§36i above) about language presupposing the existence of the instrument. Limb [i] does not presuppose, but rather precludes, the “determination” which is described. Limb [ii] cannot therefore be presupposing, rather than precluding, “directions” simply because it refers to “directions”. The question is what is meant by “do not apply to amounts determined under this regulation” in Limb [ii].

The reason why the Limb [i] language (“must not include”) is preclusive, as the Claimants accept, is this. What any Liability Determination does – by its inherent nature and by express statutory design – is to identify an “amount”. There is an “amount” which is the subject of the Liability Determination. It is the “amount” which is “determined” as being one which the Contractor is “liable to pay”. This inherent nature and express statutory design are seen in regulation 13. The title of regulation 13 begins with the phrase “determination of amounts”. The statutory function in regulation 13(2) is that the Revenue Officer “may determine the amount” which a Contractor “is liable to pay”. In speaking of Liability Determinations, Limb [i] uses the phrase “include amounts”; Limb [ii] uses the phrase “amounts determined”. Regulation 13(4) makes provision about the amount which a Liability Determination can “cover” and to which it can “extend”. Regulation 13(5)(b) speaks of “the amount determined”. The point is this. In order to have the Liability Determination there has to be an “amount” which is its subject. If the sole candidate “amount” is one which cannot be its subject, there can be no Liability Determination. One way to describe this is to say that a Liability Determination cannot “include” the candidate “amount”. That is the language used in Limb [i].

However, in the same way what any Non-Liability Direction does – by its inherent nature and by express statutory design – is to identify an “amount”. There is an “amount” which is the subject of the Non-Liability Direction. It is the “amount” which is “directed” as being one which the Contractor is “not liable to pay”. This inherent nature and express statutory design are seen in regulation 9. The opening provision in regulation 9 identifies when the regulation applies. Regulation 9(1) says:

This is a straightforward interpretation of the language used in the Interrelationship Provision. It produces a straightforward operation. It regulates the problem of two instruments pointing in opposite directions (§16 above) in respect of the same amount: one instrument ‘determining’ liability to pay it; the other instrument ‘directing’ non-liability to pay it. It regulates that problem in a clear and symmetrical way. It is the prior, extant instrument which governs the position, precluding the other. It means there is an ability to obtain relief by Non-Liability Direction which is specific and tailored; not all-encompassing and open-ended. It would have been easy for the drafter of the Regulations to provide that the Bases for Non-Liability Directions were absolute and enduring, would subsist and would be given primacy at all times. The tailored provision for relief takes its place within a broader statutory scheme with clear policy objectives. The Contractor is required to make the deduction in the deductible amount. The Contractor was given the means to verify the status of the subcontractor and indeed obliged to ensure that verification (reg.6(1)) while being protected if that registered status subsequently changes (reg.6(7)). The Contractor is required to pay the deductible amount, whether or not it has been deducted. The statutorily-imposed obligations reflect the clear primary legislation. They are requirements imposed in the public interest as part of a scheme which secures the collection of downstream tax liabilities. They matter.

Mr Coppel KC is right that Limb [i] uses the language “must not include” while Limb [ii] uses the language “do not apply”. He is right that these phrases are different. He is right that Limb [ii] could have used the phrase “must not include”. But the Interrelationship Provision has not been drafted in a way which involves differences in language connoting legally distinct concepts and ideas. This truth can be seen as follows. The two Limbs unmistakeably use different words and phrases to describe the very same idea, in relation even to the very same species of decision. In Limb [i] a Liability Determination will “include” an amount, while in Limb [ii] a Liability Determination involves amounts “determined”. These are different words (“include” and “determine”), but they are used interchangeably, communicating the same idea. They are each describing amounts which are the subject of a Liability Determination. In the same way, in Limb [i] a Non-Liability Direction is made “in respect of” amounts, while in Limb [ii] a Non-Liability Directions “apply to” amounts. Again, these are different phrases (“in respect of” and “apply to”), used interchangeably, communicating the same idea: amounts which are the subject of a Non-Liability Direction. The Interrelationship Provision is not a provision in which a change in wording means the drafter was communicating a different idea. The ideas communicated by the words derive from their natural meaning in context. Ultimately, the point is this. Regulation 9(1)(a) identifies the amount – defined in regulation 9(2) as the “excess” – which can be the subject of the regulation 9(5) Non-Liability Direction. Where a Non-Liability Direction cannot – by operation of Limb [ii] – “apply” to that very amount, the Non-Liability Direction cannot be made. This language is a natural and straightforward fit. That is unaltered by the fact that other ways of putting the same thing would be to say that the Non-Liability Direction cannot be made “in respect of” that amount; or that a Non-Liability Direction cannot “include” that amount; or even that the amount cannot be an “amount directed” by a Non-Liability Direction.

I cannot accept the “hibernating” (“inchoate”) direction interpretation. It is very odd. It gives the Limb [ii] phrase “do not apply to” an artificial, and ultimately subversive, meaning. It starts with a dormant (hibernating) existence, coupled with a legal ‘inapplicability’. It involves an active operation, in driving HMRC’s withdrawal of the prior extant Liability Determination and, failing that, its FTT’s appellate re-evaluation. Either way, the ‘inapplicable’ – “hibernating” – Non-Liability Direction is operative in causing a situation where it leaps into ‘applicability’ after all. I can find nothing in the wording or structure of the Regulations that supports this analysis. It accepts present ‘inapplicability’ while entailing present effectiveness in driving change. It accepts an express present primacy for the prior extant Liability Determination, only for that primacy to be reversed by the later Non-Liability Direction, achieved through HMRC withdrawal or FTT appeal. It involves – through an odd and indirect multi-phase process – a “do apply to” outcome. That is what the drafter of Limb [ii] would have said in the first place. Primacy for Non-Liability Directions – whenever made – would have been very straightforward to achieve by language which made a subsequent Non-Liability Direction applicable; not through a convoluted process borne out of words which state the precise opposite (“do not apply to”).

Like the FTT (North Point §§14, 18), I agree that this means Limb [ii] – viewed in isolation – is a preclusive provision which would be open to “abuse” by HMRC. The power to make a Liability Determination (reg.13(2)) is exercisable in triggering scenarios (reg.13(1): §8 above) which include the Revenue Officer considering it “necessary in the circumstances” (reg.13(1)(c)). A Revenue Officer might act before anyone has had the chance to think about the Carefulness-Basis for a Non-Liability Direction (reg.9(3)); or before the Contractor has had the chance to request a Non-Liability Direction under the Chargeability-Basis or Collection-Basis (reg.9(4)(b)); or before the timeframe has elapsed for the tax returns and payments which would satisfy the Collection-Basis (reg.9(4)(a)(ii)); or after a request has been made for a Non-Liability Direction under the Chargeability-Basis or Collection-Basis but instead of deciding the request on its merits (reg.9(4)(a)); or where an “excess” has been identified (reg.9(1)(a)) but without ever asking whether the Bases for a Non-Liability Direction are met (reg.9(1)(b)); or on issuing a refusal notice in relation to the Carefulness-Basis (reg.9(6)) thus preventing the Contractor exercising their statutory right of Carefulness Appeal (reg.9(7)-(9)); or after the commencement by the Contractor of a Carefulness Appeal (reg.9(7)) preventing the appeal from being determined on its merits (reg.9(9)). These and other situations could involve unfairness and unreasonableness in the operation of the statutory scheme. But the answer lies in remembering that Limb [ii] does not stand in isolation. It stands against the constitutional backcloth (§41 above) which involves the recognised, undiluted application of public law duties and availability of the supervisory jurisdiction of the High Court. One way to think of this is as follows. Think of regulation 13(1)(c) and regulation 13(2) so that the phrase “an officer of Revenue and Customs” means “an officer of Revenue and Customs acting lawfully, reasonably and fairly, such duties being enforceable in law”. That reflects the constitutional backcloth, where power cannot be abused and there are established guarantees and safeguards to ensure that this is so.

It is undoubtedly right that the legally correct interpretation of Limb [ii], in light of the constitutional backcloth, gives rise to important questions about the way in which HMRC acts in approaching the making of Non-Liability Directions and the making or withdrawal of Liability Determinations. HMRC must act in accordance with its view of the ‘merits’. It must act lawfully, reasonably and fairly. Some such questions are directly addressed in HMRC’s published CISR Manual. I repeat that the Claimants do not claim in these judicial review proceedings that the CISR Manual breaches any public law duty. Nor do they claim that HMRC has acted in breach of any public law duty in the decision-making process in the sequence of events in the present case. The CISR Manual describes an important sequential approach. CISR §82020 includes this:

Importantly, HMRC has the power – an ongoing power – to withdraw a Liability Determination. The exercise of that power of withdrawal itself attracts not only ‘merits’ questions for HMRC but also basic and legally-enforceable public law duties of lawfulness, reasonableness and fairness. All of this is common ground. A consequence of withdrawal would be that the preclusive consequence of the extant Liability Determination, pursuant to Limb [ii], would be lifted. This is a function of the straightforward interpretation of Limb [ii], in the overall legal context; not an artificial world of hibernating (inchoate) Non-Liability Directions. The exercise of the power of withdrawal will arise in all the facts and circumstances of the case. If there were a case where it was claimed by reference to its preclusive effect to have been unlawful, unreasonable or unfair for a Liability Determination to have been made or maintained, this power of withdrawal would directly be engaged. The Claimants do not claim in these judicial review proceedings that the non-withdrawal of the Liability Determination breaches any public law duty.

I turn to the question of double taxation and double recovery. I return to CISR §83050 (see §39iv above), inserting square brackets for referencing purposes:

Finally, I return to the FTT cases (§§18-21 above). In my judgment: the FTT was correct in Hoskins (at §§21-22) to describe Non-Liability Directions and Liability Determinations as “mutually exclusive”; the FTT was correct in Barrett (at §§101, 105) that no Non-Liability Direction can be effective to reduce or eliminate the effect of a prior extant Liability Determination; the FTT was correct in Ormandi (at §§48(4)(6), 49) that a Liability Determination, unless withdrawn, precludes a subsequent Non-Liability Direction; and the FTT was correct in North Point (at §18) that public law principles enforced by judicial review are available to address questions of “abuse”. I record that I have wondered whether the North Point situation – where a Carefulness appeal (reg.9(7)) against a refusal (reg.9(6)) is ‘extinguished’ by a later Liability Determination – is answered by the FTT being able to give a ‘directed direction’ (reg.9(9)) taking effect from the date of the refusal. But nobody supported this analysis (see §13 above), it is not what is in issue in this case, and public law protection remains.

For the reasons which I have given, HMRC’s impugned decision involved no error of law, its interpretation of Limb [ii] being legally correct. I will dismiss the claim for judicial review. Having circulated this judgment as a confidential draft, I am able here to deal with any consequential matters. It is agreed that, in light of this Judgment I should Order: (1) that the claim for judicial review be dismissed, and (2) that the Claimants do pay the Defendant’s costs to be assessed if not agreed. The Claimants ask for permission to appeal, on which the Defendant’s position is neutral.

I am going to grant the Claimants permission to appeal on the following ground: the Judge was wrong in law in interpreting Limb [ii] of the Interrelationship Provision as meaning that a prior and extant Liability Determination is preclusive of the making of a subsequent Non-Liability Direction in respect of the same amount. My confidence in the correctness of my reasoned analysis does not extend to regarding as unrealistic (or fanciful) the prospect of the Court of Appeal finding that my conclusions were wrong. Large amounts are at stake with serious implications. Permission to appeal is not opposed. It is for the Claimants and their representatives to decide what arguments to deploy. But I ought to record that I was not materially assisted by the way in which four proposed ‘grounds of appeal’ (i)-(iv) were put. It was suggested (i) that public law principles could not “operate” and (iv) the general power to withdraw a Liability Determination “will not operate”. The answer is that a refusal to withdraw a Liability Determination – in breach of public law standards – would engage public law and constitute a safeguard against abuse, as the FTT too has recognised. There was then an attempt (ii) to disclaim the acceptance – made clear at the hearing, and in my judgment correctly – that Limb [i] is preclusive. There were then references (iii) to my having failed to acknowledge a “basic principle of tax law” and a “constitutional heresy”, when what I have found is a liability to the Revenue under Regulations whose legality and human rights-compatibility have not been impugned. Be all of that as it may, I have identified the ground of appeal on which I grant permission to appeal. If the Claimants and their representatives wish to pursue these matters at higher judicial altitude, they have the permission of this Court to do so.