Royal Courts of Justice
Strand
London WC2A 2LL
BEFORE:
MR JUSTICE LEWISON
BARNES (HMIT)
CLAIMANT
- v -
HILTON MAIN CONSTRUCTION
DEFENDANT
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(Official Shorthand Writer's to the Court)
MR TIM EICKE (Solicitor for the Inland Revenue) appeared on behalf of the CLAIMANT
MR JEREMY COUSINS QC and MR ANDREW CHARMAN (instructed by Manby & Steward) appeared on behalf of the DEFENDANT
J U D G M E N T
MR JUSTICE LEWISON: This is an appeal by the Inland Revenue by way of case stated from a decision of the General Commissioners for Income Tax. The issue in the appeal is whether the Commissioners were right to allow the taxpayer's appeal against a refusal to renew a certificate under section 565 of the Income and Corporation Taxes Act 1988, which would have exempted the taxpayer from having to suffer the deduction of payments on account of tax from payments made to it as a sub-contractor in the construction industry. The certificate in question was an annual certificate which had expired.
I can take the background to the legislation which I have to consider from the judgment of Ferris J in Shaw v Vicky Construction Limited [2002] STC 1544:
"It became notorious during the latter part of last century that many sub-contractors engaged in the construction industry disappeared without settling their tax liabilities with a consequential loss of revenue to the Exchequer. In order to remedy that abuse Parliament enacted legislation going back to the early 1970s under which a contractor is obliged except in the case of a sub-contractor who holds a relevant certificate to deduct and pay over to the Revenue a proportion of all payments made to the sub-contractor in respect of the labour content of any sub-contract. The amount so deducted and paid over is in due course allowed as a credit against the sub-contractors liability to the Revenue. The need to make and pay over such deductions can be an irritation to the contractor obliged to carry out this exercise. It also adversely effects the cash flow of the sub-contractor. Accordingly it is advantageous to a sub-contractor to have a statutory certificate rendering such a deduction unnecessary. The provision of such a certificate tends to make the sub-contractor holding the certificate a more attractive party for the contractor to deal with and by enabling the sub-contractor to receive the contract price without deduction improves the sub-contractor's case flow.
"The legislation which governs the present regime is now contained in sections 559 to 567 of the Income and Corporation Taxes Act 1988. The basic requirement is imposed by section 559. It imposes the general requirement on a contractor to make deductions from payments made to a sub-contractor and to pay over to the Revenue the amounts deducted. The current percentage required to be deducted is 18 per cent. The section also prescribes how such amounts are to be treated in the hands of the Revenue.
"Section 561 provides an exception from the requirements of section 559. In the case of a payment made to a sub-contractor who holds a certificate under section 561 which is in force when the payment is made the issue of such a certificate is governed by section 561 itself. In order to be entitled to the grant of a certificate the taxpayer must satisfy certain conditions. In the case of a company the conditions are those set out in section 565."
The relevant conditions for the purposes of this appeal are as follows. Section 565(3) provides:
"The company must subject to subsection (4) below have complied with all the obligations imposed on it by or under the Taxes Act or the Management Act in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of or other information about the business of the company in respect of periods so ending."
Subsection (4):
"A company which has failed to comply with such an obligation or request as is referred to in subsection (3) 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 subsection (8) below will be satisfied."
Subsection (8):
"There must be reason to expect that the company will in respect of periods ending after the end of the qualifying period comply with all such obligations as are referred to under subsections (2) to (7) above and with such requests as are referred to in subsection (3) above."
Subsection (8A):
"Subject to subsection (4) above a company shall not be taken for the purposes of this section to have complied with any such obligation or request as is referred to in subsections (3) to (7) above if there has been a contravention of a requirement as to the time at which or the period within which the obligation or request was to be complied with."
Subsection (9):
"In this section qualifying period means the period of three years ending with the date of the company's application for a certificate under section 561."
Section 565(8A) was added by amendment. Its effect, as Mr Eicke for the Inland Revenue submitted in the course of his reply, is that delayed payment counts as no payment at all. The General Commissioners found the following relevant facts. The taxpayer company was incorporated on 30th May 2001 and was involved in the construction business. Its first and only construction industry scheme certificate was issued on 9th January 2003. Sub-contractors certificate renewal applications were submitted on 23rd December 2003 and received on 5th January 2004. When the Revenue reviewed the application it became evident that the company had not paid PAYE, CIS and National Insurance liabilities on time. Mr Morris of Stoke Tax Office spoke to the company's accountant, Mr Styles, on 12th January 2004 and explained why the renewal was being refused. A letter refusing the renewal of certificates was issued on 13th January 2004. It states that one of the conditions to be met in order to be entitled to a certificate is that the company's tax affairs must have been kept up-to-date for the last three years. The company had not satisfied this condition because of its failure to pay Corporation Tax on time for the years ending 31st March 2002 and 31st March 2003 and its persistent late payment of PAYE during the years 2001/2002, 2002/2003 and 2003/2004. The company had not paid its PAYE, NICS and CIS liabilities at all within the qualifying period. All of the 31 payments it had made during the period were made late.
The Commissioners accepted the Inspector's Schedule of Payments to be accurate. That schedule showed that in 2001/2002 the company's payments ranged between 56 days late and 146 days late and were 100 days late on average. In 2002/2003 the payments ranged from one day late to 165 days late and were on average 36 days late. In 2003/2004 the payments were between 21 days late and 43 days late and were 33 days late on average. The payments were made over 14 days late on 24 occasions.
The company paid its Corporation Tax late twice during the qualifying periods. Again, the Commissioners accepted the Inspector's Schedule of Payments as accurate. The payment in respect of the year ending 31st March 2002 was due on 1st January 2003. It was paid in two instalments, one on 27th March 2003, 85 days late, and one on 14th April 2003, 103 days late. The payment in respect of the year ending 31st March 2003 was due on 1st January 2004 and paid on 7th January 2004.
Having considered the evidence and arguments advanced before them the Commissioners came to the following conclusions expressed in paragraph 9 of the case stated:
We were satisfied that the Inland Revenue submissions are correct that the late payments were not minor and technical and extended over the whole of the relevant period. This was not challenged by the appellant.
We were given evidence that Mr Degg(?) on behalf the company had visited the Stafford Inland Revenue office on a regular basis to seek assistance in paying the correct amount of PAYE and the Inland Revenue did not give evidence to the contrary. At these meetings we were told that no warning was given to Mr Degg(?) by the Inland Revenue that late payment was likely to endanger the issue of a CIS certificate, nor were any penalties applied or sought at any time for late payment. We accepted this evidence.
We were given evidence that Mr Degg's wife had left him in October 2001 taking over £18,000 from the company's account without his prior knowledge and that this combination of circumstances should be considered carefully by us in mitigation. We accepted this evidence.
We were given evidence that if we refused a CIS certificate the company would have to close putting 51 employees out of work, but if the CIS certificate were issued the company would expand and that financing punctual PAYE payments would in future not be a problem. We accepted this evidence.
Under the submission in paragraph 31 of the summary of the Vicky case presented to us we have given anxious consideration to the proportionate manner which we must decide in this case. We feel that because it has not been alleged that there is likely to be a default by the company in PAYE payments and because the refusal by us to approve the issue of a CIS certificate would have a wholly disproportionate effect on the lives of the employees whose jobs would be at risk we should find for the appellants. We considered that paragraph 36 of the Vicky case summary made clear that this decision would be just."
The Commissioners concluded in sub-paragraph 7 of that paragraph that:
"The decision by us that led to the closure of a company would be a disproportionate and inequitable decision provided that we were satisfied that the company would in future make payment to the Inland Revenue fully and correctly and punctually and also would pay any current arrears in the near future."
The Inland Revenue say that having regard to the facts the General Commissioners found their decision cannot stand. First they say that section 565(4) erects two hurdles, both of which the taxpayer must successfully jump if there have been failures to pay tax on time in the past. The two hurdles are first that the failures in question are minor and technical, and second that those failures do not give reason to doubt that the conditions in subsection (8) will be satisfied in the future. Accordingly, the Inland Revenue say that the taxpayer is not entitled to a certificate if either the failures are not minor and technical, or even if they are minor and technical they nonetheless give rise to a doubt that the taxpayer will fulfil the conditions for the future.
In Hudson v JDC Services Limited [2004] STC 834 Lightman J held that the Revenue's construction of the sections was correct. He said at paragraphs 13 and 14 of his judgment this:
"The first issue is whether as could be tended by the Revenue in section 565(3) there are laid down two requirements, namely that the failure is minor and technical and that the failure does not give rise to a doubt whether the conditions mentioned in 565(8) will be satisfied or whether, as contended by JDC in its skeleton argument, the subsection posits a composite test of whether the failures in question are minor and technical, so as to give reason to doubt that the taxpayer will comply with all his obligations. It seems to me quite plain that the two requirements are laid down. As contended by the Revenue, the already strict test for entitlement to a CIS certificate laid down in section 565(8) is deliberately raised where there have been failures in the past and there are imposed two further hurdles to be surmounted. Accordingly, where the past failures are not minor and technical, then whatever the prognosis the taxpayer is not entitled to a certificate.”
The taxpayer accepts that if I follow Lightman J's decision in Hudson, then the Inland Revenue's appeal must be allowed. Second, the Revenue say that the General Commissioners applied a test of proportionality which they were not entitled to apply. The scheme taken as a whole complied with the European Convention on Human Rights and no question of proportionality arises in addition to any inherent in the scheme itself.
The taxpayer says that I should not follow Hudson because Lightman J did not consider certain arguments based on the provisions of the Human Rights Act 1998. He was, however, referred to the decision of Ferris J in the Vicky case in which Ferris J considered and rejected arguments based on the Human Rights Act. In the Vicky case Ferris J held a subsisting certificate issued under section 565 is a possession for the purposes of Article 1 of the First Protocol. However, that is not this case. It is not a question of depriving the taxpayer of a certificate already issued by refusing to issue a renewal certificate. Ferris J rejected the argument that an expectation of renewal amounted to a possession.
However, Ferris J went on to hold that a sub-contractor’s chose in action consisting of his right to receive payment in full under a contract was capable of being a possession for the purposes of Article 1 of the First Protocol. He held that a deduction of tax from that contractual entitlement was a potential interference with that right. However, he came to the conclusion that the package of sections dealing with the deduction of tax and the grant of exemption certificates was not a disproportionate interference with that possession. Consequently, the sub-contractor's Convention rights were not infringed. It seems to me that unless I decline to follow Ferris J, then it must follow that the taxpayer's Convention rights have not been infringed in this case.
The taxpayer's argument is that the refusal to renew a certificate in favour of a sub-contract may have consequences disproportionate to the reasons for refusal. The taxpayer relies on the General Commissioners' findings, first, that the business will close and, second, that this would be a disproportionate result. They say that in applying section 3 of the Human Rights Act 1988 I should read into the statutory scheme words to avoid such a disproportionate result. Of course, if the scheme is Convention compliant without reading in any words, then section 3 does not apply. I am prepared to assume that a right to payment in gross under a contract is a possession. This may well depend on the terms of the contract itself since some building contracts cater expressly for deductions from payments made to sub-contractors and there was no evidence of any particular contract placed before the General Commissioners.
The first question I consider is whether that possession has been interfered with. The Inland Revenue argue that it is an incident of the construction industry that payments to sub-contractors suffer statutory deduction and therefore either there is no possession at all or if there is, there is no interference. It seems to me that if that submission is right this means that a law imposing a statutory overlay on the common law in a particular area of economic activity could never be challenged under The Human Right Act or the European Convention on Human Rights. I do not accept this argument.
I pass then to the question whether the interference is justified. The taxpayer relies in this connection on the decision of the European Court of Human Rights in the National & Provincial Building Society and Others v The United Kingdom [1997] 25 EHRR 127. The particular paragraphs of the judgment of the court which are pertinent to the present argument are as follows. In paragraph 78 of the decision the court said:
"The court recalls that Article 1 of Protocol No 1 guarantees in substance the right to property. It comprises three distinct rules. The first which is expressed in the first sentence of the first paragraph and is of a general nature lays down the principle of the peaceful enjoyment of possessions. The second in the second sentence of the same paragraph covers deprivation of possessions and makes it subject to certain conditions. The third contained in the second paragraph recognises that the contracting states are entitled to control the use of profit in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. However, the three rules are not distinct in the sense of being unconnected. The second and the third rules are concerned with particular interferences with the right to peaceful enjoyment of property and should therefore be construed in the light of the general principle announced in the first rule."
In paragraph 80 the court said:
"According to the court's well established case law an interference including one resulting from a measure to secure the payment of taxes must strike a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph. There must therefore be a reasonable relationship of proportionality between the means employed and the aims pursued. Furthermore, in determining whether this requirement has been met it is recognised that a contracting state, not least when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the court will respect the legislature assessment of such matters unless it is devoid of reasonable foundation."
The taxpayer emphasises that it is the scheme as a whole that I must consider. The taxpayer says that the reference to the margin of appreciation is inappropriate where it is a national court considering national legislation. It may well be that the phrase itself is inappropriate, but the concept of deferring to the legislature when it has adopted one out of a variety of solutions to a perceived problem remains the same. Under our constitution Parliament is entrusted with the primary role of devising solutions to national, economic and social problems. The court's task is limited to that of review.
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.
So there is in my judgment already a considerable measure of proportionality inherent in the scheme. First, there is the possibility of exemption from the default position. Second, the mere fact of non-compliance with tax obligations does not of itself rule out the grant of exemption. Third, there is the inevitable imprecision of the phrase "minor and technical". Fourth, the statutory question is not whether the failures are minor and technical, but whether in the board's opinion they are minor and technical. Fifth, although the language of section 561(9) suggests that the function of the Commissioners on appeal is merely to review the Board's opinion (since the statutory question is not whether the failures are minor and technical but whether in the Board's opinion they are), Lightman J has held that the Commissioners are in fact free to substitute their own view. I am not invited to depart from that decision. Sixth, the refusal of the certificate is not final. The taxpayer can always apply again if its performance has improved. Can I say that this scheme is devoid of reasonable foundation? I am clear that I cannot. My conclusion therefore is the same as that of Ferris J.
The taxpayer relies heavily on the General Commissioners’ finding in paragraph 9(7) that their decision is disproportionate. However, the taxpayer's broad argument based on proportionality has to have as its starting point a Convention right that has been infringed. If there is no such right, then there is no peg on which to hang the argument based on proportionality. Since I consider that no Convention right has been infringed there is no occasion to resort to section 3 of the Human Rights Act.
I consider also that section 3 has not allowed a court to tailor the legislation to the circumstances of an individual hard case. We all know that hard cases make bad law. The court must consider the general run of cases of that kind. If the legislation were to incorporate a general test of proportionality that would place a heavy burden on tax inspectors to conduct a prospective review or forecast of the potential effect of refusal of a certificate on individual businesses. Moreover, it is not said that it will always be disproportionate to refuse a certificate if the result would be that the taxpayer would be put out of business. So there would require to be a judgment by the inspector not only whether a refusal would have that effect, but also whether that effect is proportionate to the failures.
There may be social, economic and administrative arguments for and against the imposition of such a burden or there may be other solutions to perceived injustices in the statutory scheme, but they are matters for debate and legislation not for interpretation by a court. In those circumstances I consider that the General Commissioners' application of a test of proportionality was not a test that the legislation allowed them to apply. What they appear to have done is to have applied the unsuccessful submission for the taxpayer in the Vicky case.
It follows in my judgment that on the current state of the law I must conclude that the General Commissioners decision was legally flawed. That being so what is the remedy? Lightman J decided that on an appeal the court has jurisdiction under the Taxes Management Act to quash a certificate which should not have been issued. The taxpayer submits that this is a discretionary power. Even if the taxpayer fails to meet the conditions for the grant of a certificate the Inland Revenue is not bound to revoke it. That, as it seems to me, is beside the point. Parliament has entrusted that kind of discretionary decision to the Board of Inland Revenue. My job is to decide a point of law raised by the case stated. I have decided that the General Commissioners erred in law; the certificate should not have been issued. Whether a renewed application will have any better chance of success remains to be seen. The proper course is to allow the appeal and quash the certificate.