HMRC is able to cancel a company’s gross payment status for the purposes of the construction industry scheme (CIS) without considering whether it would have a seriously detrimental effect on the business, the Supreme Court has decided
The ruling was given after a final legal challenge by JP Whitter, a family-run business of water well engineers, started in 1972. [JP Whitter (Water Well Engineers) Ltd v Commissioners for Her Majesty’s Revenue and Customs [2018] UKSC 31].
In around 1984 the company registered for gross payment under the CIS. It then underwent regular reviews to determine whether it ought to retain its registration certificate. It first failed a review in July 2009, when its registration was cancelled. The same occurred in June 2010. On both occasions the registration was reinstated by HMRC following an appeal.
Between August 2010 and March 2011 the company was late in making PAYE payments on seven occasions. The delays were generally of a few days, but on one occasion of at least 118 days. It is accepted that the company failed to comply with the requirements of the CIS without reasonable excuse. At that time the company had about 25 employees and an annual turnover of about £4.4m, much of it derived from contracts with a small number of major customers.
A further review followed, and in May 2011 HMRC, acting under section 66(1) of the Finance Act 2004, cancelled the company’s registration. In doing so, HMRC took no account of the consequences for the company’s business.
The company appealed to the First Tier Tribunal (FTT) which accepted its evidence that the cancellation, once it took effect, would have had a seriously detrimental impact.
It found that at the time of HMRC’s decision cancellation would have been likely to lead to the loss of around 60% of the company’s turnover, and the dismissal of about 80% of its employees, and that recovery would be expected to take about ten years. The FTT also recorded that in July 2011 significant changes were made to the company’s PAYE systems, with the result that payments thereafter were always made on time.
The FTT allowed the company’s appeal, holding that HMRC had been wrong not to take account of the likely impact on the company’s business. However, the FTT’S decision was overturned by the Upper Tribunal with which the Court of Appeal agreed, and the Supreme Court has also found in favour of HMRC on the issues involved.
The Supreme Court judgement pointed out that the statutory requirements for registration for gross payment are highly prescriptive. The relevant section of Finance Act 2004 states that HMRC ‘may’ at any time make a determination cancelling a person’s registration for gross payment where certain conditions are satisfied.
The judges said the dispute centred on the scope of that discretion. For its part, JP Whitter Ltd claimed that this section is unfettered in its terms, which do not exclude consideration of the consequences of cancellation for the company. The company argued that, without any indication to the contrary, the impact on the company must be a relevant consideration. It also put forward an argument under human rights legislation.
The Supreme Court said it held that the Court of Appeal was correct in dismissing the human rights argument, on the basis that any interference with those rights was proportionate. It also said the argument based on unfettered discretion overlooked the basic principle that any statutory discretion must be exercised consistently with the objects and scope of the statutory scheme.
The judgment stated: ‘The discretion does not extend to consideration of matters which relate neither to the requirements for registration for gross payment, nor to the objective of securing compliance with those requirements.
‘The mere fact that the cancellation power is discretionary rather than mandatory is unsurprising. Some element of flexibility allows for cases where the failure is limited, temporary and poses no practical threat to the objectives of the CIS. It is wholly inconsistent with that tightly drawn scheme for there to be implied a general dispensing power.’
Steven Porter, a tax disputes expert at the law firm Pinsent Masons, said: ‘This will be an extremely disappointing decision for many in the construction industry where the removal of gross payment status can result in the loss of business or failure to win business in the first place.’
Report by Pat Sweet
