SPC00603

Income Tax - Subcontractors Certificate - section 585 TA 88 - first appeal dismissed - taxpayer making second application and being refused- res judicata - whether issue estoppel can apply in a tax appeal under section 561(9) - whether issue estoppel prevents taxpayer asserting defaults were not minor and technical - whether second appeal should be stayed as an abuse of process - whether section 46 TMA prevents the second appeal being brought.

THE SPECIAL COMMISSIONERS

CARTER LAUREN CONSTRUCTION LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMSRespondents

Special Commissioner: Charles Hellier

Sitting in public in London on 24 August 2006

Matt Boddington of Accountax Consulting Ltd for the Appellant

Colin Williams, Inspector of Taxes for the Respondents

© CROWN COPYRIGHT 2006

1

DECISION

Introduction

  1. On 30 September 2005 the Appellant applied to HMRC for a “CIS5” certificate under section 561 TA 88. On 10 November 2005 HMRC refused the certificate. The Appellant appealed.
  2. The appeal was heard by the General Commissioners on 2 February 2006. They refused the appeal. The Appellant made no appeal against that decision.
  3. The Appellant made a fresh application for a certificate on 24 March 2006. That was refused by HMRC on 6 April 2006. On 5 May 2006 the Appellant appealed against that decision electing for the appeal to be heard before the Special Commissioners.
  4. This preliminary hearing relates to the question of whether issues determined by the General Commissioners can be raised again by the Appellant in this second appeal. The Respondents assert that the Appellant is estopped from raising certain issues on the grounds that either (i) the doctrine of issue estoppel applies, or (ii) it would be an abuse of process to re-litigate those issues; or (iii) the matters determined by the General Commissioners are by virtue of section 46 TMA 1970 conclusively so determined and not open to re-examination in the second appeal.
  5. These contentions require an examination of the requirements of the sub-contractors’ legislation, an appreciation of the decision made by the general commissioners, an investigation of the applicability of the doctrines and statutes relied upon by the Respondents, and an examination of the applicability of those doctrines to the nature of the issues at large before each appeal tribunal. This decision is structured accordingly.

1.The Subcontractors’ Legislation

  1. Chapter IV Part XIII TA 88 provides that when a contractor in the construction industry pays a subcontractor he must deduct tax from the payment. It provides for an exemption when the subcontractor holds a certificate issued by HMRC under section 561.
  2. Possession of such a certificate by a subcontractor is highly valuable. Without it the contractor will suffer significant cash flow disadvantages because, although the tax deducted may be recovered by him, it may take some time to be reclaimed.
  3. The legislation provides conditions which must be satisfied before the certificate is issued. In the case of a company they are set out in section 565. There is a right of appeal against refusal to issue or renew a certificate given by section 561(9). The appeal may be to the General or to the Special Commissioners.
  4. Included among the conditions in section 565 are the following:

“(3) The company must, subject to subsection (4) below, have complied with all obligations imposed on it by or under the Tax Acts 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.”

  1. The qualifying period is a period of 3 years ending with the date of application for the certificate. Thus the qualifying period in relation to the first appeal commenced on 1 October 2002, but that for the second appeal on 25 March 2003.
  2. Section 565 continues:

“(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….

“(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 in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above.

“(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.”

  1. That there have been 6 High Court appeals in relation to these matters over the last 2 years may show the importance of such a certification to a company (see Barnes v Hilton Main Construction 2005, STC 1532, Templeton v Transform Shop Office 2006 DTC 900, Arnold v G-Con Ltd 2006 STC 693, and on appeal 2006 STC 1516, John Cormack v CBL Cable Contractors 2005 EWHC 1294 (Ch), Hudson v JDC Services Ltd 2004 STC 834, and Revenue & Customs Commissioners v Facilities Maintenance Engineering Ltd 2006 EWHC 689 (Ch)).

The nature of the appeal Commissioner’s jurisdiction

  1. Section 561(9) provides for an appeal against the refusal of a certificate. It provides that “the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board, …”.
  2. Depending upon whether the appeal Commissioner’s jurisdiction is to conduct a full appeal or to review the Board’s decision on Wednesbury principles, the issues relevant to issue estoppel and abuse of process may be different. In Hudson (HMIT) v JDC Services Ltd 2005 EWHC 602 (Ch), however, Lightman J held that section 561(9) conferred a jurisdiction on the tribunal to determine afresh the decision of the Board and that the tribunal were free to substitute its own judgement for that of the Board. This affects the way in which any issue estoppel could apply.
  3. On the basis of Hudson the determination of each of the following issues will therefore be necessary for the making of a decision on appeal as to whether a certificate should be issued:

(i)whether there were defaults;

(ii)if so, whether those defaults (or, possibly, one or more of them) were minor and technical;

(iii)again, if there were defaults, whether those defaults gave cause for concern over future compliance; and

(iv)in any case, whether there was reason to expect that the company would be compliant in future.

Minor and Technical

  1. Two issues arise in relation to the minor and technical defence in section 565(4) which are relevant to the question of issue estoppel because they relate to the nature of the decision by the General Commissioners. The first relates to the facts and evidence that are relevant to the question of whether a default is minor and technical - and thus to whether or not the second tribunal will have regard to the same facts as the first in relation to any part of its decision.
  2. The second issue relates to whether the minor and technical defence is to be applied to each separate act of non-compliance or to the acts of non-compliance as a whole. That issue is of relevance because it relates to the question of exactly what issue was, or had to be, determined by the first tribunal.

(i) the facts relevant to minor and technical

  1. I have already noted the difference between the two limbs of section 565(4): the first requiring a finding of whether acts of non compliance were minor and technical, and the second separately requiring a decision as to whether those acts gave cause for concern as to future compliance. That distinction, and the decision of Lightman J in Hudson in relation to it was referred to by Laddie J in John Cormack (see paragraphs 15 and 16 of his judgment). Having done so Laddie J then turned to the meaning of “minor and technical”. He said, rejecting an argument that a large or repeated default could not be minor and technical no matter what the circumstances, at paragraph 27:-

“I do not accept this argument. It seems to me that the words “minor and technical” have to be construed in their context. As Lightman J pointed out in Hudson, there are two discrete matters to be considered in applying section 565(4) …. One looks to the past. The other looks to the future. As far as the former is concerned, the underlying question is whether or not the past defaults of the taxpayer have been, to use Lightman 1’s words, “of any significance”. Significance in this context includes consideration of whether the defaults demonstrate a cavalier attitude of the taxpayer to his obligations under the tax legislation. Even if defaults are large or numerous in money terms, the circumstances may make them not significant for these purposes. The words “minor and technical” can have different meanings. There is nothing in the legislation to suggest that they are primarily or exclusively concerned with size and frequency. Some of the liabilities covered by the legislation are not concerned directly with the payment of money. In context “minor and technical” should be construed in a way which allows them to be used to gauge whether there is a risk that the sub-contractor will default on his tax obligations. If, for example, a company is late in paying a very large tax bill because, wrongly and in breach of its customer’s instructions, the bank on which the company’s cheque is drawn fails to honour it, the breach should be treated as minor and technical even though, from an accountant’s point of view, the sum involved was large and not minor.” [my italics]

  1. On the same day as this application was heard, Simons Tax Cases reported the decision of the Court of Appeal in Arnold v G-Con (now reported at 2006 STC 1516).
  2. The Court rejected that part of Laddie J’s judgment in CBL in which he said that the words “minor and technical” should be construed in a way which allows them to be used to gauge whether there is a risk that the sub-contractor will default in his tax obligations. Sir Peter Gibson gave a judgment with which the other members of the Court agreed and said that the first condition looks to the past whereas the second condition looks to the future.
  3. In the High Court hearing of Arnold (HMIT) v G-Con Ltd [2005] EWKC 2456 Ch, Mann J said that whether defaults were minor and technical was ultimately a matter of impression, and that the bald figures in that case could not be described as minor and technical by themselves. He then said:

“It is of course relevant to consider whether there is anything in surrounding facts which will be capable of rendering those figures minor and technical if they otherwise do not seem to be so. I am not sure whether there is anything in surrounding facts, short of an estoppel, which would be capable of rendering breaches which are not, on their face, minor and technical, nevertheless minor and technical.”

  1. Thus, like Laddie J, 3 months later, Mann J acknowledged that surrounding facts could have the effect of rendering minor and technical that which would not otherwise be so. I conclude that the facts surrounding a default will be relevant to the issue.
  2. Mann J went on to consider those facts which the General Commissioners had taken into account in reaching the conclusion that the defaults were minor and technical. One of those was compliance in respect of other tax matters. He held that this was irrelevant consideration:

“I do not think it is arguable that compliance in respect of other tax matters, such as the prompt payment of corporation tax, is capable of turning the defaults in relation to accounting for PAYE and NIC into minor and technical lapses if they were not otherwise capable of bearing that characterisation.”

  1. In the Court of Appeal in Arnold v G-Con, in relation to the evidence which was relevant to the minor and technical issue Sir Peter Gibson said that it was right to reject the notion that the whole of the taxpayer’s compliance record should be taken into account.
  2. Likewise Mann J concluded (at paragraph 35) that the fact that no warning had been given to the company was an irrelevant consideration.
  3. To my mind all this suggests that the range of facts which could be relevant to the question of whether a default was minor and technical (or whether a series of defaults was minor and technical) is limited to those which bear directly on, or which have a direct connection with, the default.
  4. For this reason I reject the idea that the fact of later compliance in the particular area in which the earlier default(s) occurred can be a relevant consideration. But this is subject to the point relating to whether a number of faults are considered singly or together referred to below. Accordingly, but subject to that point, it seems to me that the facts relevant to the General Commissioners’ decision must be the same as those relevant to the decision in the second appeal at least so far as concerns the defaults which are common to both appeals.

(ii)The defaults singly or together

  1. The second issue is this: the language of section 585(4) relates to “a” default: in the singular rather than the plural. It applies where the company has failed to comply with “such an obligation”, and provides for relief “as regards the obligation” if “the” failure is minor and technical.
  2. In the court of Appeal in Arnold v G.Con, at paragraph 28, Sir Peter Gibson deals with the question of multiple defaults. He says:

“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 to be minor and technical”.

  1. It seems to me that Sir Peter Gibson may be making two points here. First (and I think clearly) that other breaches and therefore their number and substance can be relevant to a decision, and secondly (probably) that it is permissible to make a decision that a series of breaches were as a whole not minor and technical. The first point is the exception to the proposition I set out at paragraph 27 above. But I note it is an exception only in relation to breaches - not their absence: he is not suggesting that subsequent good behaviour is relevant.
  2. Of course the singular can encompass the plural where the context admits, but in a case where a company has defaulted on occasions A, B and C and there is a decision on appeal that the relief in section 585(4) is not available, the question arises as to whether the decision was that at least one of A, B and C was not minor and technical, or that A, B and C together were not minor and technical. The first possibility for example be the case if A was a particularly unmitigated, venial and egregious default, but B and C were each only a few days’ delay in making a return or if the circumstances surrounding B and C made them minor and technical.
  3. This is of particular relevance to this application because the effect of the passage of time is that a number of the defaults which were before the General Commissioners have now fallen out of account because they now pre-date the beginning of the 3 year qualifying period. Thus if the General Commissioners’ decision was that each of A, B and C were not minor and technical, then even though A may now have fallen out of account, the decisions in relation to B and C remain relevant issues in relation to the current appeal. On the other hand, if their decision was that A, B and C together were not minor and technical, then because A is no longer relevant, this decision no longer relates to an issue relevant to the current appeal because the issue before the tribunal will instead be whether or not B and C (and possibly D) are minor and technical taken together.

The Decision of the General Commissioners

  1. The first appeal was heard by the General Commissioners for Cardiff and the Vale. The clerk to the Commissioners wrote to the Appellant on 7 February 2006 and reported their decision thus:

“Having considered the evidence called and submissions made by both parties the General Commissioners were not satisfied that the admitted failures by the company to comply with all of its obligations under the Taxes Acts were minor and technical and, accordingly, upheld the refusal of the CIS 5 Certificate”.

  1. Pausing here, I note that there is here a finding that there were defaults (which I presume must have been in the 3 year period) and a finding that they were not minor and technical. The Commissioners did not indicate (and were not required to indicate) whether or not they regarded the continuing compliance condition as satisfied.
  2. I was told that an argument (the Human Rights argument) had been advanced by the Appellant before the General Commissioners that, reading section 565 with Article 14 of the European Convention on Human Rights, the appeal should be allowed because an unconnected company in another part of the country with similar failures to those of the Appellant had been granted a certificate, and therefore that there was discrimination against the Appellant justifying the allowing of the appeal.
  3. The clerk’s letter made no reference to the consideration by the Commissioners of this argument. Mr Williams therefore wrote to the clerk on 27 June 2006. The clerk replied on 30 June:

“I would confirm that, when dismissing the company’s appeal against refusal of their application for a CIS 5 Certificate the General Commissioners recorded, as a finding, that there was no discrimination in the treatment of the company by HM Revenue & Customs. In these circumstances they indicated that they were not required to take a view on the submission with regard to Article 14”.