Trinity Term [2018] UKSC 31 On appeal from: [2016] EWCA Civ 1160

JP Whitter (Water Well Engineers) Limited
(Appellant) v Commissioners for Her Majesty’s
Revenue and Customs (Respondent)
Lord Mance
Lord Sumption
Lord Carnwath
Lord Lloyd-Jones
Lord Briggs
13 June 2018
Heard on 10 May 2018
Appellant Respondent
Thomas Chacko James Eadie QC
Jessica Boyd James Rivett
(Instructed by Ian Whalley
(Instructed by Solicitor’s
Office HM Revenue and
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LORD CARNWATH: (with whom Lord Mance, Lord Sumption, Lord LloydJones and Lord Briggs agree)
1. This appeal raises a short question on the operation by the respondent
Commissioners (“HMRC”) of the Construction Industry Scheme under the Finance
Act 2004 (“the Act”). The appellant company (“the company”) was registered for
gross payment under the scheme. As is now accepted, it failed to comply with the
requirements of the scheme without reasonable excuse. In consequence, on 30 May
2011, HMRC exercised their power under the Act to revoke its registration. In doing
so, they took no account of the likely effect of their action on the company’s
business. The company contends that this represented a failure to take account of a
material consideration, in breach of both domestic public law, and of the European
Convention on Human Rights (“the Convention”).
Factual background
2. The facts are set out in detail in the judgment of Henderson LJ in the Court
of Appeal: [2016] EWCA Civ 1160. A summary is sufficient for present purposes.
The company is a family-run business of water well engineers, started in 1972. In
2011 it 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.
3. It was first registered for gross payment in about 1984, and its registration
was regularly reviewed thereafter. It first failed a review in July 2009, when its
registration was cancelled, and the same occurred in June the following year; but 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 being generally of a few days, but on one
occasion of at least 118 days. This led to a further review and to the cancellation
which is the subject of the present proceedings. The company’s appeal succeeded
before the First-tier Tribunal (“FTT”) ([2012] UKFTT 639 (TC)), but that decision
was not upheld by the Upper Tribunal ([2015] UKUT 0392 (TCC)) or the Court of
Appeal ([2016] EWCA Civ 1160). It now appeals to this court with permission given
by the court itself. By section 67(5) of the Act, the cancellation does not take effect
until the final determination of the appeal.
4. The FTT accepted the company’s evidence that major customers would be
likely to withdraw work if it lost its gross payment status. 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
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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.
We have no information as to what has happened to the business in the period since
2011, nor as to the likely effect of the loss of its status if this appeal fails, and the
cancellation now takes effect. In that event, the company would not be able to reapply for one year after the cancellation takes effect: section 66(8).
The legislation
5. As Henderson LJ noted, the overall structure and purpose of the legislation
has remained broadly the same since the inception of the statutory scheme some 45
years ago. He cited Ferris J’s description of the background in Shaw v Vicky
Construction Ltd [2002] EWHC 2659 (Ch); [2002] STC 1544:
“3. In the absence of the statutory provision with which this
appeal is concerned Vicky would be entitled, like any other subcontractor, to be paid the contract price in accordance with its
contract with the contractor without any deduction in respect of
its own tax liability. However it became notorious that many
sub-contractors engaged in the construction industry
‘disappeared’ without settling their tax liabilities, with a
consequential loss of revenue to the exchequer.
4. In order to remedy this abuse Parliament has enacted
legislation, which goes 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 subcontractor 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-contractor’s liability to the
Revenue …”
6. The relevant provisions in the present case are contained in the Finance Act
2004, Part 3 Chapter 3 “Construction Industry Scheme”. The main operative
provisions are section 61, which provides for deductions on account of tax from
“contract payments” as defined; and section 60 which excludes from the definition
payments made to a person registered for gross payment when the payment is made.
Registration of sub-contractors is governed by sections 63 and 64. Section 63
provides that if HMRC are satisfied that the relevant requirements of sections 63
and 64 are satisfied in respect of a company, it must be registered for gross payment;
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but, if not, it must be registered for payment under deduction. Henderson LJ rightly
observed (para 23) that the registration provisions are “highly prescriptive”, HMRC
having no discretion at this stage; and that payment under deduction is the “default
7. The detailed requirements for registration of a company are set out in Part 3
of Schedule 11. Again these requirements were rightly described by Henderson LJ
as “highly prescriptive” (paras 27-28). Relevant in the present case is para 12 which
sets out “The compliance test”. This generally requires the company to have
complied, in the “qualifying period” of 12 months preceding the application, with
all obligations imposed on it under the Tax Acts or the Taxes Management Act 1970.
This is subject to certain exceptions prescribed by regulations for failures to be
“treated as satisfying” the relevant condition (“prescribed ‘minor failures’”, as
Henderson LJ described them) (para 12(2)). Also a company that has failed to
comply is treated as satisfying the condition if HMRC are “of the opinion that …
the company had a reasonable excuse for the failure to comply” and that it “complied
… without unreasonable delay after the excuse had ceased” (para 12(3)). The
company must also have paid required social security contributions during the
qualifying period (para 12(4)); and have complied with specified obligations under
the Companies Act 1985 (para 12(5)). Paragraph 13 enables the Treasury by order,
subject to approval in draft by the House of Commons, to vary the conditions for
registration for gross payment.
8. Section 66 provides for cancellation of registration for gross payment:
“(1) The Board of Inland Revenue may at any time make a
determination cancelling a person’s registration for gross
payment if it appears to them that –
(a) if an application to register the person for gross
payment were to be made at that time, the Board would
refuse so to register him,
(b) he has made an incorrect return or provided
incorrect information (whether as a contractor or as a
sub-contractor) under any provision of this Chapter or
of regulations made under it, or
(c) he has failed to comply (whether as a contractor
or as a sub-contractor) with any such provision …”
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As is common ground, the use of the word “may” in section 66(1) imports an
element of discretion, by contrast with the mandatory words of section 63. The
dispute is as to its scope.
9. Where registration for gross payment is cancelled under section 66(1), the
person must be registered for payment under deduction (section 66(6)). As already
noted, he may not reapply for registration for gross payment for one year after the
cancellation takes effect (section 66(8)), but the effect of the cancellation is
suspended pending determination of an appeal (section 67(5)).
10. By section 67 a person aggrieved by cancellation of registration may appeal
by notice given to HMRC within 30 days. Provision for HMRC review or
determination by the tribunal are set out in sections 49Aff of the Taxes Management
Act 1970. A favourable conclusion on HMRC review is treated as if it were an
agreement for settlement under section 54, and so equivalent to a determination of
the appeal (section 49F(2)). As already seen, the first two cancellations were
disposed of in this way. However, on the third occasion, HMRC maintained its
position and the appeal accordingly was referred to the tribunal.
11. Section 102 of the 1970 Act gives HMRC a general power “in their discretion
[to] mitigate any penalty”. It is not however suggested that cancellation of
registration can be treated as a “penalty” within this provision.
12. In the alternative, the company relies on its right to protection of property
under Article 1 of the First Protocol to the Convention (“A1P1”):
“Every natural or legal person is entitled to the peaceful
enjoyment of his possessions. No one shall be deprived of his
possessions except in the public interest and subject to the
conditions provided for by law and by the general principles of
international law.
The preceding provisions shall not, however, in any way impair
the right of a state to enforce such laws as it deems necessary
to control the use of property in accordance with the general
interest or to secure the payment of taxes or other contributions
or penalties.”
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The decisions below
13. As already noted, the FTT allowed the appeal, holding that HMRC had been
wrong not to take account of the likely impact on the company’s business. The
tribunal described section 66 as giving a “general unfettered discretion” to take
account of the impact on a business of cancellation. It thought that HMRC must have
itself have taken some account of such factors in its decisions on the two reviews,
even though no specific reasons were given. It saw good reasons for the distinction
between registration and cancellation, because of the serious implications of
cancellation for an existing business (paras 60-62).
14. As already noted, the Upper Tribunal and the Court of Appeal took a different
view. It is unnecessary to repeat their detailed reasoning. Henderson LJ approach is
encapsulated in the following passage:
“60. As a matter of first impression, I cannot find any
indication in this tightly constructed statutory scheme that
Parliament intended HMRC to have the power, and still less a
duty, to take into account matters extraneous to the CIS regime,
when deciding whether or not to exercise the power of
cancellation in section 66(1). By ‘matters extraneous to the CIS
regime’ I mean in particular, in the present context, matters
which do not relate, directly or indirectly, to the requirements
for registration for gross payment, and to the objective of
securing compliance with those requirements. My preliminary
view, therefore, is that consideration of the financial impact on
the taxpayer of cancellation would fall well outside the
intended scope of the power.”
He found nothing in the submissions to displace that first impression. In particular,
he saw no difficulty in explaining the discretion given by section 66, as compared
with the registration provisions, given the highly prescriptive nature of the regime:
“… It seems to me entirely appropriate, and a substantial
protection for the registered person, that HMRC should then be
given a discretion whether or not to exercise the power of
cancellation, even in cases where the condition in section
66(1)(a) is satisfied. The Upper Tribunal gave two examples,
in para 64 of the UT Decision, quoted above, of cases where
HMRC might properly exercise such discretion in the
taxpayer’s favour, without travelling outside what I would
regard as the proper scope of the power. It needs to be
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remembered, in this connection, that the ‘reasonable excuse’
exception does not apply to all the requirements of the
compliance test, and in the absence of any discretion even a
single minor failure to pay national insurance contributions on
the due date, or a minor failure to comply with one of the
Companies Act requirements, would be fatal, even if there were
a reasonable excuse for the non-compliance. Similarly, the
rigid structure of Regulation 32 itself leaves no scope for the
exercise of any discretion, even if the relevant test was failed
by a narrow margin, the amount involved was relatively small,
and although (when viewed in isolation) there was no
reasonable excuse for the non-compliance, there was
nevertheless good reason to suppose that it would not be
repeated. I therefore remain unpersuaded that there is any need
to broaden the scope of the discretion conferred by section
66(1) in order to provide it with any worthwhile content.” (para
15. In respect of the alternative argument under the Convention, Henderson LJ
noted (para 37) that it was common ground before the Court of Appeal that both
registration for gross payment, and the contractual right to payment of the contract
price, constituted “possessions” for the purposes of A1/P1. However, he did not
accept that any interference with those possessions was disproportionate:
“… Given the practical and cash-flow advantages of
registration for gross payment, it is always probable that
cancellation of the registration will seriously affect the
taxpayer’s business. Far from being exceptional, such
consequences are likely to be the norm, and taxpayers must be
taken to be well aware of the risks to their business which
cancellation will bring. In individual cases, of which this may
perhaps be one, the result may seem harsh; but a degree of
harshness in a regime which is designed to counter tax evasion,
and where continued compliance is within the power of the
sub-contractor, cannot in my view be characterised as
disproportionate. Both deterrence, and ease of compliance, are
important factors which help to make the CIS scheme as a
whole clearly compliant with A1P1 …” (para 80)
The submissions in this court
16. The company (by Mr Chacko and Miss Boyd of Counsel) argue that the
discretion given by section 66 should be taken at face value. It is in terms unfettered,
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and there is nothing to indicate an intention to exclude consideration of the practical
effect of cancellation. Absent a contrary indication, they submit, the consequences
of the exercise of a power must be assumed to be a relevant consideration. They
contrast, for example, Schedule 56, para 9 to the Finance Act 2009, which provides
for mitigation of certain penalties in “special circumstances”, but specifically
excludes consideration of the taxpayer’s ability to pay. If Parliament had wished to
limit the scope of the discretion under section 66 it would have used express words.
There was no logical dividing line between the scope of the discretion accepted as
permissible by the Court of Appeal, and that argued for by the company. Nor was a
broader discretion inconsistent with the proper exercise of HMRC’s statutory
functions, as illustrated for example by the wide discretion accepted as appropriate
in the context of customs penalties: see Denley v Revenue and Customs Comrs
[2017] UKUT 340 (TCC), paras 13-14.
17. Such a discretion also reflects the well-established proposition that removal
of an advantageous trading status has a more serious impact on a business than
refusal to grant the status in the first place. They cite the common law principle of
proportionality as applied in the well-known case of R v Barnsley Metropolitan
Borough Council, Ex p Hook [1976] 1 WLR 1052, 1057, where Lord Denning MR
“[T]here are old cases which show that the court can interfere
by certiorari if a punishment is altogether excessive and out of
proportion to the occasion … It is quite wrong that the Barnsley
Corporation should inflict upon [Mr Hook] the grave penalty
of depriving him of his livelihood. That is a far more serious
penalty than anything the magistrates could inflict. He is a man
of good character, and ought not to be penalised thus …”
18. In the alternative, as in the courts below, they rely on A1/P1. As was accepted
before the Court of Appeal, they submit that cancellation clearly involves an
interference with the possessions represented by (at least) the sub-contractor’s
entitlement to the full contract price or the bundle of rights inherent in registration.
Although the article preserves the right of the state to enforce such laws as it deems
necessary to secure the payment of tax, that is still subject to the requirement of
proportionality. They rely on the words of Lord Phillips MR in Lindsay v Customs
and Excise Comrs [2002] EWCA Civ 267; [2002] 1 WLR 1766, para 52:
“…Under Article 1 of the First Protocol to the Convention such
deprivation will only be justified if it is in the public interest.
More specifically, the deprivation can be justified if it is ‘to
secure the payment of taxes or other contributions or penalties’.
The action taken must, however, strike a fair balance between
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the rights of the individual and the public interest. There must
be a reasonable relationship of proportionality between the
means employed and the aim pursued … I would accept
[counsel’s] submission that one must consider the individual
case to ensure that the penalty imposed is fair. However strong
the public interest, it cannot justify subjecting an individual to
an interference with his fundamental rights that is
They rely to the same effect on the necessary balance as described by Lord Reed in
Bank Mellat v Her Majesty’s Treasury (No 2) [2014] AC 700, para 74:
“… whether, balancing the severity of the measure’s effects on
the rights of the persons to whom it applies against the
importance of the objective, to the extent that the measure will
contribute to its achievement, the former outweighs the latter.”
This it is submitted can only be done by assessing the severity of the consequences
for the particular individual in question, even if the legislative scheme taken as a
whole is proportionate.
19. For HMRC Mr Eadie QC generally supports the reasoning of the Court of
Appeal. In respect of the Convention, he does not accept that cancellation involves
an interference with a possession for the purposes of A1P1. The subcontractor’s
right to payment of the contract price is in law subject to the limits imposed by the
statutory scheme. Similarly, any benefits from registration flow from the statutory
scheme and are subject to its conditions, including the risk of cancellation. He relies
on the distinction drawn by the Strasbourg court in JA Pye (Oxford) Ltd v United
Kingdom (2006) 43 EHRR 3 (the same point did not arise in the Grand Chamber:
(2008) 46 EHRR 45). At para 51 the court considered the circumstances in which a
legislative provision is to be regarded as “an incident of, or limitation on, the
applicants’ property right at the time of its acquisition”. It explained:
“… Article 1 does not cease to be engaged merely because a
person acquires property subject to the provisions of the
general law, the effect of which is in certain specified events to
bring the property right to an end, and because those events
have in fact occurred. Whether it does so will depend on
whether the law in question is properly to be seen as qualifying
or limiting the property right at the moment of acquisition or,
whether it is rather to be seen as depriving the owner of an
existing right at the point when the events occur and the law
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takes effect. It is only in the former case that article 1 may be
held to have no application.” (Emphasis added)
The present case, Mr Eadie submits, comes clearly into the former category. The
power of cancellation for non-compliance is an intrinsic part of the “possession”
from the moment of acquisition; its exercise cannot engage the article.
20. In any event, he submits, it is clearly within the wide margin allowed by the
Convention in fiscal matters: see Gasus Dosier-und Fördentechnik GmbH v
Netherlands (1995) 20 EHRR 403, para 59. National & Provincial Building Society
v United Kingdom (1997) 25 EHRR 127, para 80. The Strasbourg court has also
made clear that the margin may extend to the adoption by the state of “general
measures which apply to pre-defined situations regardless of the individual facts of
each case even if this might result in individual hard cases”: Animal Defenders
International v United Kingdom (2013) 57 EHRR 21, para 106.
21. Attractively though the appeal has been argued, I have no doubt that the Court
of Appeal reached the right conclusion, substantially for the reasons they gave.
Apart from the Convention, the company’s submission comes down to a short point:
that is, given the existence of a discretion in section 66, it must in the absence of any
specific restriction be treated as an unfettered discretion. That to my mind overlooks
the basic principle that any statutory discretion must be exercised consistently with
the objects and scope of the statutory scheme.
22. Like Henderson LJ, I cannot read the power as extending to matters “which
do not relate, directly or indirectly, to the requirements for registration for gross
payment, and to the objective of securing compliance with those requirements” (para
60). He rightly emphasised the highly prescriptive nature of the scheme. This starts
with the narrowly defined conditions for registration in the first place, among which
the record of compliance with the tax and other statutory requirements is a
mandatory element, allowing no element of discretion. The same conditions are
brought into the cancellation procedure by section 66. The mere fact that the
cancellation power is not itself mandatory is unsurprising. Some element of
flexibility may be desirable in any enforcement regime to allow for cases where the
failure is limited and temporary (even if not within the prescribed classes) and poses
no practical threat to the objectives of the scheme. It is wholly inconsistent with that
tightly drawn scheme for there to be implied a general dispensing power such as
implied by the company’s submissions.
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23. Turning to A1/P1 I see force in Mr Eadie’s submission that, even accepting
that rights conferred by registration amount to “possessions”, they cannot extend
beyond the limits set by the legislation by which they are created. However, I find
it unnecessary to rest my decision on that point, since I have no doubt that the Court
of Appeal were right to hold that any interference was proportionate. Once it is
accepted that the statute does not in itself require the consideration of the impact on
the individual taxpayer, there is nothing in A1/P1 which would justify the court in
reading in such a requirement. Registration is a privilege conferred by the
legislation, which has significant economic advantages, but it is subject to stringent
conditions and the risk of cancellation. The impact on the company is no different
in kind from that which is inherent in the legislation. I agree entirely with Henderson
LJ that the exercise of the power within the scope of the statutory framework comes
well within the wide margin of appreciation allowed to the state for the enforcement
of tax.
24. For these reasons, I would dismiss the appeal.