J P Whitter - HMRC not obliged to consider impact of cancellation of Gross Payment Status on business
In J P Whitter (Water Well Engineers) Ltd v HMRC  UKSC 31, the Supreme Court has confirmed the view of the Court of Appeal that HMRC has the power to remove 'Gross Payment Status' from sub-contractors under the Construction Industry Scheme, without an obligation to take into account the impact on the tax-paying business.
JP Whitter (Water Well Engineers) Limited (JPW) was registered for Gross Payment Status under the Construction Industry Scheme (CIS). CIS requires certain contractors to deduct and pay over to HMRC a proportion of all payments made to the sub-contractor in respect of labour under a sub-contract. The amount deducted and paid over is, in due course, allowed as a credit against the sub-contractor’s liability to HMRC. However, sub-contractors with statutory certificates of gross payment registration are exempt from those requirements. That tends to make any sub-contractor holding a certificate a more attractive party for a contractor to deal with. It also improves the subcontractor’s cash flow by enabling the sub-contractor to receive the contract price without deduction.
The status is subject to stringent rules including the need for a record of good tax compliance. Failure to adhere to the rules can cause a business to be stripped of the status.
In June 2009, JPW failed a review of its status for the first time. This happened again the following year and in both instances HMRC cancelled, and then reinstated, its gross payment status, following an appeal. Then, in a period of less than ten months, JPW made late payments on seven occasions, the longest delay being 118 days. It had no 'reasonable excuse' for the delay. In May 2011, following a review, HMRC cancelled JPW's registration, pursuant to section 66(1), Finance Act 2004.
JPW is a family-run company and a significant proportion of its business is derived from a small number of key customers. Those customers would withdraw their custom if JPW was to remain without Gross Payment Status. HMRC took no account of these facts when it revoked its registration.
JPW appealed HMRC's decision to cancel its gross payment registration.
Before the First-tier Tribunal (FTT), JPW argued that the exercise of HMRC's discretion regarding cancellation was fettered and, in the absence of contrary intention, the impact of cancellation on it was a relevant consideration which should have been taken into account by HMRC. It further submitted that the cancellation interfered with its possessions under Article 1, Protocol 1 of the ECHR (A1P1). Possessions in this context refers to JPW's entitlement to the gross contract price or the rights associated with registration under the CIS.
The FTT agreed with JPW and allowed its appeal. The FTT accepted the company’s evidence that the cancellation, once it took effect, would have had a seriously detrimental impact on its business. In the FTT's view, HMRC had been wrong not to take account of the likely impact on JPW's business.
HMRC successfully appealed to the Upper Tribunal (UT) and JPW's appeal to the Court of Appeal was dismissed.
JPW appealed to the Supreme Court.
Supreme Court judgment
The appeal was dismissed.
The Supreme Court agreed with the findings of the UT and the Court of Appeal. It found that section 66(1) did not require or authorise HMRC, when exercising its right to cancel a company's registration under the CIS, to take into account the impact of the cancellation on the taxpayer's business. It stated that any statutory discretion must be exercised consistently with the objects and scope of the relevant statutory scheme. The Court could not find any indication in the CIS that Parliament intended to give HMRC the authority to take into account matters extraneous to the CIS that did not relate directly, or otherwise, to the requirements for registration of gross payment, or to the objective of securing compliance with those requirements. Lord Carnwath said, at :
"… 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) [of the Court of Appeal's decision]. He [Henderson LJ] 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."
In relation to the argument that HMRC had disproportionately interfered with JPW's possessions under A1P1, the Court found that this interference with a taxpayer's registration rights was proportionate and within the margin of appreciation permitted with regard to tax enforcement by the state. Lord Carnwath said, at :
"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."
The lack of Gross Payment Status can affect businesses, not only in respect of cash flow, but also in that Gross Payment Status is often a requirement in the tendering process. This judgment is therefore important for those businesses who operate under the CIS and highlights the importance of complying with the strict rules of registration in relation to Gross Payment Status under the CIS. The Court has confirmed that HMRC is not obliged to consider extraneous factors when exercising its discretion to cancel such status, including any detrimental impact cancellation may have on the taxpayer's business.
Although there is still discretion for reasonable excuse (should a contractor not have made sufficient timely submissions and payments within the 12-month period tested by HMRC systems), that discretion is only likely to be exercised in favour of the contractor where exceptional circumstances have led to the compliance failure.
A copy of the judgment can be viewed here.