Out-Law News 3 min. read

CIS gross payment can be cancelled without considering effect on taxpayer


The UK's HM Revenue & Customs (HMRC) could 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 company, the Supreme Court has decided. 

“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," said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.

JP Whitter (Water Well Engineers) Limited, a family-run business of water well engineers, had its gross payment registration cancelled by HMRC after failing to comply with the CIS by making late payments of taxes. It appealed HMRC's decision, arguing that HMRC should have taken into account the detrimental effect the revocation would have on the company’s business.

The company said that major customers would be likely to withdraw work if it lost its gross payment status. At the time of HMRC’s decision, the company said 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. It estimated that recovery would take about ten years.

CIS is a tax deduction scheme which involves tax being deducted at source from payments which relate to construction work. It was introduced in order to counter widespread tax evasion amongst subcontractors in the construction industry. Contractors must deduct tax from payments to subcontractors and pay the tax to HMRC. The amount deducted and paid over is allowed as a credit against the subcontractor’s liability to HMRC.

Subcontractors fulfilling certain conditions can register with HMRC to be able to receive payments gross. This makes a sub-contractor with gross payment status a more attractive party for a contractor to deal with and improves the sub-contractor’s cash flow by enabling the sub-contractor to receive the contract price without deduction.

The legislation provides that HMRC "may" cancel a person's registration for gross payment "if it appears to them" that various conditions are satisfied. The company argued that in exercising its discretion to cancel the registration HMRC should take into account the likely impact on the company's business. The First-tier Tribunal agreed with the company but the Upper Tribunal and the Court of Appeal decided that HMRC had no duty to take into account matters outside the CIS regime.

Giving the decision of the Supreme Court, Lord Carnwarth said that HMRC did not have an unfettered discretion as to whether to cancel the registration as "any statutory discretion must be exercised consistently with the objects and scope of the statutory scheme".

Agreeing with, and quoting from Henderson LJ's decision in the Court of Appeal, he said that HMRC's power did not extend 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”. Lord Carnwarth said that the Court of Appeal had "rightly emphasised the highly prescriptive nature of the [CIS] scheme".

"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."

"The goal going forward when a business’s status is removed will be seeking to persuade HMRC that the circumstances are within the narrower margin of discretion that the Supreme Court confirmed HMRC has to not remove gross payment status,” said Steven Porter.  

The Supreme Court also dismissed the Company's arguments that HMRC had breached Article 1 of the First Protocol to the European Convention on Human Rights (A1P1), which entitles a person to "the peaceful enjoyment of his possessions":

"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," said Lord Carnwarth.

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