HMRC cancelled a company’s registration for gross payment under the Construction Industry Scheme after repeated late PAYE payments, without considering the likely serious effect on its business. The Supreme Court held that the discretion to cancel registration under section 66 of the Finance Act 2004 must be exercised consistently with the scheme’s compliance objectives and does not extend to that business impact. Any interference with possessions was proportionate under Article 1 of the First Protocol.
The appellant is a family-run water well engineering business, started in 1972. In 2011 it had about 25 employees and an annual turnover of about £4.4 million, much of it from a small number of major customers. It had been registered for gross payment under the Construction Industry Scheme since about 1984. Earlier cancellations in 2009 and 2010 were reversed after appeal, but between August 2010 and March 2011 it made late PAYE payments on seven occasions, including one delay of at least 118 days. On 30 May 2011 HMRC cancelled its registration. The company accepted that it had failed to comply without reasonable excuse. It argued that HMRC had wrongly failed to consider the likely effect on its business, contrary to domestic public law and Article 1 of the First Protocol to the European Convention on Human Rights.
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The First-tier Tribunal accepted evidence that major customers would be likely to withdraw work. It found that cancellation would probably have caused the loss of around 60 per cent of turnover and the dismissal of about 80 per cent of employees, with recovery expected to take about ten years. It allowed the appeal, treating section 66 as conferring a general discretion to consider that impact. The Upper Tribunal and the Court of Appeal disagreed. By section 67(5), cancellation does not take effect until the appeal is finally determined. The company could not reapply for one year after cancellation took effect. The Supreme Court had no information about the business after 2011.
The statutory scheme
The scheme, in Part 3 of the Finance Act 2004, addresses the long-standing problem of construction sub-contractors disappearing without paying tax. A contractor must generally deduct tax from contract payments unless the sub-contractor is registered for gross payment. Registration is highly prescriptive. If the statutory conditions are satisfied, HMRC must register the company for gross payment; if not, it must be registered for payment under deduction, which is the default position. The compliance test generally requires compliance with tax and related obligations during the preceding 12 months, subject to prescribed exceptions for minor failures and to failures for which HMRC consider there was a reasonable excuse and which were then remedied without unreasonable delay.
Section 66(1) provides that HMRC may cancel gross-payment registration if it appears that a fresh application would be refused, or that the person has provided incorrect information or failed to comply with the scheme. Unlike registration, cancellation is discretionary. The person must then be registered for payment under deduction. Henderson LJ, whose approach the Supreme Court endorsed, found no indication that Parliament intended HMRC to consider matters extraneous to the scheme, including the financial impact of cancellation. The discretion still had a useful role: some requirements have no reasonable-excuse exception, and limited flexibility may be appropriate for narrow or temporary failures that pose no practical threat to compliance.
The Supreme Court’s reasoning
Lord Carnwath, with whom Lord Mance, Lord Sumption, Lord Lloyd-Jones and Lord Briggs agreed, said that a statutory discretion must be exercised consistently with the objects and scope of the scheme. The cancellation power does not extend to matters which do not relate, directly or indirectly, to the requirements for gross-payment registration and the objective of securing compliance with them. The conditions for registration are narrowly defined, and compliance is a mandatory element. Section 66 brings those same conditions into cancellation. Limited flexibility for failures that are temporary and pose no practical threat does not imply a general power to dispense with cancellation because of its consequences for a particular business.
On the Convention argument, it had been common ground below that registration and the contractual entitlement to the contract price were possessions. Lord Carnwath saw force in HMRC’s submission that rights created by registration cannot extend beyond the statutory limits under which they arise, including the risk of cancellation. He found it unnecessary to decide that issue. Even if there was an interference, it was proportionate. Once the statute itself does not require consideration of the individual impact, Article 1 does not justify reading in that requirement. Registration is a valuable privilege, but it is subject to stringent conditions. The impact on the company was no different in kind from the impact inherent in the legislation, and enforcement within the statutory framework fell within the wide margin allowed to the state in tax matters.
Verdict: The Court unanimously dismissed the company’s appeal. HMRC was not required to weigh the commercial consequences of cancellation. Any interference with possessions was proportionate, so the Court did not need to decide whether Article 1 of Protocol 1 was engaged.
