Revenue and Customs v Smith

The turnover test for a construction-industry subcontractor’s tax certificate was a proportionate response to the risk of tax evasion. It fell within the State’s margin of appreciation under Article 1 of the First Protocol to the ECHR and was not discriminatory merely because part-time or older workers might find it harder to satisfy the threshold. The court must assess the statutory scheme generally, rather than by reference to an individual case. Regulation 27 of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 applied the amended section 562 conditions to renewal applications, including the turnover test.

HMRC appealed by way of Case Stated from the General Commissioners’ decision allowing John Richard Smith’s appeal against refusal of a CIS6 subcontractor’s tax certificate. Mr Smith had passed the business and compliance tests but failed the turnover test. The General Commissioners considered that refusal would adversely affect his business and infringe his human rights, particularly because he was an older worker who had reduced his hours following ill-health.

The appeal concerned whether the turnover test was incompatible with the ECHR and whether it applied to an application for renewal under regulation 27 of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993.

1. HMRC’s appeal was allowed. The General Commissioners had erred in finding that refusal of the certificate infringed Mr Smith’s human rights.

2. Article 8 ECHR was not engaged by the certification provisions. The relevant potential right was the peaceful enjoyment of possessions under Article 1 of the First Protocol, namely the subcontractor’s right to receive contractual payments in full.

3. Measures securing the payment of taxes must strike a fair balance between the general interest and the individual’s fundamental rights. In taxation matters the State enjoys a wide margin of appreciation, and the legislature’s assessment must be respected unless it lacks a reasonable foundation. The turnover test had a rational connection with the prevention of tax evasion in the construction industry and was not disproportionate.

4. The scheme was not discriminatory merely because part-time subcontractors, or older subcontractors who worked part-time, might be less likely to meet the threshold. The risk addressed by the scheme was not shown to be lower for part-time workers. Adjusting the threshold by hours worked, age or previous certification would create substantial complexity and opportunities for abuse. The scheme therefore maintained a fair balance.

5. Regulation 27 required section 561 to apply to renewal applications in the same way as applications for issue. Since section 561(2) referred to the conditions in section 562, the later insertion of section 562(2A) automatically brought the turnover test into renewal applications. Section 20 of the Interpretation Act 1978, applied to subordinate legislation by section 23, supported that conclusion, although the result also followed from construction of regulation 27 itself.

6. There was no need to read down section 562 or the Regulations under section 3 of the Human Rights Act 1998. Mr Smith failed the turnover test, and HMRC were entitled to refuse the certificate.

• High Court (Chancery Division): HMRC’s appeal from the General Commissioners was allowed.