J P Whitter (Waterwell Engineers) Limited v HM Revenue and Customs

The Court of Appeal considered the scope of the power under section 66(1) of the Finance Act 2004 to cancel a person’s registration for gross payment under the Construction Industry Scheme (CIS). The court held that the discretionary power to cancel is to be exercised within the tightly framed statutory scheme for registration (including the compliance test in Schedule 11 paragraph 12 and the tolerances in Regulation 32 of the 2005 Regulations) and does not authorise HMRC to take into account the wider financial impact on the registrant’s business when deciding whether to cancel. The court rejected arguments that common law proportionality or Article 1 of the First Protocol to the European Convention on Human Rights required HMRC to weigh the adverse business consequences when exercising the section 66 power, save in potentially exceptional cases. The appeal from the First-tier Tribunal’s decision was dismissed and the Upper Tribunal’s reinstatement of the cancellation was upheld.

This was an appeal against the decision of the Upper Tribunal reinstating HMRC’s cancellation of the appellant company’s gross payment registration under the Construction Industry Scheme. The appellant was J P Whitter (Waterwell Engineers) Limited, a small family-owned water well engineering company whose gross payment registration had been cancelled by HMRC following multiple late PAYE payments and failed annual reviews.

Nature of the claim / relief sought: The company appealed against HMRC’s cancellation under section 66(1) of the Finance Act 2004; the First-tier Tribunal (FTT) had allowed the company’s appeal on the ground that HMRC had acted irrationally by failing to take into account the impact of cancellation on the company’s business. The Upper Tribunal allowed HMRC’s appeal and reinstated the cancellation; the company appealed to the Court of Appeal.

Issues framed:

• Whether HMRC, when exercising the power to cancel registration for gross payment under section 66(1) FA 2004, are obliged or entitled to take into account the financial impact on the taxpayer’s business of cancellation.
• Whether a requirement of proportionality (at common law or under Article 1 of the First Protocol (A1P1) incorporated by the Human Rights Act 1998) requires such consideration in the exercise of the power.
• How the statutory framework (Schedule 11 paragraph 12, Regulation 32 and the other CIS provisions) should be construed in this context.

Court’s reasoning: The court analysed the closely prescriptive statutory scheme for gross registration, emphasising that gross payment status is a privilege earned by satisfying the compliance test and other statutory conditions. Section 66(1) confers a discretionary power to cancel where the statutory conditions are not met; that discretion is properly exercised within the ambit of matters relevant to compliance and future compliance under the CIS. The court found no indication that Parliament intended HMRC to take into account extraneous matters such as the wider financial consequences for the taxpayer’s business, and observed that if Parliament had intended that such factors were to be weighed it would have provided express guidance. The court considered and rejected arguments based on common law proportionality and on A1P1: the CIS scheme as enacted is Convention-compliant, and the existence of the statutory discretion is itself a safeguard. While the court did not rule out exceptional cases where a broader proportionality inquiry might be required, it held that the facts found by the FTT (serious adverse business consequences resulting from the company’s predictable non-compliance) did not satisfy such a test. The Court of Appeal therefore dismissed the company’s appeal, upholding the Upper Tribunal’s decision to reinstate the cancellation.

Appeal dismissed. The Court of Appeal held that section 66(1) FA 2004 must be read and applied within the tightly framed CIS statutory scheme and does not authorise or require HMRC to take into account the wider financial impact on a registrant’s business when deciding to cancel gross payment registration. The court further held that neither common law proportionality nor Article 1 of the First Protocol imposed a requirement to take that impact into account in this case, save possibly in exceptional circumstances which were not made out on the facts.

First-tier Tribunal decision allowing company [2012] UKFTT 639 (TC); Upper Tribunal (Tax and Chancery Chamber) allowed HMRC’s appeal and reinstated the cancellation [2015] UKUT 0392 (TCC) (also reported [2016] STC 204); appeal to the Court of Appeal from the Upper Tribunal decision [2016] EWCA Civ 1160 (this judgment).