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

HMRC’s discretion to cancel gross-payment registration under section 66(1) of the Finance Act 2004 is confined to considerations connected with the Construction Industry Scheme, its conditions of registration and future compliance. It neither authorises nor requires HMRC to weigh the likely financial effect of cancellation on the taxpayer’s business.

Cancellation interferes with possessions protected by A1P1 and its exercise must therefore be Convention-compliant. Ordinarily, however, the properly construed discretion forms part of a proportionate statutory scheme. Severe but predictable business consequences of non-compliance will not, without exceptional circumstances, require a wider individual proportionality assessment.

The appellant water-well engineering company was registered for gross payment under the Construction Industry Scheme. Following repeated late PAYE payments and prior warnings, HMRC cancelled its registration. The company accepted that it failed the compliance test and had no reasonable excuse, but contended that cancellation would severely damage its business because major customers required gross-payment status.

The First-tier Tribunal allowed the company’s appeal, holding that HMRC had failed to consider that impact: [2012] UKFTT 639 (TC). The Upper Tribunal allowed HMRC’s appeal and reinstated the cancellation: [2015] UKUT 0392 (TCC). The central issues were whether proportionality, at common law or under A1P1, required HMRC to consider the business impact, and whether that impact was a relevant consideration on the true construction of section 66.

1. Appeal dismissed. Henderson LJ, with whom Christopher Clarke and Jackson LJJ agreed, held that the Upper Tribunal had correctly reinstated HMRC’s cancellation decision, despite errors in aspects of its reasoning.

2. Section 66(1) of the Finance Act 2004 had to be construed within the closely articulated Construction Industry Scheme. Gross payment is an exception to the default of payment under deduction. It is a privilege earned by satisfying stringent conditions directed to tax collection and compliance. The statutory discretion has meaningful work to do by permitting HMRC to respond flexibly to matters bearing on compliance and the prospect of repetition. It does not extend to matters extraneous to that purpose, including the taxpayer’s financial position or likely business losses from cancellation.

3. No wider common-law proportionality requirement altered that construction. The statutory scheme, including the discretion and appeal safeguards, struck a proportionate balance. The consequences of losing gross status were foreseeable and ordinarily within the taxpayer’s control through timely compliance. The company had failed to correct its PAYE system despite two earlier opportunities.

4. A1P1 applied when HMRC exercised the discretion because cancellation interfered with the possessions recognised in Vicky. The court rejected the Upper Tribunal’s hypothetical comparison between mandatory and discretionary schemes. Nevertheless, a Convention-compliant scheme, construed as above, will ordinarily supply a complete answer. A wider individual proportionality review was not ruled out in exceptional circumstances, but the severe commercial consequences found here were a likely and predictable consequence of cancellation, not an exceptional burden.

• Court of Appeal (Civil Division): The company’s appeal was dismissed. The court upheld the result reached by the Upper Tribunal: [2016] EWCA Civ 1160.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal from the First-tier Tribunal was allowed and the cancellation notice reinstated: [2015] UKUT 0392 (TCC); [2016] STC 204.

• First-tier Tribunal: The company’s appeal was allowed because HMRC had not considered the effect of cancellation on its business: [2012] UKFTT 639 (TC).