JP Whitter (Water Well Engineers) Ltd v Revenue and Customs [2018] UKSC 31

A water well engineering company lost its gross payment status under the Construction Industry Scheme due to late PAYE payments. The Supreme Court held HMRC was not required to consider the cancellation's business impact, dismissing the appeal on statutory construction and human rights grounds.

Facts

JP Whitter (Water Well Engineers) Ltd was a family-run business established in 1972, employing around 25 people with an annual turnover of approximately £4.4m, much derived from contracts with a small number of major customers. It had been registered for gross payment under the Construction Industry Scheme since approximately 1984. Following earlier cancellations in 2009 and 2010 (both reinstated on appeal), the company was late in making PAYE payments on seven occasions between August 2010 and March 2011, one delay being at least 118 days. On 30 May 2011, HMRC cancelled its gross payment registration under section 66 of the Finance Act 2004, without taking account of the likely effect on the company’s business.

The First-tier Tribunal found that cancellation would likely result in the loss of around 60% of the company’s turnover and dismissal of about 80% of its employees, with recovery expected to take around ten years. The FTT allowed the appeal, but the Upper Tribunal and Court of Appeal reversed that decision.

Issues

The Supreme Court had to determine:

• Whether the discretion conferred on HMRC by section 66(1) of the Finance Act 2004 to cancel registration for gross payment required or permitted consideration of the likely impact of cancellation on the taxpayer’s business.
• Whether cancellation, without consideration of such impact, constituted a disproportionate interference with the company’s rights under Article 1 of the First Protocol to the European Convention on Human Rights (A1P1).

Arguments

Appellant (the company)

The company argued that the discretion in section 66 should be taken at face value as unfettered, and that absent a contrary indication, the consequences of exercising a power must be assumed to be a relevant consideration. It was contrasted with Schedule 56, para 9 of the Finance Act 2009, which expressly limits consideration of a taxpayer’s ability to pay. The company relied on the common law principle of proportionality as expressed by Lord Denning MR in R v Barnsley Metropolitan Borough Council, Ex p Hook, and on A1P1, citing Lindsay v Customs and Excise Comrs and Bank Mellat v HM Treasury (No 2) to submit that proportionality requires assessment of the severity of consequences for the particular individual.

Respondent (HMRC)

HMRC supported the Court of Appeal’s reasoning. On A1P1, HMRC argued that rights flowing from registration were subject to the conditions of the statutory scheme and relied on the distinction drawn in JA Pye (Oxford) Ltd v United Kingdom between property rights qualified at acquisition and those subsequently deprived. HMRC also invoked the wide margin of appreciation afforded to states in fiscal matters.

Judgment

Lord Carnwath, giving the unanimous judgment, dismissed the appeal. The Court held that the company’s domestic law submission overlooked the basic principle that any statutory discretion must be exercised consistently with the objects and scope of the statutory scheme.

Agreeing with Henderson LJ in the Court of Appeal, Lord Carnwath stated that he could not read the power as extending 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. He emphasised the highly prescriptive nature of the scheme, beginning with narrowly defined conditions for registration in which compliance with tax obligations is a mandatory element allowing no discretion. Those same conditions are imported into the cancellation procedure by section 66.

The fact that the cancellation power is not itself mandatory was described as unsurprising, as some flexibility was desirable for cases involving limited or temporary failures posing no practical threat to the scheme’s objectives. However, a general dispensing power of the kind contended for by the company was wholly inconsistent with the tightly drawn scheme.

On the A1P1 ground, Lord Carnwath acknowledged force in HMRC’s submission that rights conferred by registration could not extend beyond the limits set by the legislation creating them, but found it unnecessary to decide on that basis. Once it was accepted that the statute did not itself require consideration of the impact on the individual taxpayer, there was nothing in A1P1 justifying the court reading in such a requirement. Registration was described as a privilege with significant economic advantages, subject to stringent conditions and the risk of cancellation. The impact on the company was no different in kind from that inherent in the legislation, and the exercise of the power came well within the wide margin of appreciation allowed to the state for tax enforcement.

Implications

The decision confirms that HMRC’s discretion under section 66(1) of the Finance Act 2004 to cancel gross payment registration is confined to matters relating to the requirements for registration and the objective of securing compliance. HMRC is not required (and indeed is not empowered) to take account of collateral consequences such as the financial impact of cancellation on the taxpayer’s business.

The case illustrates the wider public law principle that statutory discretions, even when expressed in apparently unfettered terms, must be exercised consistently with the purpose and scope of the legislation conferring them. It also demonstrates the limited traction of A1P1 proportionality arguments in the context of highly prescriptive tax-enforcement regimes, particularly where the relevant entitlement is itself a creature of statute subject to express conditions.

The decision is significant for sub-contractors in the construction industry who benefit from gross payment status. It confirms that loss of such status, even where commercially devastating, will not ordinarily be reviewable on the basis of its business impact. The ruling reinforces HMRC’s broad latitude in enforcing the Construction Industry Scheme and underscores the importance for taxpayers of ensuring strict compliance with its requirements. The Court left open, without deciding, the question whether rights conferred by registration extend beyond the limits of the statutory scheme for A1P1 purposes.

Verdict: Appeal dismissed. The Supreme Court held unanimously that HMRC was not required to take account of the impact of cancellation on the company’s business when exercising its discretion under section 66 of the Finance Act 2004, and that any interference with the company’s rights under Article 1 of the First Protocol was proportionate and within the wide margin of appreciation afforded to the state in fiscal matters.

Source: JP Whitter (Water Well Engineers) Ltd v Revenue and Customs [2018] UKSC 31