25/06/2018
JP Whitter (Water Well Engineers) Ltd v Revenue and Customs Commissioners [2018] UKSC 31, [2018] All ER (D) 62 (Jun)
The Supreme Court has ruled that the HMRC does not have to consider the impact on a company’s business when deciding whether or not to cancel a company’s registration for gross payment under the Construction Industry Scheme (CIS).
What is the CIS?
The CIS was introduced in the 1970s in an effort to reduce what was seen as widespread tax evasion within the construction industry. The scheme requires subcontractors to be subject to a flat-rate deduction of tax. This ensures that over the course of 12 months, subcontractors will pay the correct amount of tax. However, an organisation can apply to register for gross payment status if they can show an exemplary record of tax compliance. This provides an advantage in terms of cash flow, as they can receive payment for their services without the deduction, in the same way as other businesses. In addition, it can make them more attractive to employers, who do not have to cope with working out the deductions when paying invoices.
HMRC periodically reviews subcontractors who appear on the gross payment status register to check whether they remain compliant. If they fall below the required standard, the tax department can remove them from the register.
The facts of the case of JP Whitter (Water Well Engineers) Ltd v Revenue and Customs Commissioners
The appellant is a company of water-well engineers. It had repeatedly failed to account for PAYE on time, due to its long-standing use of a payroll system that automatically resulted in paying PAYE at least a few days late.
HMRC began to raise objections to this in 2009, twice removing gross payment status but then restoring it after appeals. In 2011, HMRC removed gross payment status and this time refused the appellant’s appeal, giving rise to this litigation.
JP Whitter stated that if its gross payment registration was cancelled, its major customer would be lost, and it would be unable to tender for large commercial work. As a result, it would lose over 60% of its turnover and would have to make 20 of its 25 employees redundant.
The issue for the court was whether HMRC was obliged to consider the impact on a business if gross payment status was lost.
The decision of the Supreme Court
The Supreme Court upheld the decision made by the Court of Appeal that HMRC was not required or permitted to consider the potential impact on a subcontractor of losing gross payment status when deciding whether or not to remove that status. However, HMRC had discretion because “some element of flexibility may be desirable in any enforcement regime to allow for cases where the failure is limited and temporary (even if not within the prescribed classes) and poses no practical threat to the objectives of the scheme”.
As it was accepted that the status of being registered for gross payment was itself a bundle of rights that counted as a possession for the purpose of Article 1 of Protocol 1 of the European Convention on Human Rights, the Supreme Court had to decide on whether HMRC acted proportionately. The court held it was, with Lord Carnwath stating:
“Registration is a privilege conferred by the legislation, which has significant economic advantages, but it is subject to stringent conditions and the risk of cancellation. The impact on the company is no different in kind from that which is inherent in the legislation”.
What this case means for subcontractors
This case confirms that construction subcontractors who have been granted gross payment status need to be vigilant in their compliance with HMRC rules and policies. Although the HMRC does have discretion when it comes to deregistering a business, this discretion cannot and should not be based on any negative impact deregistration would have on the organisation affected.
Fisher Scoggins Waters are experts in construction, manufacturing, and engineering law, based in London. If you would like more information on construction contract disputes, please phone us on 0207 993 6960.