SPC  553

SUB-CONTRACTOR’S CERTIFICATE – Revenue refusing on account of the failure to comply with two stated conditions – whether on being satisfied about those conditions the Revenue can raise the non-compliance with a third condition which is particularised on the day before the hearing – no (except when arising out of new facts put forward by the Appellant in showing compliance with the first two conditions)
PRACTICE – sub-contractor’s certificate – condition relating to compliance with obligations under Tax Acts – whether to strike out the Revenue’s investigations on the basis that the Appellant had no obligations – no

THE SPECIAL COMMISSIONERS

	SUB-CONTRACTOR	Appellant

	- and -

	THE COMMISSIONERS OF HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in private in London on 3 March 2006 and 23 May 2006

Giles Goodfellow QC, counsel, instructed by BNB Tax Consultants, for the Appellant

Tim Eiche, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006
Note.  It is understood that this appeal is not proceeding further.  The Presiding Special Commissioner has authorised publication of this anonymised report of decisions on two preliminary issues.

ANONYMISED DECISION ON FIRST PRELIMINARY ISSUE

1.	In the course of an appeal by Sub-Contractor against refusal to grant it a sub-contractor’s certificate, following a preliminary hearing on 1 March 2006 I directed as a preliminary issue:
The hearing on 3 March 2006 is to be limited to (a) (if not agreed before the hearing) whether the turnover test is satisfied by the Appellant, and (b) whether it is open to the Respondent to raise the issue of the compliance test (but not the issue of whether or not the Appellant has complied with the compliance test).
2.	Point (a) was agreed in favour of the Appellant before the hearing and accordingly I considered point (b) only.  The issue arises in relation to the refusal of the Revenue to grant a subcontractor’s certificate to the Appellant.  The Appellant was represented by Mr Giles Goodfellow QC, and the Revenue by Mr Tim Eicke.
3.	I agreed to a hearing in private.
4.	I am deciding the preliminary issue on the basis of the following facts:
(1)	On 12 July 2005 the Appellant started business including the furnishing (or arranging for the furnishing) of labour in carrying out construction operations.
(2)	On 29 September 2005 it applied for a CIS 5 certificate on the basis of a predicted annual turnover of £4m. Further information was requested by the Revenue and supplied on 7 October 2005.
(3)	On 8 November 2005 the Revenue directed that s 562(8) to (14) of the Taxes Act 1988 shall apply to the directors of the Appellant.  Completed forms were returned on 10 November 2005.
(4)	On 15 November the Revenue gave formal notice of refusal of the application for the certificate.  A covering letter gave as reasons (a) that the Appellant did not satisfy the business test because it did not carry out construction work in the UK and did not provide labour for such construction work; it was considered to have a factoring arrangement with its clients and any contractor would be paying it as a nominee for the client; and (b) that it did not satisfy the turnover test because the payments received represent the turnover not of the Appellant but of its clients.
(5)	On 6 December 2005 the Appellant appealed and elected for the appeal to be heard by the Special Commissioners.  On 10 January 2006 the Appellant discovered that the case had not been referred to the Special Commissioners.  It applied on 12 January 2006 for an expedited hearing which the Revenue opposed but the Special Commissioners granted on 19 January directing 3 March 2006 as the hearing date.
(6)	On 10 February 2006 the Revenue said in a letter “You will appreciate that no consideration has yet been given to whether [Sub-Contractor] would pass the compliance test…I will now run the compliance tests for the company.”
(7)	The parties were unable to agree directions and applied for a directions hearing which I was able to deal with only on 1 March 2006 as I had been away during the previous week.
(8)	On 27 February 2006 the Revenue agreed that the Appellant satisfied the business test, and on 2 March 2006, as a result of further information submitted following the directions hearing, that it satisfied the turnover test.
(9)	At about 1.45 pm on 2 March 2006 the Revenue faxed a two-page list of compliance failures to the Appellant.
5.	Mr Giles Goodfellow QC, for the Appellant, contends:
(1)	The reasons for refusal of the certificate now being agreed by the Revenue to be wrong the appeal should be allowed.
(2)	It would be unfair to allow the Revenue to raise allegations of failure to comply with the compliance conditions at this late stage.  In exercise of their power to give such directions as appear necessary or desirable so as to enable proceedings to be disposed of expeditiously, effectively and fairly (Regulation 9 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994).  The Revenue are putting forward a different factual case from the one on which they based their refusal to grant the certificate, which will require a substantial amount of investigation and time at a hearing, and which could have been raised at the time of the original decision.  If they are allowed to raise them the hearing will have to be adjourned, causing further delay and frustrating the purpose of the expedited hearing.
(3)	Helpful guidance can be obtained from the High Court’s practice in deciding whether to allow late amendments under CPR Pt 17.3.7.  These include the burden being on the party seeking to justify the amendment; the likely impact of the proposed change on the trial date; the impact of the trial date being vacated on the Tribunal’s time and on other litigants; the likely prejudice to the other side of vacating the trial date, or conversely of not allowing the amendment; non-monetary considerations; the conduct of the parties and the prospect of the amendment being successful.  On such basis the amendment should not be allowed.
6.	Mr Tim Eicke, for the Revenue, contends:
(1)	The preliminary issue is fundamentally misconceived; the compliance condition is a statutory test, not something that the Revenue are raising.
(2)	Parliament requires the Board to be satisfied that all the conditions are satisfied and the Board does not have any power to waive this.
(3)	On an appeal the Special Commissioner must also be satisfied that all the tests are fulfilled, whether or not the Revenue considered them in making the original decision.
(4)	The Appellant can have no legitimate expectation that a public authority will act contrary to the terms of a statute (R v Secretary of State for Education and Employment ex p Begbie [2000] 1 WLR 1115).
7.	The following provisions of the Taxes Act 1988 are relevant:
“559 Deductions on account of tax etc from payments to certain sub-contractors
(1) Subject to the following provisions of this section, where a contract relating to construction operations is not a contract of employment but—
(a)	   one party to the contract is a sub-contractor; and
(b)	   another party to the contract (“the contractor”) either is a sub-contractor under another such contract relating to all or any of the construction operations or is a person to whom section 560(2) applies,
this section shall apply to any payments which are made under the contract and are so made by the contractor to—
		(i)	   the sub-contractor;
(ii)	   a person nominated by the sub-contractor or the contractor; or
(iii)	   a person nominated by a person who is a sub-contractor under another such contract relating to all or any of the construction operations.
(1A) Subsection (1) above shall not apply to any payment made under the contract in question that is treated as earnings from an employment by virtue of Chapter 7 of Part 2 of ITEPA 2003 (agency workers).
(2) Subsection (1) above shall not apply to any payment made under the contract in question if the person to whom it is made or, if it is made to a nominee, each of the following persons, that is to say, the nominee, the person who nominated him and the person for whose labour (or, where that person is a company, for whose employees’ or officers’ labour) the payment is made, is excepted from this section in relation to those payments by virtue of section 561.
(3) ...
(3A) Subsection (1) above shall not apply to a payment made under any contract if such conditions as may be prescribed in regulations made by the Board are satisfied in relation to the payment and the person making it.
(4) On making a payment to which this section applies the contractor shall deduct from it a sum equal to the relevant percentage of so much of the payment as is not shown to represent the direct cost to any other person of materials used or to be used in carrying out the construction operations to which the contract under which the payment is to be made relates; ...
(4A) In subsection (4) above ‘the relevant percentage’, in relation to a payment, means such percentage (not exceeding the percentage which is the basic rate for the year of assessment in which the payment is made) as the Treasury may by order determine.
…
561 Exceptions from section 559
(1) Subject to the provisions of regulations under ...5 section 566(2), a person is excepted from section 559 in relation to payments made under a contract if a certificate under this section has been issued to that person and is in force when the payment is made, but—
(a)	   where the certificate has been issued to a person who becomes a partner in a firm, that person is not excepted in relation to payments made under contracts under which the firm or, where a person has nominated the firm to receive payments, the person who has nominated the firm is a sub-contractor; and
(b)	   where a certificate has been issued to a person as a partner in a firm, that person is excepted in relation only to payments made under contracts under which the firm or, where a person has nominated the firm to receive payments, the person who has nominated the firm, is a sub-contractor.
(2) If the Board are satisfied, on the application of an individual or a company, that—
(a)	   where the application is for the issue of a certificate to an individual (otherwise than as a partner in a firm), he satisfies the conditions set out in section 562;
(b)	   where the application is for the issue of a certificate to a person as a partner in a firm, that person satisfies the conditions set out in section 562]if he is an individual or, if a company, the conditions set out in section 565 and, in either case, the firm itself satisfies the conditions set out in section 564;
(c)	   where the application is for the issue of a certificate to a company, the company satisfies the conditions set out in section 565 and, if the Board have given a direction under subsection (6) below, each of the persons to whom any of the conditions set out in section 562 applies in accordance with the direction satisfies the conditions which so apply to him,
the Board shall issue to that individual or company a certificate excepting that individual or company (or, in a case falling within paragraph (b) above, that individual or company as a partner in the firm specified in the certificate) from section 559.
(3) References in subsection (2) above to an individual, a company or a firm satisfying conditions set out in section 562, ...564 or 565 include, in relation to a condition which may, by virtue of a provision of that section, be treated as being satisfied, references to that individual, company or firm being treated as satisfying that condition.
(4), (5) ...
(6) Where it appears to the Board, on an application made under subsection (2) above by a company, that the company—
(a)	   was incorporated on a date within the period of three years ending with the date of the application; or
(b)	   has not carried on business continuously throughout that period; or
(c)	   has carried on business continuously throughout that period but the business has not at all times in that period consisted of or included the carrying out of construction operations; or
(d)	   does not at the date of the application hold a certificate which is then in force under this section;
the Board may direct that the conditions set out in section 562 or such of them as are specified in the direction shall apply to the directors of the company and, if the company is a close company, to the persons who are the beneficial owners of shares in the company or to such of those directors or persons as are so specified as if each of them were an applicant for a certificate under this section ...
In this subsection “director” has the meaning given by section 67 of ITEPA 2003.
(7) Where it appears to the Board that there has been a change in the control of a company holding or applying for a certificate, the Board may make any such direction as is referred to in subsection (6) above.
(8) The Board may at any time cancel a certificate which has been issued to a person and is in force under this section if it appears to them that—
(a)	   it was issued on information which was false;
(b)	   if an application for the issue of a certificate under this section to that person were made at that time, the Board would refuse to issue a certificate;
(c)	   that person has permitted the certificate to be misused; or
(d)	   in the case of a certificate issued to a company, there has been a change in the control of the company and information with respect to that change has not been furnished in accordance with regulations under section 566(2);
and may by notice require that person to deliver the certificate to the Board within the time specified in the notice.
Section 840 shall apply for the purposes of paragraph (d) above.
(9) A person aggrieved by the refusal of an application for a certificate under this section or the cancellation of such a certificate may, by notice given to the Board within 30 days after the refusal or, as the case may be, cancellation, appeal to the General Commissioners or, if he so elects in the notice, to the Special Commissioners; and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section.
…
565 Conditions to be satisfied by companies
(1) In the case of an application for the issue of a certificate under section 561 to a company (whether as a partner in a firm or otherwise), the following conditions are required to be satisfied by the company.
(2) The company must be carrying on (whether or not in partnership) a business in the United Kingdom and that business must satisfy the conditions mentioned in section 562(2)(a) to (d).
(2A) The company must either—
(a)	   satisfy the Board, by such evidence as may be prescribed in regulations made by them, that the carrying on of its business is likely to involve the receipt, annually in the period to which the certificate would relate, of an aggregate amount by way of relevant payments which is not less than the amount which is the minimum turnover for the purposes of this subsection; or
(b)	   satisfy the Board that the only persons with shares in the company are companies which are limited by shares and themselves excepted from section 559 by virtue of a certificate which is in force under section 561;
and in this subsection “relevant payments” has the meaning given by section 562(2B).
(2B) The minimum turnover for the purposes of subsection (2A) above is whichever is the smaller of—
(a)	   the amount obtained by multiplying the amount specified in regulations as the minimum turnover for the purposes of section 562(2A) by the number of persons who are relevant persons in relation to the company; and
(b)	   the amount specified for the purposes of this paragraph in regulations made by the Board.
(2C) For the purposes of subsection (2B) above a person is a relevant person in relation to the company—
(a)	   where the company is a close company, if he is a director of the company (within the meaning given by section 67 of ITEPA 2003) or a beneficial owner of shares in the company; and
(b)	   in any other case, if he is such a director of the company.
(3) The company must, subject to subsection (4) below, have complied with all obligations imposed on it by or under the Tax Acts or the Management Act in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of, or other information about, the business of the company in respect of periods so ending.
(4) A company which has failed to comply with such an obligation or request as is referred to in subsection (3) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that the conditions mentioned in subsection (8) below will be satisfied.
(5) The company must, if any contribution has at any time during the qualifying period become due from the company under Part I of the Social Security Act 1975 or Part I of the Social Security (Northern Ireland) Act 1975 have paid the contribution when it became due.
(6) The company must have complied with any obligations imposed on it by the following provisions of the Companies Act 1985 in so far as those obligations fell to be complied with within the qualifying period, that is to say—
(a)	  sections 226, 241 and 242 (contents, laying and delivery of annual accounts);
(b)	   ... 
(c)	   section 288(2) (return of directors and secretary and notification of changes therein);
(d)	   sections 363 to 365 (annual returns);
(e)	   section 691 (registration of constitutional documents and list of directors and secretary of oversea company);
(f)	   section 692 (notification of changes in constitution or directors or secretary of oversea company);
(g)	   section 693 (oversea company to state its name and country of incorporation);
(h)	   section 699 (obligations of companies incorporated in Channel Islands or Isle of Man);
(j)	   Chapter II of Part XXIII (accounts of oversea company).
(7)…
(8) There must be reason to expect that the company will, in respect of periods ending after the end of the qualifying period, comply with all such obligations as are referred to in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above.
(8A) Subject to subsection (4) above, a company shall not be taken for the purposes of this section to have complied with any such obligation or request as is referred to in subsections (3) to (7) above if there has been a contravention of a requirement as to the time at which, or the period within which, the obligation or request was to be complied with.
(9) In this section “qualifying period” means the period of three years ending with the date of the company’s application for a certificate under section 561.”
8.	The form of these statutory provisions is that s 559 provides for deductions on account of tax from payments to sub-contractors.  This is subject to the exception in s 561 where a certificate has been granted.  Section 565 provides that in the case of an application for a certificate by a company “the following conditions are required to be satisfied by the company.”  There follows 12 subsections setting out conditions (or definitions relating thereto).  Broadly these comprise three different conditions: relating to the business, to the turnover, and to compliance.  Some of these are drafted as absolute conditions, such as subs (2) relating to the business, although they involve judgment about whether they have been satisfied (such as whether the business is carried on with proper records, from proper premises and with proper equipment, stock and other facilities).  Others are drafted in terms of the Board being satisfied, as in subs (2A) relating to the likely annual turnover.  The compliance conditions is a mixture of both; subs (3) states that the company must have complied with all its tax obligations, but subs (4) treats the company as having satisfied them if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that certain conditions will be satisfied in the future.
9.	In relation to granting of certificates, s 561(2) is drafted in terms that if the Board are satisfied that (in the case of a company) it has satisfied the conditions in s 565, “the Board shall issue to that…company a certificate exempting that…company…from section 559.”.  Subsection (9) provides that a person aggrieved by the refusal of an application for a certificate may by notice given to the Board within 30 days after the refusal appeal to the General or Special Commissioners “and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section.”
10.	If a certificate is refused it means that the Board are not satisfied that the company has satisfied the conditions in s 565.  For the appeal system to work, the taxpayer must know the basis on which the Board are not satisfied, the Revenue must know the taxpayer’s grounds of appeal, and the Commissioners must know what decision they are reviewing.  In this appeal the Board refused the certificate on two grounds, that the Appellant did not satisfy the business test and the turnover test, the reason being given in each case.  That is what this appeal is against.  We now know, but the Appellant cannot have known at the time, that the Board had not even considered the compliance conditions, for the perfectly good reason that if the Appellant failed the other conditions there was no need to look into the detail of compliance, something that involves not only the Appellant but the directors of companies controlled by them, requiring time-consuming work by the Revenue.  If the Board had stated this in the refusal there would have been no problem about their keeping its options open about raising compliance issues.  But they did not.  They now seek to rely on compliance failures that they particularised only at about 1.45 pm on the day before the hearing (although I have no doubt they would have complied with the 9 am deadline that I had set in a direction issued the day before if the officer’s train had not been delayed by snow), and even then one relevant company is unnamed (the name being given at the hearing) and it is stated that the numbers of failures to file vouchers are based on a three-month sample but at the hearing they would rely on the entire qualifying period.
11.	Mr Goodfellow characterises this an analogous to a late amendment of pleadings; and Mr Eicke as a case of the Revenue not being able to waive conditions laid down by Parliament.  Implied in their different approaches is that (from Mr Goodfellow’s point of view) the Revenue must be taken to have been satisfied about the compliance conditions in refusing the certificate on other grounds and are now trying to amend their reasons for refusal, and that (from Mr Eicke’s point of view) the Revenue have only just, on being satisfied that they were wrong in refusing the certificate on the two stated grounds, turned their attention to the compliance conditions, which they are bound to do in the proper exercise of their statutory duty.  Given their different factual starting points both approaches are entirely reasonable.  What seems significant to me is that the Appellant had no means of knowing before 10 February 2006, when they were first told, that the Revenue had not previously turned their minds to compliance conditions.  Unless the Revenue make clear that they had not considered the compliance conditions it seems to me that the Appellant was entitled to expect that the stated reasons for refusal are the only reasons.  If this were not the case the appeal system would be unworkable, as is well illustrated by this appeal.
12.	Mr Eicke seeks to avoid this result in the following way, quoting from his skeleton:
“Even a ‘decision’ (if only by omission) not to consider, in this case, the compliance test amounts to a ‘relevant decision’ which must be reviewed and, if now erroneous, it is for the Special Commissioner to ‘put himself in into the shoes’ of HMRC and decide for himself whether all three statutory tests are satisfied.”
I do not agree.  If the decision was to delay looking into the compliance conditions until it was clear that they might be relevant because the Appellant satisfied the other conditions, it is not a decision that I would want to change on review; it was clearly a correct and sensible decision.  I entirely agree with him that there is no obligation on the Revenue to consider all the conditions at the same time or to waste time on investigations into something that might not arise.  My objection to the decision is not that they made it, but that they did not tell the Appellant that they had made it.  As to his submission that I should put myself into the shoes of the Revenue and decide for myself whether all three statutory conditions are satisfied, I do not consider that this is my task on an appeal which is to review the reasons that are stated for refusal of the certificate.  
13.	I would make one exception to the conclusion that the Revenue are limited to the reasons given for the refusal to grant a certificate (unless they make it clear that there are other matters that they have not yet considered).  If in the course of considering representations by the taxpayer about the satisfaction of the conditions on which the refusal was based, matters come to light which demonstrate that other conditions are, or may not be, satisfied the Revenue are entitled, and bound, to investigate these as new facts (I believe that this was the case in Hudson Contract Services Limited v HMRC [2005] STC (SCD) 740).  In this appeal in the course of demonstrating that the turnover conditions were satisfied the Appellant has given details of receipts from 12 July to 29 September 2005.  It seems that the Appellant is the successor company to Predecessor Limited which went into administration and between those dates 71 contractors must have paid the Appellant without asking to see a CIS card or certificate.  The Revenue accept that this may be a failure by the contractors, which is irrelevant to the Appellant’s compliance, but they request an “explanation of what was said to contractors (either when invoicing them or when informing them that it has taken over the business of Predecessor Limited or when disclosing that it acted as principal to the consultancies) which satisfied those contractors that they were entitled to make gross payment to [the Appellant].”  In my view this is a proper investigation into a possible infringement by the Appellant of the compliance conditions.
14.	The effect of my decision is that if the parties agree, or I subsequently determine, the point in the previous paragraph in favour of the Appellant, the appeal will be allowed when there are other compliance conditions which may not be satisfied.  I would then be indirectly granting a certificate knowing that the statutory conditions which “are required to be satisfied by the company” (s 565(1)) may not be satisfied.  I do not think I can take this into account.  I would not be giving effect to a legitimate expectation that the Revenue will act contrary to the statute (which I have no power to do).  I would be determining an appeal against the Revenue’s stated grounds for refusing a certificate, which the Revenue now concede are wrong.  Whether the Revenue could immediately revoke the certificate, as Mr Eicke suggested, is not something on which I need speculate.
15.	Accordingly the answer to preliminary issue (b) is that the Revenue are entitled to raise compliance conditions only so far as they arise out of the information supplied by the Appellant in showing that the turnover condition is satisfied.  I therefore adjourn the appeal for this to be decided if the parties cannot agree it.
16.	In outlining the facts I have not included the many references by the Appellant to the Revenue of the commercial necessity of having a certificate and of the cash flow problems caused by the time taken in dealing with the application.  Part of the delay (from 6 December 2005 to 10 January 2006) could have been avoided if the Appellant had itself registered the appeal with the Special Commissioners immediately on giving notice of appeal, which I mention in case it assists other taxpayers in this position. Since appeals against refusals of sub-contractors certificates are of a different nature to appeals in relation to tax for some past period the Special Commissioners will do their best to arrange speedy hearings of such appeals.

ANONYMISED DECISION ON SECOND PRELIMINARY ISSUE

17.	This is a decision on a second preliminary issue of law, the first issued on 7 March 2006 [set out above] in which I decided that the Revenue could not later raise reasons for refusing a sub-contractor’s certificate that were not given in the decision refusing the certificate, subject to the exception mentioned below.  I was told that this decision is under appeal.  Mr Giles Goodfellow QC appeared for the Appellant and Mr Tim Eicke for the Revenue.
18.	My first decision stated that [paragraph 13 above was quoted].
19.	The Revenue’s letter of 21 April 2006 said that they are contacting the contractors who made payments to the Appellant and set out the grounds on which they contend that the Appellant was in breach of the compliance conditions:
(1)	Failing to produce a registration card pursuant to Regulation 7F(2) of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 on each occasion that a payment was received; or
(2)	If the Appellant sub-contractor was unable to produce a certificate then s 559 of the Taxes Act 1988 applies and the sub-contractor is obliged to produce a registration card pursuant to Regulation 33(3).
20.	Pursuant to a direction I made following a preliminary hearing on 11 May 2006 the Revenue have produced the replies they received from the paying contractors. Mr Eicke’s skeleton instances the following examples of failures by the Appellant to comply with the compliance conditions:
(1)	A certifying document on the Appellant’s notepaper and signed by the Operations Director, states “This letter is to certify that Predecessor Limited is a holder of a valid CIS5 certificate under the Construction Industry Scheme.”  The certificate number and its start and expiry dates and the company number of Predecessor Limited are given.  It goes on to say “Notice of Secondary Bank Account.  Under Regulation 43(2) [which, it seems, should be 34(2)] of the Income Tax (Subcontractors in the Construction Industry) Regulations 1993, I give the following details and confirm that this bank account is in the name of this company.”  Details of an account in the name of Barclays Bank is given, which I understand is the Appellant’s account.  This document was given to a company which is not one of the 71 contractors.
(2)	A similar certifying document was provided to G Limited for which the director of that company recalled that “he had been provided with CIS5 documentation to make payment in full.  [The director] quoted the name [Predecessor Limited] in relation to the CIS documentation.”  If this is the document in my papers it is a certifying document issued on Predecessor Limited paper giving that company’s bank details relating to an account with HSBC.  G Limited is not one of the 71 contractors.
(3)	A certifying document issued by E Limited to I Limited and signed by a Director, and stating at the end that “E Limited is acting as a nominee for [the Appellant].”  The details of E’s certificate are given with details of the Appellant’s bank account with Barclays, and there is added “Please refer to IR14/15 (CIS) Booklet, page 22, section 5.9.” [This deals with a bank account operated by a debt factor, which is designated “name of factor, account name of subcontractor, and states that payment may be made without deductions although the debt factor does not have a certificate].  I Limited is one of the 71 contractors.
(4)	A certifying document issued by E Limited to M Limited and signed by a Director, and stating at the end that “E Limited is acting as a nominee for [the Appellant].”  The details of E’s certificate are given with details of the Appellant’s bank account with Barclays, and the same reference to IR14/15 is added.  M Limited is one of the 71 contractors.  
(5)	The Appellant wrote a final demand letter on 17 August 2005 to L Limited relating to a debt due to Predecessor Limited.  L Limited is not one of the 71 contractors.
21.	Mr Goodfellow contends in outline:
(1)	Nether Regulation quoted in the letter of 21 April 2006 imposes an obligation on the Appellant, or alternatively it is not one of the “obligations imposed on [the Appellant] by or under the Tax Act or the Management Act in respect of periods ending within the qualifying period” (s 565(3)), because the obligations do not relate to a period. 
(2)	Regulation 7F imposes obligations on the contractor not the sub-contractor.  These arise when the sub-contractor is using the registration card and the sub-contractor is “required to do so.”  The Appellant did not hold a registration card and was not required by the contractors to produce one.
(3)	Regulation 33 imposes obligations on the contractor only when a person is using a gross payment certificate; it is incidental to the contractor’s duty to satisfy himself of the matters set out in Regulation 33(2); it arises only where the contractor required production; and failure to produce does not involve a breach of obligation by the sub-contractor; it merely has the consequence that s 559 applies to the payment obliging the contractor to deduct and account for the appropriate percentage.
(4)	None of the instances quoted above relates to the Appellant.  They all relate to Predecessor Limited which continued to hold a certificate (Mr Eicke disputes that the certificate is valid after it ceased to trade).  If payments were made to the Appellant’s bank account it was because Predecessor Limited no longer had a bank account and such payments were accounted for to the Administrator of Predecessor Limited.
(5)	The Revenue’s grounds have no foundation in law and the Tribunal to give a preliminary decision on this point.
22.	Mr Eicke contends in outline:
(1)	It is either implied into the Regulations or is derived from the obligation not to act negligently or fraudulently in s 36 TMA 1970 that the Appellant has a duty when asked for a is CIS card or certificate at a time at which they did not hold either, to inform the contractor that they do not hold the necessary certificate.
(2)	The failings outlined above cannot be described as “minor and technical” because they go to the very heart of the scheme and show a patent disregard of the requirements of the scheme by the Appellant’s directors.  Also because of such disregard there is no “reason to expect” that the Appellant will respect its obligations under the scheme in future (s 565(8) of the Taxes Act 1988).
(3)	The purpose of the reference to a period in s 565(3) was to limit the period for which obligations had to be satisfied, not to exclude obligations not relating to a particular period.
(4)	There should be a full factual enquiry but the appeal should be stayed until after the appeal on my first decision when the full extent of the factual matters in dispute is known.
23.	As will be seen from the summary above the Revenue’s enquiries have been wider than the 71 contractors who had paid the Appellant for the Appellant’s own services and the alleged failures have included payments made in respect of Predecessor Limited to the Appellant’s bank account.  Although I had assumed that the Revenue’s enquiries would be restricted to the 71 contractors, my previous decision related to matters of which the Revenue were aware from their enquiries about the turnover condition, of which I instanced the payments by 71 contractors.  Accordingly I do not consider that the Revenue have acted outside by previous decision in raising these possible compliance failures.
24.	As I am not concerned about possible compliance failures by Predecessor Limited, I need to understand the relationship between the two companies to determine whether the Appellant has defaulted.  Although it has not been referred to, among my papers is an agreement of 12 July 2005 for sale by Predecessor Limited of its business and assets to the Appellant.  The agreement includes the sale of Predecessor Limited’s trading debts to the Appellant.  If this is found as a fact it means that the Appellant received in its own right payments for invoices issued by Predecessor Limited, rather than that Predecessor Limited was asking for payment with the Appellant’s notepaper being used in error, or that the Appellant received payments into its bank account on behalf of Predecessor Limited.  Neither party has addressed me on the extent of the Appellant’s obligations on this basis and I am not prepared to decide without hearing argument that anything relating to Predecessor Limited invoices is irrelevant to whether the Appellant has complied with its obligations.  
25.	On Mr Goodfellow’s contention that obligations not relating to a specific period are irrelevant, I prefer Mr Eicke’s interpretation that the purpose of referring to “obligations imposed on [the Appellant] by or under the Tax Act or the Management Act in respect of periods ending within the qualifying period” (s 565(3)) is to limit the period to which the obligations relate, not to exclude obligations that do not relate to a period.
26.	Accordingly I do not consider that I should accept Mr Goodfellow’s contention that the Revenue’s grounds have no foundation in law and that I should direct that they issue a CIS 5 certificate to the Appellant.  I agree with Mr Eicke that there should be a hearing to determine the facts and to decide whether the Appellant has satisfied the compliance conditions in this respect, but I do not consider that that this should wait until after the appeal against my decision of the first preliminary issue.  If the Revenue succeed in the appeal there will need to be investigation of further facts with a consequent additional hearing, but if the Appellant succeeds and in the meantime the issue of these possible compliance failures has been resolved in the Appellant’s favour, it seems to me that it will be entitled to a certificate (although I understand that Mr Eicke disputes this).  Bearing in mind the time that has elapsed since the Appellant applied for a certificate that was refused on grounds that the Revenue accept were wrong, I consider that this issue should be resolved as soon as possible and not wait for an appeal.  As was urged on me by the Revenue in another case “[T]he normal rule in relation to an order of the court [is] that it was treated as valid and be obeyed until it was set aside...” (Crown Prosecution Service v T, The Times, 13 April 2006, concerning an ASBO which the Judge believed: “was invalid and unenforceable as being too vague, lacking in clarity and being too widely drawn, etc”; it was held that the order had to be treated as valid (although the clarity of the order affected the issue of enforcement).)
27.	The way forward is to have directions for a hearing to resolve these issues.  I invite the parties to endeavour to agree directions failing which either party may apply to the Clerk to the Special Commissioners for a directions hearing which I shall endeavour to fit in without delay.
28.	I hope it is in order for me to add one point clarifying my earlier decision because Mr Eicke’s skeleton suggests that he has misunderstood it in one respect, and this could be a matter relevant to the appeal.  When I said: 
“As to his [Mr Eicke’s] submission that I should put myself into the shoes of the Revenue and decide for myself whether all three statutory conditions are satisfied, I do not consider that this is my task on an appeal which is to review the reasons that are stated for refusal of the certificate”
what I meant was that I did not consider it to be my role to conduct a fresh enquiry about whether all three statutory conditions were satisfied even though they were not reasons for which the certificate was refused.  I did not mean that I considered that I had only a judicial review type of jurisdiction.  I meant that my appellate jurisdiction was restricted to reviewing (in the sense of being able to substitute my own decision for) the reasons stated for refusing the certificate.  As Mr Goodfellow pointed out, “review” is used elsewhere in tax legislation, notably in s 741 of the Taxes Act 1988, and has always been construed to allow the Special Commissioners to substitute their own decision as an appellate, rather than judicial review type, jurisdiction.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 7 March 2006

SC 3012/06

Authorities referred to in skeletons and not referred to in the decision:
Woods v Chaleef [1999] EWCA 1522
Kettleman v Hansel Properties [1987] AC 189
Woldwide Corporation  Ltd v GPT Ltd [1998] EWCA Civ 1894.