SPC00586

Construction Industry Scheme - whether the Appellant’s business included the furnishing or arranging for the furnishing of labour 562(2)(a)TA 88 - whether the payments made by the Appellant to personal services companies it administered were within section 559(1); whether the Appellant had failed to notify a change of control - meaning of change of control : section 840 and Regulation 42 of the CIS Regulations - whether failure was “in respect of a period” -  effect of section 118 TMA on any failure - whether any failure minor and technical.

THE SPECIAL COMMISSIONERS

	GABEM MANAGEMENT LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	CHARLES HELLIER

Sitting in public in London on 2, 3, 6, 7, 8 and 10 November 2006

Giles Goodfellow Q.C. and Brian Kennelly instructed by McGrigors for the Appellant

Timothy Brennan Q.C. and Akash Nawbatt instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Gabem Management Limited “Gabem” appeals against the refusal of HMRC (or the Revenue) to grant it a “CIS5” certificate.
2.	Sections 559 - 567 TA 1988 (the CIS provisions) create a special regime for payments to sub-contractors under contracts relating to construction operations. Broadly, section 559 requires the payer to deduct tax at 18% on making such a payment unless the payee holds a certificate issued by the Revenue. Such a certificate is usually called a CIS 5 or a CIS 6 certificate. Section 561 sets out the conditions for the issue of such a certificate.
3.	Section 566 provides a power to make regulations inter alia for the issue of registration cards to sub-contractors. These are referred to as CIS 4 cards. They do not permit the payer to pay without withholding but the regulations require a person making a payment within section 559 to inspect the payee’s CIS 4 card before making the payment. On making payment the payer is required by the regulations to fill in a voucher. He gives the voucher to the sub-contractor who can use it as evidence of tax deducted, and makes a return to the Revenue either electronically or by means of copies of the vouchers of the payments made under the scheme. This CIS 4 system provides some assurance to the Revenue that when the payer makes a return to the Revenue of those vouchers, the names of the payees on the vouchers are the names of real persons known to the Revenue.
4.	It can be seen that holding a CIS 5 or CIS 6 certificate affords a sub-contractor much advantage: it can receive payments gross and the payer does not have to become involved in the administration of deduction, vouchers and their reporting. They can therefore be greatly prized. But the conditions for the issue of such a certificate are strict. Among them is a condition that the company has complied with its Tax Acts obligations in respect of periods ending in the three years prior to its application, although there can be an exception if a failure so to comply is “minor and technical”.
5.	Section 561(9) provides for an appeal against the refusal to issue a certificate. It was common ground that, as Lightman J held in Hudson v JDC Services 2004 EWHC 602(Ch), this tribunal is given jurisdiction by that sub-section to consider afresh whether a certificate should be granted and to substitute its judgment for that of the Respondents.
Background
6.	I now need to provide a summary of Gabem’s business in order to explain the reasons given by the Revenue for refusing a CIS 5 certificate, but I shall return later in this decision to set out in greater detail other facts relevant to its business.
7.	Gabem provides a comprehensive administrative, compliance and company secretarial service for personal service companies (PSCs). A PSC is a company all of whose shares are owned by one person and which employs that person (the “worker”) as its sole employee. The PSC’s business consists of providing the worker’s service for reward. Gabem administers, and provides payroll and company secretarial services to, some 60,000 such companies.
8.	I have used the following expressions in this decision with the meaning intended to be attached as shown below:
“Agency”	an employment agency with which the worker has contact and through which an assignment is agreed with an end user;
“User” or “end User” the person who uses the labour of the worker;
“Back-to-back contracts”
two contracts: one between Gabem and the Agency/User for the supply of the worker’s services, and one between Gabem and the PSC under which the PSC agrees with Gabem to supply the services which Gabem has agreed to supply to the Agency/User.
Gabem acting as “ostensible principal”
where the terms of a contract between Gabem and an Agency/User do not indicate that Gabem is acting as agent for a PSC when in fact it is;
Gabem acting as “disclosed agent”
where the terms of a contract between Gabem and an Agency/User indicate that Gabem is acting as agent.
“Gabem Group”	Gabem Holdings Ltd and its subsidiary companies.
“HMRC” or the “Revenue”
			the Respondents.
9.	By providing his services through a PSC rather than directly under a contract of employment, the worker can obtain certain tax advantages. If the user of his labour pays for it at a rate exceeding the minimum wage but the PSC pays the worker the minimum wage only, and pays a dividend to him of its net profit after corporation tax and expenses, the worker can profit as a result of the absence of NI on the return he receives as dividend, and the fact that the rate of tax paid by the PSC on its profits will be less than his normal rate of tax (the dividend effectively attracting no tax unless he is a higher rate taxpayer). The expenses incurred by the worker may also be deductible in determining the overall tax bill when they might not have been had he been a direct employee.
10.	The effect of Gabem’s business is thus to facilitate the obtaining of these tax advantages by the workers.
11.	A worker wishing to provide his services in this way may approach Gabem. He fills in an application form. If accepted by Gabem, Gabem will allocate a new PSC to him and arrange for the issue or transfer of all its shares to him. He will enter into a standard employment contract with the PSC. He will be its only employee. The PSC will have entered into a contract with Gabem (the Services Contract) under which Gabem will provide administrative services to the PSC and through which the supply of the PSC’s services will be governed. The worker will have identified, or will from time to time identify, the user or users of his labour or the employment agency or agencies through which his labour will be supplied to a user. Gabem then makes arrangements with those end User or Agency inter alia for payment to be made for the work done. One of the issues before me was the capacity in which Gabem made those arrangements: whether it made them as agent for the PSC or as principal supported by a back-to-back contract under which the PSC contracted with Gabem to supply the services which Gabem had agreed to supply.
12.	Gabem directs the formation of the PSCs. Two companies outside the Gabem Group, Gabem Services Ltd and Gabem Company Secretarial Ltd assume the role of director and company secretary of the PSC. The worker is neither a director nor company secretary of his PSC.
13.	The worker then does the work. Gabem invoices the end User or Agency. Gabem receives payment into its bank account. Payment is then made from that bank account of:
	(i)	the worker’s wages under his contract with his PSC (after deducting PAYE and NI);
	(ii)	PAYE and NI in respect of those wages;
	(iii)	Corporation tax payable by the PSC on its net profits;
	(iv)	expenses reimbursed to the worker;
	(v)	VAT payable by the PSC;
	(vi)	a dividend to the worker as shareholder.
14.	These payments are not all made immediately: PAYE, NI, corporation tax and VAT liabilities will be due at the end of the relevant statutorily prescribed period. But the worker’s wage and the dividend (determined by reference to his PSC’s profits after making necessary provisions) will be paid to the worker shortly after receipt of funds by Gabem.
15.	Some of the end Users will not be entities engaged in the construction industry. Some workers are teachers. Some are nurses. Currently about 65% of Gabem’s business relates to PSCs providing labour in the construction industry.
16.	But some of the end Users of the workers’ labour are entities engaged in construction operations. On making payment for the work undertaken by a sub-contractor such persons will, making payment to Gabem,  thus be concerned that they fall within the construction industry scheme (the “CIS” scheme) in sections 559 - 567.
17.	Gabem therefore applied for a CIS 5 certificate. It was granted such a certificate in 2003 for a three year period ending on 30 June 2006. It applied for a new certificate on 3 April 2006 and was refused. The Revenue gave the following reasons for that refusal.
18.	First, that one of the conditions (the Business Condition) imposed by section 561 for the grant of a certificate is that the business of the applicant must consist of, or include, the furnishing of, or the arranging for the furnishing of labour. This condition the Revenue said was not met: Gabem’s business was administering companies, not furnishing or arranging for the furnishing of labour.
19.	Second, they said that Gabem had not complied with all its Tax Act obligations in the last three years. They said it failed under two headings:
(i)	that when Gabem made the payments referred to in paragraph 13, it was making payments within section 559 and so should have deducted tax, inspected the PSC’s CIS 4s (which the PSCs did not have), provided vouchers and made relevant returns. It had done none of these things. (I refer to this as the “Section 559(4) Issue”); and
(ii)	that in 2003 the control of Gabem had changed. Regulation 42 of the regulations made under section 566 required such a change of control to be notified to the Revenue. It had not been. (I refer to this as the “Regulation 42 Issue”).
20.	In neither case, the Revenue said, was the failure minor and technical, and Mr Brennan says that the failures give reason to doubt Gabem’s future compliance with its tax obligations, and that there is no reason to expect that Gabem would comply with all its obligations in future.
21.	The Business Condition and the Section 559(4) Issue both rest on the details of what Gabem does, and in particular its arrangements with the PSCs and the end Users or Agencies. Relevant to some of the argument before me on both issues was whether Gabem acted as agent for the PSCs in its dealings with the end Users or Agencies, or as principal. The Regulation 42 issue is more self-contained. Accordingly, the remainder of this decision is structured as follows:
		Paras	
1.	Further Findings of Fact in relation to Gabem’s business	22 to 24	
2.	Did Gabem Act as principal or agent?	25 to 54	
3.	The Conditions for the issue of a certificate.	55	

4.	The Business Condition		
	(i) the statutory provisions	56 to 59	
	(ii) the parties’ submissions	60 to 63	
	(iii) discussion and conclusions (Case (a), (b) and (c))	64 to 83	
5.	The section 559(4) Issue		
	(i) the statutory provisions	84 to 86	
	(ii) The payments (and their nature)	87 to 98	
	(iii)  The application of section 554 (in each of cases Case (a), Case (b) and Case (c)	99 to 120	
	(iv) conclusion	121 to 122	
6.	The Regulation 42 Issue		
	(a) the statutory provisions	123 to 124	
	(b) further relevant facts	125	
	(c) the arguments	126 to 140	
	(d) conclusion	141 to 142	
7.	The section 118 TMA argument	143 to 147	
8.	The Minor and Technical Defence		
	(i) relevant case law	148 to 161	
	(ii) application to the section 559(4) Issue (Further findings of fact, The Revenue’s acquiescence, Gabem’s adviser’s advise, Lack of obviousness,)	162 to 182	
	(iii) application to the Regulation 42 Issue	183 to 186	
9.	Reason to Doubt
(a) the section 559(4) issue;
(b)  the regulation 42 issue.	187 to 193	
10.	Reason to Expect	194 to 202	
11.	Conclusion	203 to 204	
			
1. Further Findings of Fact in Relation to Gabem’s business
22.	I heard oral evidence and had a witness statement from Trudy Gordon, the Managing Director of Gabem, and from Neil Stokes, the Finance Director of Gabem. I also had bundles of copy documents including copies of Gabem’s brochures, examples of workers’ application forms and contracts with their PSCs, the PSCs’ contracts with Gabem, Gabem’s master contracts with particular agencies and confirmations in relation to specific worker’s services, and of print-outs of invoices delivered by Gabem to the Agencies. I also had copies of correspondence with the Revenue and of certain internal Revenue correspondence. 
23.	Where there was any material dispute in relation to any fact I shall set out the relevant evidence and my conclusions on it. Otherwise I shall set out my findings of fact without reference to their derivation. (I make further findings of fact in other sections of this decision which are specifically relevant to the issues discussed in those sections).
24.	The following findings relate to the period from 2003 up to June 2006. I shall deal with changes after that date where relevant specifically. The statements of fact in “Background” above are also findings of fact from the evidence before me.
(1)	For the services it provides to each PSC Gabem receives a fixed weekly fee from each PSC for each week in which the worker works for the PSC.
(2)	Gabem records the assignments to be undertaken by the worker, receives time sheets from the worker, invoices the Agency or User for the work done - generally at weekly intervals, collects and receives payments, makes the payments as described at paragraph 13 above, performs the necessary calculations, prepares statements to go to the worker, maintains accounting records for the PSC, deals with HMRC on behalf of the PSC and deals with other compliance issues for the PSC. Gabem also arranges insurance for the PSC and offers various other tax and insurance services to the worker.
(3)	Gabem deals with some 600 Agencies and a further 600 Users. In those dealings it plays no part in finding work for the worker or the PSCs: it does not contact Agencies or Users to seek work for the PSCs or the workers, or contact the workers to offer an opportunity for work. Instead, it is the workers who find the opportunities and agree with the Agency or User the place, hours, rates, nature and duration of an engagement.
(4)	When a worker who already has a Gabem PSC finds a new assignment he will normally contact Gabem directly and relay to Gabem the details of the Agency or User. If the Agency or User is one with which Gabem has dealt before, Gabem will then contact the Agency or User to ask for details of the assignment. Gabem will generally then be sent a confirmation schedule by the Agency or User. Sometimes however the first Gabem hears of the assignment is when it receives written details from the Agency or User. In either case when Gabem receives the details from the Agency or User it sends a text message to the worker detailing the main terms of the assignment (e.g. duration, rate, location). The schedule of written details sent to Gabem by the Agency/User will normally provide for acceptance to be notified to the Agency or User by signing and returning the schedule. Subject to the points made below, Gabem usually does this on the day, or the day after the text message is sent.
	Very occasionally Gabem will not accept a proffered assignment - usually because it appears to Gabem from its terms that it is in the nature of an employment contract rather than what Gabem recognises as a contractor relationship.
	Very occasionally the worker queries the terms of the assignment in the text message and Gabem will then discuss the issue with the Agency or User.
	If the Agency or User is new to Gabem, Gabem will send the Agency or User a copy of its Master Agreement. I deal with this in more detail below.
	In some cases Gabem will return the assignment schedule having made certain amendments to it. I deal with this below.
(5)	Gabem endeavours to agree with Agencies and Users that the relations between them will be governed by a Master Agreement. The agreement deals with the detailed terms on which the worker’s services are to be provided to the Agency or User and encompasses issues such as confidentiality obligations and liability. The terms of this agreement are expressed to govern all contracts relating to Gabem PSCs made with the Agency or User. Gabem’s preference is that the Master Agreement should be in its own standard form.
	Some Agencies and Users have accepted the terms of Gabem’s Master Agreement. Gabem maintain a list of such Agencies and Users. Some of these send Gabem assignment schedules which simply state the basic terms of the assignment and which do not purport to change the details of the relevant contract. Such schedules are signed and returned by Gabem. Others send assignment schedules with their own standard terms annexed. These miscreants are identified on Gabem’s list, and Gabem returns the schedules with an endorsement indicating that the previously agreed standard terms apply.
	Other Agencies and Users have negotiated specific standard terms with Gabem. The procedure for these mirrors that for the Gabem Master Agreement users.
	With some Agencies and Users there is no agreement clearly in force at the time the assignment goes ahead. That may be because negotiations are taking place between the Agency/User and Gabem about standard terms of engagement but have not concluded, or because the parties are engaging in a battle of forms. In such cases the assignment proceeds but the assignment schedule is not signed by Gabem.
I deal in (14) below with the capacity in which Gabem is expressed to contract in these agreements (whether as principal or as agent for a PSC). A number of the contracts with the Agencies are made in the name of the PSCs. There were three such examples in the bundle before me. They were signed by Trudy Gordon on behalf of the corporate director of the PSC.
(6)	Apart from issues relating to the negotiation or imposition of standard terms, the procedures undertaken by Gabem are the same whichever of the above categories the Agency/User falls into: whether the relevant terms express Gabem to be acting as principal or as agent for a PSC, Gabem’s procedures and its fees remain the same.
(7)	There have been cases where a worker has agreed the terms of an assignment with an Agency or User at a time when he did not have a relationship with Gabem or his own PSC. A worker may even commence an assignment before he has submitted a membership application form to Gabem. In many such circumstances, Gabem has accepted the application, provided the worker with the shares in his PSC, arranged for him to sign his contract of employment with the PSC and subsequently invoiced the Agency or User for the services provided including those provided before the worker became employed by the PSC. This may happen where the Agency or User suggests to the worker that he might supply his services through a PSC using Gabem during their discussions about the assignment. It did not appear to me that these were exceptional cases but they were not the majority.
	When this happens the procedures followed and actions taken by Gabem do not differ from those taken where the order is more conventional. 
(8)	Gabem invoices the Agencies or Users in its own name. Prior to mid- 2006 its invoices did not identify the relevant PSC or its VAT number, although they did identify the worker whose services were being charged for. (There was some confusion over the documentation before me in relation to this issue. Gabem retains its records electronically and does not retain paper copies of its invoices. The invoices in the bundles before me were printed out from the electronic records but initially they were not printed out in the correct pro-forma style for the time the invoice was sent. This problem once identified was eventually resolved, and I draw my conclusion in this paragraph from the resolved position).
(9)	Separate bank accounts were not kept for the PSCs. Gabem has two bank accounts: one interest bearing account with HSBC and one non-interest bearing with RBS.
	Into the HSBC account are paid all the receipts from Agencies and Users in settling the invoices sent to them. From the HSBC account are paid:
	(i)	to the workers, payments of net salary and dividends;
	(ii)	to HMRC, payment of VAT, PAYE, NI and corporation tax in respect of the PSCs;
	(iii)	the business expenses of Gabem including overhead expenses, and rental paid to Gabem Holdings Ltd (its parent) but not salaries; and
	(iv)	transfers to the RBS account.
	From the RBS account Gabem makes payments in respect of the salaries of its own employees. 
	HSBC have not been told that the monies in the HSBC account are held on trust for, or are otherwise beneficially owned by anyone other than Gabem.
(10)	The employment contracts between each worker and his PSC are in standard form. They have been updated from time to time to reflect changes in law and practice but not in ways material to this appeal. Each worker signs and returns his employment contract, after having made application to Gabem and been allocated his PSC. For work with some Agencies or Users additional terms are added to the employment contract. 
(11)	There is a Services Agreement between each PSC and Gabem in standard form. Each such agreement is signed on behalf of Gabem and the PSC before the PSC is allocated to any worker. These Agreements are drafted by Gabem’s lawyers and updated from time to time. The Services Agreement specifies the services which Gabem is to provide to the PSC. These include the whole of the accounting administrative and company secretarial work of the company and the collection of amounts payable to the company from contractors for which the company has carried out services. They also include, at number 22 in the schedule to the agreement the catch-all “to perform on behalf of the company… all administrative and managerial needs of the company.”
(12)	Gabem Secretarial Services Ltd is the director of all the PSCs. Miss Gordon is a director of it. On behalf of it and the PSCs, she declares dividends to the workers out of the profits of the PSCs. Such dividends are generally paid at around the same time as the worker’s wages and comprise the net profits of the PSC for the relevant period.  Miss Gordon also signed on behalf of Gabem the Services Agreements in the bundle before me and many of the contracts between Gabem and the Agencies or Users.
	The Services Agreements are occasionally updated. The only major change relevant to this appeal has been the inclusion of a new Clause 5 in about July 2003. I shall discuss this clause later.
(13)	A brochure is provided by Gabem to new and potential workers. That brochure explains that the worker will be the only shareholder in, and only employee of his PSC and makes clear that the worker has no authority to act on behalf of his PSC; it indicates that the worker can go to any Agency provided that Gabem “can agree terms of business with them and they can pay Gabem on time on behalf of [his] PSC”. A copy of this brochure is included within a brochure which sent to Agencies.
(14)	Whilst Gabem’s Standard Master Agreement provides that Gabem acts as agent for the PSCs and contracts in that capacity, some of the specific agreements with the Agencies or Users name Gabem alone as the counterparty and do not provide that Gabem acts as agent (although they may permit Gabem to assign or sub-contract). One of the reasons that some Agencies or Users prefer to contract with Gabem, rather than Gabem expressly acting as agent for the PSC, is that the Agency may wish to have a right of recourse against Gabem (and take the benefit of its insurance policies) rather than simply against a fairly insubstantial PSC. Another reason is that some Agencies or Users do not like to make payment to Gabem unless the contract specifies Gabem as their counterparty. There are however Agencies and Users which are not sensitive about the question of how Gabem is expressed to contract: these tend to sign up to Gabem’s Standard Master Agreement.
(15)	Gabem also sends a standard letter to an Agency or User when an arrangement has been made for a worker who is new to that Agency or User to supply services. The letter makes it clear that the worker has no authority to act on behalf of Gabem or the relevant (named) PSC. Gabem also sends a standard letter to new agencies which indicates that Gabem acts as agent for the PSCs.
(16)	Clause 4 of the Services Agreement between a PSC (defined as “the Company”) and Gabem provides as follows:
“4. Agency
4.1	The Company [i.e. the PSC] hereby authorises [Gabem] during the continuance of this agreement as agent for an on behalf of the Company to enter into contracts and arrangements with third parties or their agents (“Agency Engagement Contracts”) for the provision of the services of the Company in consideration of the payment of engagement fees to the Company.
4.2	Except as expressly provided in this Agreement, [Gabem] shall have no personal rights duties obligations or liabilities under Agency Engagement Contracts. The Company shall perform observe and discharge all of its duties, obligations and liabilities under Agency Engagement Contracts and shall indemnify and keep indemnified [Gabem] from and against all loss, damage or liability (whether criminal or civil) suffered and all costs and expenses incurred by [Gabem] resulting from any breach or non-performance of an Agency Engagement Contract or by reason of [Gabem] acting as the agent of the company pursuant to this Agreement unless such loss, damage or liability is suffered or such costs and expenses are incurred by reason of the negligence, wilful default or fraud of [Gabem] or any of its employees, officers or agents.  
(17)	Miss Gordon’s evidence, which I accept, was that it was not considered that the predecessor of this clause permitted Gabem to contract as principal with the Agency or User as some Agencies required Gabem to do. As a result, in July 2003 clause 5 was added to the Services Agreement. That clause provides as follows:
	“5. Direct Engagement
5.1	The Company hereby authorises [Gabem] during the continuance of this Agreement to enter into contracts and arrangements with third parties or their agents as principal for the provision of the services of the Shareholder in consideration of the payment of engagement fees to [Gabem] (“Direct Engagement Contracts”). 
5.2	In relation to each Direct Engagement Contract:
5.2.1		the Company shall provide the services [of] an Operative to perform those services to be supplied under the Direct Engagement Contract and shall perform observe and discharge all of the duties, obligations and liabilities under the Direct Engagement Contract relating to the provision of such services;
5.2.2		[Gabem] shall perform, observe and discharge all other duties, obligations and liabilities under the Direct Engagement Contract and shall indemnify and keep indemnified the Company from and against all loss, damage or liability (whether criminal or civil) suffered and all costs and expenses incurred by the Company resulting from any breach or non-performance of the Direct Engagement Contract unless such loss, damage or liability is suffered or such costs and expenses are incurred by reason of the negligence, wilful default or fraud of the Company, the Operative or the Shareholder.
5.2.3		[Gabem] shall pay to the Company the amount fixed for the provision of the services of the Company under the Direct Engagement Contract for each week or part of the week in which the Operative works under the Direct Engagement Contract (less any fee and VAT payable by the Company to [Gabem] under clause 7 in respect of such work) as soon as reasonably practicable after payment to [Gabem] of such amount by the contractor (or its agent) for whom those services were provided or within two months after the due date for payment of that amount to [Gabem] under the Direct Engagement Contract (whichever is the earlier);
5.2.4		the company shall indemnify and keep indemnified [Gabem] from and against all loss, damage or liability (whether criminal or civil) suffered and all costs and expenses incurred by [Gabem] resulting from any breach or non-performance of its duties, obligations and liabilities under clause 5.2.1.”
(18)	Some of the Agencies and Users who contract for labour to be provided by the PSC’s workers for construction operations contract under Gabem’s Master Agreement and some contract under agreements under which Gabem contracts as principal.
(19)	Gabem’s Standard Master Agreement (for contracting with Agencies or Users) contains the following provisions:

“RECITALS
…..[Gabem] is acting as agent for an on behalf of the [PSCs].
“Assignment” Means a project… for which one or more of the [PSCs] is engaged… to render services to a Client on the terms of this Agreement…
2. THE AGREEMENT
2.1	These Terms constitute the entire agreement and understanding between the [Agency/end User] and [Gabem] and govern all Assignments undertaken during the continuance of this agreement.
…
3. ASSIGNMENTS
3.1 	The [PSC’s] obligations to provide services pursuant to these terms shall be performed by such member or members of the Personnel as the [PSC] may consider appropriate…..
3.5	Upon acceptance by [Gabem] of an Assignment on behalf of [a PSC], the [Agency/User] shall supply [Gabem] with an assignment confirmation note specifying the duration of the assignment, the identity of the [end User], the fees payable by the [Agent/User] and such expenses as may be agreed, and any other relevant information…
5.5	All payments shall be made to [Gabem].
I note that clause 3.5 does not require the identification of the PSC. In the assignment schedules in the bundle before me, the PSC was not always specifically identified.
(20)	Miss Gordon was a director of the company which was director of PSCs. Miss Gordon was also a director of Gabem. I infer that each PSC had the same knowledge of the operation of Gabem as did Miss Gordon.
2. Did Gabem Act as Principal or Agent?
25.	Neither party argued before me that the written agreements between the PSCs and Gabem, or between Gabem and the Agencies or end Users were shams or to be construed otherwise than in accordance with their terms. Neither was it argued that the worker in fact acted as agent for the PSC in his negotiation with the Agency or end User or that Gabem and the PSCs were simply agents for the worker. There were however as noted above examples in the bundles of cases where the worker started work for the Agency, or end User, before he had made his contract with his PSC. Those examples pointed to the fragility of the formal contract structure but (a) because there were also examples of the sequence operating to plan they were not themselves indicative that the properly sequenced agreements were shams, and (b) the cases where the sequence was wrong may result in an unexpected analysis of the position of the worker and the PSC but do not affect the nature of all Gabem’s operations for the purposes relevant to me.
26.	As I have noted above, when Gabem contracted with some Agencies/Users the contract expressed Gabem to be the agent of a PSC; in other contracts with Agencies/Users Gabem was not expressed to act as agent. Mr Goodfellow submitted that in the contracts in which it was not expressed to be agent for a PSC it was nevertheless an agent for a PSC.
27.	Gabem would have been acting as agent for a PSC if: (a) it acted as disclosed agent for a disclosed PSC, or (b) if it acted as disclosed agent for an undisclosed PSC or (c) if it acted as undisclosed agent for an undisclosed PSC.
28.	I was taken to a number of cases in which the question of whether or not a person was acting as agent was considered. From those cases I take the following principles of which the first seven are relevant to the discussion in this section of the decision, and the last relevant to the discussion on sections 4 and 5:
(i)	an agency relationship can only be established by the consent of the principal and agent to what in law amounts to an agency relationship (Garnac Grain Co v H.M.F. Faure 1968 AC 1130 @1137);
(ii)	the consents need not necessarily be to a relationship that the parties understand, or even accept to be that of principal and agent: it is sufficient if they have agreed what amounts in law to such a relationship (Garnac, Branwhite v Worcester Works Finance 1969 1 AC 522);
(iii)	the mere use of the label “agent” will not necessarily constitute an agency relationship: one has to look at the other provisions of any agreement or dealing between the parties to determine whether the parties have consented to the situation in which the law imposes the results of agency. Nevertheless, in a formal document drafted and agreed by lawyers the use of the word “agent” in an appropriate context would be a strong indication that the parties consented to an agency relationship (The Kilmun 1988 2 Lloyds Rep. 1; South Sydney  D RLFC v News Ltd 177 ALC 511 @ para 135).
(iv) 	neither can parties avoid an agency relationship merely by saying it does not exist if the nature of their consent is to confer the relevant authority (South Sydney News para 134).
(v)	in determining whether the parties have agreed what amounts in law to an agency relationship one has to look to what the parties said and did at the time of the alleged creation of the agency. A course of dealing, or earlier or later words or conduct can also have some bearing (Garnac). The nature of other express rights and obligations in a contract can affect whether or not the parties intend an agency relationship (The Kilmun).
(vi)	the doctrine of subsequent ratification applies only where the contracting party has expressly made a contract as agent for another. It does not apply where the contracting party had made the contract as principal without any hint of agency (Keighley Maxsted & Co v Durant 1901 AC 240 see e.g. Lord Robertson at p 259).
(vii) for the doctrine of undisclosed principal to apply the agent must have authority at the time of the contract (Keighley);
(viii)	the existence of an undisclosed principal does not have the effect of creating a contractual relationship between the undisclosed principal and the counterparty which is different from the relationship between the agent and the counterparty. That is why, when an agent contracts without disclosing his agency, he remains liable on the contract (Welsh Development Agency v Export Finance 1992 BCLC 148 at p 173f per Dillon LJ) and can sue and be sued upon it unless the terms of the contract made by the agent exclude those possibilities (Siu Yin Kwan v Eastern Insurance 1994 2 AC 199 at 207).
29.	The Services Agreement governs the relationship between Gabem and a PSC. It was not suggested on behalf of Gabem that there was implied authority given by the PSCs to Gabem nor that there were actions taken by the PSCs which could be taken to be later ratification of actions taken by Gabem or any course of dealings between individual PSCs and Gabem from which consent to an agency relationship could be drawn. On this basis it is only in the terms of the Services Agreement that any relevant consent can be found. It was not suggested that there was any evidence before me that there was any other arrangement or understanding between Gabem and a PSC than that set out in the Services Agreement. The understanding of the Agencies as to the capacity in which Gabem was acting seems to me not to be relevant to whether or not a PSC had given the relevant consent. I therefore look to the terms of the Services Agreement to determine whether any  relevant consent can be found. Clause 4 and 5 of the Services Agreement are the only clauses of that agreement which expressly relate to arrangements to be made with third parties for the provision to them of the worker’s services.
Clause 4 
30.	The PSCs were to all intents and purposes under the thrall of Gabem in relation to the terms of the Services Agreement. That agreement was drafted by Gabem’s lawyers. The only party setting its terms was Gabem. Those drafting it had a free hand and there was little or no evidence of any circumstances surrounding its making which could be treated as evidence of the nature of the agreement or assist with its construction (other than perhaps the knowledge to be imputed to the PSC through Miss Gordon as to how Gabem operated). It seems to me therefore that one should adopt a strict literal approach to the interpretation of its provisions.
31.	Clause 4 is set out at paragraph 24(16) above. I note that:
(i)	clause 4 authorised Gabem to enter into contracts as agent for the PSC. It seems to me that the word “agent” is used carefully to express the authority to be given to Gabem to act for the PSC in forming contracts. This is not a loose use of the word but a use intending to confer authority. I can see nothing in the contract which is inconsistent with such an agency being intended;
(ii)	the authority to which the PSC consents is for Gabem to enter into contracts for the provision of the services of the PSC. It seems to me that a contract for the provision of the services of the worker is properly described as a contract for the provision of services of the PSC;
(iii)	the authority relates to contracts where the provision of the services is “in consideration of the payment of engagement fees to the [PSC]”. This is to be contrasted with the drafting of clause 5, which relates to contracts for which the consideration is the “payment of engagement fees to [Gabem]”.  These words seem to me potentially to impose a limitation on the authority conferred by the PSC on Gabem such that the clause 4 authority does not extend to contracts where payment is to be made to a person other than the PSC;
(iv)	in a hurriedly prepared document it might be appropriate to read “payment to the PSC” as “payment to, or to someone on behalf of the PSC”, or “to the PSC or its agent, Gabem”. But this is not a hurriedly prepared document.
32.	Accordingly, it seems to me that the authority conferred by this clause is not sufficient to enable Gabem to enter into contracts under which Gabem rather than the PSC receives the payment unless, perhaps, Gabem receives it as trustee for the PSC.
33.	But the arrangements under which Gabem operated its HSBC bank account do not have any of the flavour of a trustee arrangement. It may be that if Gabem did receive monies as agent some form of trust would be imposed upon the monies in that account, but that possibility could not weigh in favour of the clause creating the agency which created the trust.
Clause 5
34.	Clause 5 is set out at paragraph 24(17) above. Under it the PSC “authorises” Gabem to contract “as principal” for the provision of the worker’s services, and the PSC agrees to provide those services; Gabem undertakes to perform all the other duties under the contract. Gabem agrees to pay the PSC the amount fixed under the contract for the provision of the services whether or not it receives those monies (but at a generally slightly later date if it does not receive them). There are cross indemnities in respect of their respective obligations under the contract.
35.	Mr Goodfellow says that this clause authorises Gabem to act in its own name but to do so as agent for the PSC. He says that the reference to Gabem contracting “as principal” does not mean that Gabem cannot contract at the same time as a true agent. Gabem needs no authority to contract for itself, so, if all the clause does is to authorise Gabem to contract for itself and in its own name, the initial words signify nothing. He says that if you look at the fundamentals of any relationship under this clause they are the same as they are when Gabem acts as a disclosed agent. Gabem received no extra fee and makes no extra profit from acting as ostensible principal; its fee is still the flat fee from PSC. 
36.	Mr Goodfellow took me to Shell Co of Australia v Nat Shipping Bagging Services Ltd (The “Kilmun”) [1988] 2 Lloyd’s Rep 1. In that case the contract provided that Shell appointed Oremin “as its agent for the performance of certain duties” relating to the acquisition and shipping of alumina, but provided for a fixed commission of $35 per tonne to be paid to Oremin for their performance. Oremin purported to charter a vessel in Shell’s name. The question was whether Oremin had authority to do so. The Court of Appeal held that the contract did not confer such authority on Oremin: the word “agent” was not used to confer such authority and the provisions of the contract - in particular those relating to commission - were consistent only with Oremin undertaking certain obligations as principal remunerated by the commission. Mr Goodfellow says that what was of crucial importance to the question of whether Oremin was an agent or principal was whether the agreement placed it at risk of profit or loss by reference to the difference between the $35 per tonne and the costs it incurred. By contrast he said when Gabem acted under clause 5, Gabem received exactly the same fee as when it acted under clause 4: it was assuming no new financial risk; if you looked at the fundamentals Gabem was just taking an agency fee and should be regarded as acting as agent. The PSC had agreed to what the law recognised as an agency relationship.
37.	He says that there is nothing in the provisions of the clause which is inconsistent with Gabem contracting in its own name but as agent for the PSC; and that is what the PSC was consenting to under this clause. The provisions as to payment merely put Gabem in the position of a del credere agent who is liable to his principal for non-payment by the contracting party.
38.	Mr Brennan agrees that theoretically it would be possible for Gabem to contract as ostensible principal but as agent for the PSC, but says that this clause does not provide the consent of the PSC to Gabem so acting. He says the language suggests a back-to-back contract under which the PSC agrees to provide a worker to perform those services which Gabem has agreed as principal to supply, and that this clause regulates the position of Gabem and the PSC under the separate agreement between them for the supply of the services, rather than granting express authority to Gabem to act as agent for the PSC when contracting in its own name.
39.	I find it relevant that, when Gabem and its lawyers, Penningtons, had virtually a free hand in the drafting of this clause, the clause did not spell out an agency. If that was what was intended it would have been easy to amplify the wording saying for example “to authorise Gabem to contract on behalf of the PSC but using Gabem’s name only in the contract or without specifying the existence of the agency in the contract but to act so as to bind the PSC to the terms of the contract with the third party”.
40.	In favour of clause 5 authorising Gabem to act as agent are the following:
(i)	the words granting “authority” for it so to act which are possibly meaningless otherwise;
(ii)	the similarity of the words of 5.1 to those of 4.1: one authorising Gabem to act as agent for contracts where there is payment to the PSC; the other authorising Gabem to act as principal for contracts where payment is to Gabem;
(iii)	the background which must be taken as understood by both parties, that Gabem took a fixed fee only and did not otherwise participate in the profits of the contract. Its economic position was broadly the same under both clauses (save for the del credere feature and leaving aside the legal effect of the nature of its own obligations).
41.	In favour of the contrary analysis are the following:
(i)	the lack of words which expressly indicate that Gabem is to contract so as to bind the PSC under the Direct Engagement Contract;
(ii)	the contrast between the indemnity given by Gabem in 5.2.2 to the PSC for loss from the “breach or non-performance of the” Direct Engagement Contract (i.e. from Gabem’s breach of that contract); with the indemnity given by the PSC to Gabem under 5.2.4 against the breach by the PSC of its “duties… under clause 5.2.1”(where the PSC does not indemnify Gabem if the PSC fails to comply under the Direct Engagement Contract, but if it fails to perform under the Services Agreement);
(iii)	again, the same contrast but this time between 4.2 and 5.2.4 between the indemnity to Gabem by the PSC for failure to perform the Agency Engagement Contract (in the case of 4.2), and that for failure to perform under the Service Agreement (in the case of 5.2.4);
(iv)	the contrast between clause 4.2 in which the PSC agrees to perform its duties under Agency Engagement Contract, and clause 5.2.1 where the PSC agrees to perform and discharge “the” obligations under the Direct Engagement Contract;
(v)	the provision in clause 14.8 of the Services Agreement which provides that it is agreed that nothing in the Agreement “save as provided in clause 4” makes any party “general or special agent” of the other. (This clause was not drawn to my attention at the hearing, but appeared to be relevant when I was reading the agreement).
42.	On balance I do not believe that the effect of clause 5 is that the PSC grants authority to Gabem to act as ostensible principal but in fact as agent of the PSC in relation to contracts for the provision of a worker’s services: there is too much in the ancillary provisions of the clause suggesting that the PSC’s obligation is to Gabem under the Services Agreement rather than to the Agent or User under the Direct Engagement Contract. Back-to-back contracts would serve Gabem’s economic aim as well as a agency contracts, and although this approach gives less meaning to “authorises” in clause 5 than it has in clause 4, there is some sense in which Gabem is authorised to take actions which will result in obligations of the PSC to Gabem arising under this clause.  I do not see the subsequent performance of these contracts as evincing any course of dealing which points clearly to Gabem acting as agent under clause 5 nor was there any evidence of other words or conduct which could affect the question (in particular I see nothing in the way in which receipts were accounted for which bears clearly on the issue).           	
43.	I am not dissuaded from the conclusion by Mr Goodfellow’s argument in relation to the Shell case. There the type of economic risk undertaken by the claimed agent suggested that it was not an agent. Here the economic return is the same under clause 4 and clause 5. That might suggest an agency relationship but in my judgement cannot be conclusive. If A contracts B who in turn enters into a reciprocal contract with C taking only a fixed fee, that cannot conclusively indicate that B is acting as an agent: the parties’ choice of how they contract and the authority they confer cannot be determined solely by the nature of the turn taken by the middle man. The nature of the reward in Gabem’s case might weigh in favour of agency, but, in circumstances where its commercial position may equally well be achieved by back to back contracts, does not in my view weigh so heavily as to compel a different conclusion from that reached above.
44.	I also note that, as a matter of law, where Gabem contracted with the Agency or User as principal, it could commit the PSC only if the PSC had given authority for Gabem to act as agent beforehand (see para 28 (vi) and (vii) above). It cannot be said that as a result of the PSCs performance of the contract the PSC ratified the contract thereby conferring on Gabem authority to act as agent where Gabem contracted as principal. In this regard although I accept that Gabem’s general notification documentation says that it acts as agent, where a contract with an Agent or User is negotiated naming Gabem as principal only it seems to me that that earlier notification is insufficient notice that Gabem is in fact acting as agent to permit the doctrine of subsequent ratification to apply.
45.	I noted earlier the distinction between clause 4 which gives authority for contracts under which the consideration is to be paid to the PSC, and clause 5 which gives authority for contracts where the fee is to be paid to Gabem.
46.	It does not seem to me that the words of clause 4.1 limit the agency conferred on Gabem to one where it acts expressly as agent for a PSC (whether identified or otherwise). In clause 4.2 it is provided that Gabem shall have no personal rights or obligations under Agency Engagement Contracts. If Gabem were acting as disclosed agent for a PSC then Gabem’s absence of rights or obligations would follow as a matter of law; but if the authority in clause 4.1 enabled Gabem to contract as ostensible principal, then Gabem as a matter of law would have obligations under the contract. Is this an indication that clause 4 is not intended to grant authority to Gabem to act as ostensible principal? It seems to me that it is not: this provision is more apt to be a restriction on the rights and obligations which are expressed to arise under the contract rather than a limitation on the type of agency conferred.
47.	However, in the Services Agreement clauses 4 and 5 seem to me to stand in opposition: clause 4 grants particular agency powers, clause 5 deals with Gabem acting as principal. That opposition suggests strongly to me that the clauses should be regarded as mutually exclusive and that in any putative contract with a third party in which Gabem is expressed to be principal, the contractual term relating to it should be clause 5 and not clause 4 and vice versa. Therefore even if clause 4 taken on its own (i.e. as if it were present in the contract without clause 5) could be construed so as to confer on Gabem authority to act as ostensible principal but as agent for the PSC, the presence of clause 5 changes the interpretation of clause 4 so that properly construed it does not grant Gabem authority to commit the PSC when acting as ostensible principal. Accordingly, even if clause 4 could be construed so that “payment … to the [PSC]” included payment to Gabem it would not in my view apply to grant Gabem to act as agent for the PSC (as ostensible principal).
48.	As a result at this stage I conclude that:
(i)	clause 4 should be construed as giving Gabem authority to act as agent for the PSC but as disclosed agent only, and the authority is probably limited to contracts where the consideration is the payment of engagement fees to the PSC; and
(ii)	in clause 5 it is agreed that if Gabem does contract as principal, then the PSC will  become liable to Gabem under a back-to-back contract, to provide the services necessary to perform that contract. This is limited to contracts where the consideration is payment to Gabem.
49.	Now the copies of the contracts with the Agencies and Users before me in which Gabem was the named counterparty provided for the payment to be made by the Agent or User to be paid to Gabem. That was the case both where Gabem purported (as it does in its master agreement) to act as agent for the PSC, and where it purported to contract as principal.
50.	Thus if clause 4 is limited as I have suggested in its grant of authority, neither a contract as disclosed agent, nor a contract as ostensible principal could be made under the authority given by that clause. And clause 5 provides no authority for a contract in which Gabem acts as disclosed agent. If that is right then when Gabem purports to act under its Master Agreement as agent for a PSC it does so without authority (I noted at paragraph 24(5) above that some contracts of the PSCs with third parties appear to have been made in the name of the PSC. They appear to provide for payment to the PSC. The issue I raise here about Gabem’s Master Agreement is clearly not applicable to those contracts.)  
51.	I raised the question above as to whether “payment … to the [PSC]” could be construed so as to  include payment to Gabem for the benefit as to the whole or in part for the PSC either as a matter of interpretation  as a result of or understanding between the natural persons who were or represented the common directors of the relevant companies or as a result of subsequent ratification of the contract by the PSC. 
52.	I find nothing in the contract which enables such an interpretation. The fact that Trudy Gordon was a director of the company which was a director of the PSCs, and was also a director of Gabem may suggest a common understanding between Gabem and the PSCs which enabled the agency created by clause 4 to extend to contracts which provided for payment to Gabem, but there was no direct evidence before me relating to this issue. Subsequent ratification of a contract is possible where the contracting party has expressly made the contract as agent. The PSC’s acquiescence to the contracts made under Gabem’s Standard Master Agreement may be evidence of such ratification. I conclude that it is possible that Gabem acted as agent for the PSCs in relation to contracts made under its Master Agreement.
53.	Since I have concluded that clause 5 does not grant agency to Gabem, I conclude that contracts made by Gabem in which it was expressed to act as principal took effect as such and resulted in back to back contracts with the PSC.
54.	In the sections below relating to the Business Condition and the Section 559(4) Issue I have, despite the concern expressed above in relation to clause 4, and my conclusion on clause 5, considered the issues in the alternative situation where Gabem (a) acts as disclosed agent (which seems possible), (b) acts as ostensible principal  (which I believe is never the case) and (c) acts as principal with a back to back contract with the PSC (which I find does happen in a number of cases).
3 The Conditions for the issue of a certificate
55.	Section 565 requires the following conditions to be satisfied before a CIS 5 certificate may be granted to a company:
(i)	the Business Condition (see section 4 below);
(ii)	the Turnover Condition - in section 565(2A) - over which there was no dispute;
(iii) 	the Compliance Condition set out in sub-sections 565 (3) to (7):
“(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 [which is 3 years ending with the time of application] 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”; 
Sub-sections (5) to (7) provide conditions relating to NI Payments and Companies Acts compliance which I set out, to the extent relevant to this appeal later.
	(iv)	the Reason to Expect Condition set out in section 565(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”.
4.  The Business Condition
(i) The statutory provisions
56.	Section 559 provides for deduction of tax under the CIS scheme where a relevant payment is made to a “sub-contractor”. Section 560(1) provides a definition of sub-contractor:
“For the purposes of this Chapter a party to a contract… is a sub-contractor if, under the contract -
(a) 	he is under a duty to the contractor to carry out the operations, or to furnish his own labour (that is to say, in the case of a company, the labour of employees or officers of the company) or the labour of others in the carrying out of the operations or to arrange for the labour of others to be furnished in the carrying out of the operations; or
(b)	he is answerable to the contractor for the carrying out of the operations by others, whether under a contract or under other arrangements made or to be made by him.”
57.	It will be seen that the duties in paragraph (a) are of three types: carrying out, furnishing labour (one’s own or someone else’s), and arranging for furnishing.
58.	Section 562(2) provides the Business Condition for the issue of a CIS 5. It is required to be satisfied in the case of a corporate applicant by section 565(2). It provides:
“(2) The applicant must be carrying on a business in the UK which satisfies the following conditions, that is to say -
(a)	the business consists of or includes the carrying out of construction operations or the furnishing or arranging for the furnishing of labour in carrying out the operations;
(b)	the business is, to a substantial extent, carried on by means of an account with a bank;
(c)	the business is carried on with proper records…
(d)	the business is carried on from proper premises…”
59.	I note the correspondence in paragraph (2)(a) of the categories of activity - carrying out, furnishing labour for, or arranging for the furnishing of labour - which also appear in paragraph (a) of section 560(1). But I also note the absence from the required description of the business of the “answerable” category of person who can be a sub-contractor within section 560(1)(b).
(ii)	The Parties’ Submissions
60.	Mr Brennan makes two points. First, although he did not put them in this order, he says that the test in section 560(1)(a) is different from that in section 562(2)(a): the former asks merely whether a person is under a particular type of duty, the latter what his business involves. As a result, he said it would be quite possible for a person to fall within section 560(1)(a) so that payments to him were subject to the section 559 deduction regime, but for that person not to be capable of falling within section 562(2)(a) so as to qualify for a certificate. He says the test is not what a person’s activities include but what the business includes: when the statute asks what does the business include, it is not asking whether the particular activity has “something to do with” the business. You have to ask the questions: what is the business? Who are its clients? What are they paying for? What service is provided? The question cannot be answered simply by looking at the paperwork. And, crucially, Gabem’s business was administering the PSC’s not furnishing or arranging to furnish labour.
61.	Mr Goodfellow says that the contractual rights and obligations of a company form part of its business just as much as its physical activities. “Business” he says can be wider than just the activities undertaken. The question was what the business included, not what its core activities were. He says that Parliament, by contemplating that a company could satisfy the test where a company can act only through persons in a contractual relationship with it, clearly indicated that legal rights and obligations are relevant.
62.	Mr Brennan’s second point (although he put it very much as a single point with the first) was that the activities of Gabem did not involve furnishing or arranging for the furnishing of labour. He says that concluding contracts for the supply of labour, documenting the contracts, organising the billing and arranging the payment flow is not “arranging for the furnishing of labour”. The test was not whether the Appellant arranged contracts for the furnishing of labour, but whether it arranged for the furnishing of labour. In relation to the words “furnishing or arranging for the furnishing of labour”, he says that there are two different concepts. “Furnishing” looks to the responsibility for the performance of the job - doing the physical work or contracting to do it. “Arranging” connotes setting in place the machinery pursuant to which the work is done, by the furnisher, for the end user. The words are not “making arrangements which relate to the furnishing of labour”, but “arranging for the furnishing of labour”: Gabem might do the former but it did not do the latter. The evidence was that the arrangement for the provision of labour was made by the worker with the Agency or User; whilst it was quite possible to have a chain of arrangers, Gabem was not part of such a chain - it merely documented the arrangement that had already been made. Gabem did not “furnish” because it was not responsible for the performance of the work, and did not “arrange” because the arrangements were in fact made before it had any involvement in the matter. Gabem did not on its own evidence arrange work for workers. The answer to the question: “who arranged for this labour to be furnished”? was not “Gabem”.
63.	Mr Goodfellow says that in the expressions “carrying out”, “furnishing”, and “arranging” parliament envisaged three different but not necessarily mutually exclusive activities. “Carrying out” was doing the work; “furnishing” included providing one’s own labour and procuring the labour of others: at its core was a contractual responsibility to provide labour; “arranging” was a wide word which naturally encompassed the role of an agent or other intermediary who (alone or with others) put in place the transaction consisting of the furnishing of labour. “Arranging” included but could not be limited to operating some form of introduction service. The language of the Act did not limit the meaning of arranging to setting in place the actual machinery pursuant to which the work is done for the end user. He says that if a narrow construction of “furnishing” or “arranging” is adopted then the statutorily scheme will not work as clearly intended: if there is a chain of persons receiving payments which relate to construction labour and one of those persons falls outside the scheme then the scheme breaks down. If Gabem acts as ostensible principal it is contractually responsible for the provision of labour to the Agency or User  (see paragraph 28 (viii) above) and so it was furnishing labour or at the very least arranging to furnish labour.
(iii) Discussion and Conclusion
64.	It seems clear to me that the concepts of “carrying out”, “furnishing labour”, and “arranging” in section 560(1)(a) and section 562(2)(a) must have the same meanings. There is some amplification of “furnishing” in section 560(1)(a) but in the context of the description of a duty that is a necessary clarification which does not suggest to me that “furnishing” in section 562(2)(a) should be limited to furnishing a person’s own labour.
65.	I do not believe that the use of “business” in section 562(2)(a) limits the class of activities which it can be said to include to those relating to the core profit making activities of a person’s business. In particular it seems to me that if a person performs in the course of his business any of the duties listed in section 560(1)(a), then his business is properly to be described as including the carrying out, furnishing or arranging pursuant to those duties. I reach this conclusion for the reasons set out below. But I note that the use of the participle in section 562(2)(a) focuses attention on what is done rather than on what obligations are assumed: simply becoming subject to a duty to carry out etc is not sufficient. 
(i)	The correspondence between the descriptions of the various duties in section 560(1)(a) and what the business “involves” in section 562(2)(a) suggest to me that parliament intended that a person within section 560(1)(a) should be able to obtain a certificate within section 561. Indeed, it seems to me that the purpose of the business test is to avoid the Revenue being required to consider applications from persons whose activities are such that they will not fall within section 559 in relation to payment to them. The absence from section 562(2)(a) of the “answerable” category of persons in section 560(1)(b)  (a category which seems to relate to the provision of supervision by a person such as a surveyor or architect) does not affect the conclusion: it does not affect the correspondence referred to in relation to the activities of persons providing the labour.
(ii)	The use of the word “business” in sub-section 562(2)(b) - “the business is, to a substantial extent, carried on by means of an account with a bank” suggest to me a meaning of “business” which focuses on the activities being carried on in the course of the business. If “business” referred principally to the services or goods provided rather than encompassing the activities of the business as a whole, then for example, a crane operator’s business would be regarded as confined to operating a crane which would preclude it from being a business which is carried on by means of a bank account. That does not seem to me to be a sensible result.
(iii)	The use of the word “includes” brings attention to the activities carried on in the course of the business rather than the description of the activities of the business.
66.	I now consider the question as to whether Gabem’s business did include furnishing or arranging in the circumstances where it was acting (a) as a disclosed agent on the assumption that the services Agreement in fact authorised it so to act; (b) as ostensible principal (on the same assumption); and (c) as principal with a back-to-back contract with the PSC.
Case (a) Gabem acts as a disclosed agent for a PSC
67.	This may - see paragraph 52 above - have been the case where Gabem has acted on its standard Master Agreement Terms. If Gabem was an agent, the counterparty will have been aware that Gabem was acting as agent for a PSC; it may not always have known the precise name of the PSC but it will have known that it was the worker’s PSC. The principal under the contract would have been identifiable. In these circumstances Gabem would have had no personal duties under the contract with the Agency or User because it would have acquired none in its capacity as agent, and under the terms before me where it so acted, it incurred no obligations personally.
68.	In such a case Gabem will not become subject to any duties as are described in section 560(1)(a), nor be “answerable” as described in section 560(1)(b). Gabem’s contract with the PSC imposes no duty to sign up on the PSC’s behalf to the contract negotiated in outline by the worker. It will thus not be a sub-contractor in relation to the PSC’s contract with the Agency or User.
69.	That seems to me to be a strong indication that its making of the contract as agent was not something involving any of the activities specified in section 562(2)(a).
70.	It is clear that in these circumstances Gabem does not furnish labour. The only question is whether it arranges for the furnishing of labour. 
71.	I accept that “arranging” is potentially a word of wide import and that Gabem is involved in an arrangement to furnish the worker’s labour. I note that the statute refers to a duty to arrange for the labour of others to be furnished (section 560(1)), or arranging for the furnishing of labour (section 562(2)(a)). It does not refer to a duty to arrange to furnish labour. A duty to arrange “to” furnish labour - to make the effort to procure the labour - seems to me to import a requirement to organise the provision of labour, a duty to arrange “for” the furnishing of labour may be wider: so that it encompasses organising the provision of the labour but also being responsible for the introduction of others who will arrange to furnish or furnish labour. But becoming involved in an arrangement for something is not the same as arranging it, or becoming subject to a duty to arrange it: merely negotiating the detailed terms under which labour is provided does not seem to me to be arranging for its provision in this context despite it nexus with the provision of the labour.
72.	The implication of section 559 is that a sub-contractor is a party to a relevant contract and so plays a role in its performance, section 560(1) applies similarly; a mere agent is not for these purposes party to the contract. Thus such an agent in my judgment is not a sub-contractor for the purposes of section 560(1). I can see no reason to construe section 562(2)(a) so that a person who does not fall within the definition of sub-contractor should potentially be able to obtain a certificate under section 561. Thus, in the context of this part of the Act, it does not seem to me that the mere activity of committing another to provide labour - even if coupled with some negotiation of the terms on which it is to be provided - is properly described as arranging for the furnishing of labour.
73.	Therefore it does not seem to me that Gabem’s activities in Case (a) constitute arranging for the furnishing of labour.
Case (b) Gabem acts as ostensible principal but as agent for a PSC
74.	In these circumstances, Gabem would incur a personal obligation to provide the services of the worker. It would be under a duty to furnish or to arrange to furnish the worker (see the principle summarised at paragraph 28(viii) above). The PSC would be under a similar duty, but that would not detract from Gabem’s duty. Gabem would therefore be a sub-contractor in relation to the contract under which it acquires that duty.
75.	As I say at paragraph 65 above, the use of the participle - arranging, furnishing - focuses attention on what is done.  Merely becoming subject to the duty to arrange or furnish is not enough: there has to be an arranging which is other than becoming subject to a duty to arrange, or a furnishing which is other than becoming subject to a duty to furnish.  Becoming committed by signing up with the Agency or User does not suffice.
76.	The effect of Gabem’s contract with the PSC under the Services Agreement is to effect the discharge of its duty.  But that effect does not involve Gabem doing anything: it does not acquire and have satisfied rights or obligations as part of that discharge.  Neither, I think, is its earlier activity of putting that Services Agreement into place arranging for,  or furnishing labour.
77.	That leaves only the negotiating of terms with the Agency/User and the assent thereto which creates Gabem’s duty, or that coupled with its antecedent making it the Services Agreement with the PSC.  These activities on their own would I think only uncertainly be described as arranging for the provision of labour, but in the context of the CIS scheme and in particular the parallel provisions of section 562(2)(a) and section 560(1), and where the activities are relevant to Gabem’s becoming subject to a duty to arrange the furnishing of labour, in my judgment they should for those purposes be treated as arranging for the furnishing of labour. I recognise a thin dividing line between this conclusion and the one reached in relation to Case (a) at paragraphs 71 and 72 above. The difference is slight: merely that in Case (b) Gabem has a duty to perform whereas in Case (a) it does not, but the existence of that duty which on its own takes Gabem into section 560(1) is in my view sufficient just to tip the scales. I do not accept that because the worker himself may be said to have arranged the furnishing of his labour that Gabem cannot also be treated as having done so.
78.	Therefore if Gabem were to act as ostensible principal then, in relation to any such contracts where it so acted, its business would include arranging for the furnishing of labour for the purposes of section 562(2)(a).
Case (c) Where Gabem acts as principal with a back-to-back contract with the PSC
79.	In those circumstances Gabem is liable to provide the worker. It is entitled to require the PSC to provide the worker as a result of clause 5 of the Services Agreement. The signing of the contract with the Agency or User triggers the back-to-back obligation with the PSC. Gabem puts the legal arrangements in force for the provision of the worker’s services. It incurs liabilities and obtains rights in those arrangements.
80.	But what Gabem physically does in those circumstances is the same as what it does in Cases (a) and (b) above. Does the mere fact that it has rights and obligations affect whether it is arranging for the furnishing of labour? Should the test instead be addressed to what physical events happen - to whether or not Gabem’s acting means that labour is supplied when it would not otherwise have been? It seems to me that the correspondence between section 560(1)(a) and 562(2)(a) suggest that rights and obligations are relevant: section 560(1)(a) speaks of a duty; the creation and satisfaction of rights and obligations of the person in satisfaction of that duty are therefore actions which should be capable of being “arranging” or “furnishing”. Gabem’s actions are fairly thin, but the performance by the PSC of its back-to-back obligations with Gabem provides what Gabem has contracted to provide, and that providing is in my view the furnishing of labour by Gabem, or at least the existence of that contract means that Gabem is under it arranging to furnish labour.
81.	In Hudson Contract Services v HMRC Spc 496, the contractual framework was such that an operative contracted with Hudson, and Hudson contracted with a client for the supply of operatives’ labour. Dr Avery-Jones found that Hudson was furnishing labour for the purpose of section 562(2)(a) even though Hudson’s involvement in the terms of the contract and which  it was furnished was limited. He rested his consideration upon the fact that the only contract under which labour was supplied to the client was that which Hudson had with the client. In Gabem’s case and in the circumstances presently under consideration, Gabem’s contract with the Agency or User is the only contract under which the workers’ labour is supplied. On this basis too Gabem is furnishing labour.
82.	Thus in the circumstances of Case (c) I find that Gabem’s business would include furnishing or arranging for the furnishing of labour.
Conclusion
83.	Since I have found that there are circumstances where Case (c) applies, and in that case that its business includes furnishing or arranging for the furnishing of labour, I conclude that Gabem satisfies the Business Condition.
5. The Section 559(4) issue
(i)	The statutory provisions
84.	The Respondents say that Gabem was in default in relation to its obligations under section 559 and the Regulations, in that it made payments to which section 559 applied without complying with the requirements of section 559 to deduct, and the voucher, inspection and reporting requirements of the Regulations.
85.	Section 559 provides so far as is relevant:
“(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.
(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; …
(7) For the purposes of this Chapter a payment (including a payment by way of loan) that has the effect of discharging an obligation under a contract relating to construction operations shall be taken to be made under the contract; and if - 
(a) the obligation is to make a payment to a person within subsection (1)(i) to (iii) above, but
(b) the payment discharging that obligation is made to a person not within those paragraphs,
The payment shall for those purposes be taken to be made to the first-mentioned person.”
86.	It will be seen that four conditions must be satisfied before there is an obligation to deduct:
(i)	First Condition: the payment must be made under a contract “relating to construction operations.” There is a definition of “construction operations” in section 567 but no further definition of this phrase; 
(ii)	Second Condition, the payee his nominee or section 559(7) arranged obligee must be a sub-contractor under that contract;
(iii)	Third Condition: the payor must be a sub-contractor under another contract (or who is within section 560(2) which is not presently relevant); and
(iv)	Fourth Condition: the payment must be within the categories (i) to (iii) in section 559(1) or within those categories as extended by sub-section (7).
(ii) The Payments (and their nature)
87.	It is the Respondents’ case that the payments described in paragraph 13 above which Gabem made fell within section 559: that is to say that they were “payments made under the contract” to the specified people. The first step for me is therefore to consider the nature of the payments made by Gabem and to determine (a) whether they were payments of the nature contemplated by section 559, and (b) under which contract or contracts they were made.
88.	Initially I wondered, if or when Gabem did act as agent for the PSCs, whether the monies held by Gabem were held on trust for the PSCs, and therefore whether there had been any “payment” by Gabem within section 559 at all. It seemed to me arguable that a payment made by a trustee to, or to the order of, a beneficiary which passed no additional interest in the property to the beneficiary was not the kind of payment which section 559 contemplated - any more than it contemplated a payment from one beneficially owned bank account of a person to another beneficially held bank account of the same person as a “payment” to that person. However the examination of both the contract between Gabem and the PSC and the evidence as to the way in which Gabem’s accounts were held and operated leads me (albeit with some difficulty on the way) to the conclusion that Gabem did make some payments (at the very least those in relation to the situation where it was acting under clause 5 as principal) for these purposes under a contract when it paid HMRC and probably made such payments when it paid the worker, and that that contract was the Services Agreement. That is for the following reasons:
89.	Clauses 7.3 and 7.10 to 7.13 of the Services Agreement provide:
“7.3 The Company authorises GML to deduct the amount of [Gabem’s fees] from any money held by GML on behalf of the [PSC].”
“7.10 GML shall be entitled to deduct or withhold from:
7.10.1	monies received by GML from contractors for work done by the Shareholder in his capacity as an employee of the [PSC]
7.10.2	amounts which (but for this clause) would be payable to the [PSC] under clause 11.1; and
7.10.3	amounts which (but for this clause) would be payable to the [PSC] under clause 5.2.3,
all amounts required by [Gabem] for payment of PAYE, taxes and social insurance contributions payable in respect of the Shareholder’s remuneration, tax payable by the [PSC] in respect of taxable profits of the [PSC] and in respect of dividends paid to the Shareholder and VAT due by the [PSC] (amounts so deducted or withheld  being referred to in this clause as “Permitted Deductions”).
7.11  [Gabem] shall be entitled to pay all Permitted Deductions into a general account or accounts of [Gabem] with its bankers (which shall be in the name of [Gabem] and of which [Gabem] shall be the sole beneficial owner).
7.12   [Gabem] shall pay all VAT, PAYE, social insurance, tax and insurance premiums in respect of which Permitted Deductions are made by [Gabem] pursuant to this Agreement promptly as the same fall due for payment.
7.13  All interest earned on the account or accounts referred to in clause 7.11 shall belong to [Gabem] and [Gabem] shall not be obliged to account to the [PSC] for any of such interest or to compensate the [PSC] in any other way by reason of [Gabem’s] retention of the interest.”
90.	I note that none of the payments to be made under the Services Agreement are to be made to the PSC, and that paragraph 7 of the Schedule to that agreement authorised Gabem to establish a payroll system for paying the worker his wages.
91.	These clauses initially appear to work on the implicit assumption that, in relation to any monies Gabem receives on behalf of a PSC, Gabem will receive the monies from contractors into an account (or in cash) and will then deduct or withhold from these monies the Permitted Deductions together with Gabem’s fees which it will pay into an account of which Gabem is the beneficial owner, and the residue will remain held for the PSC. 
92.	In relation to any payment received from an Agency or User, the Permitted Deductions together with Gabem’s fees and the worker’s wages and dividend will equal the money received. (The PSC’s profit will be the gross receipt reduced by Gabem’s fees, VAT, NI and the worker’s wage; after deducting corporation tax all that will remain will be the amount to be paid as dividend.  Thus the deductions use up all the receipt bar the worker’s wage and the dividend).  Thus the Services Agreement assumes that on receipt of a sum a certain part of it will be transferred to Gabem’s account and the remaining part (equal to the sum of the dividend and worker’s wages) held separately.
93.	This structure is not reflected in the evidence of the management of Gabem’s bank account. All sums received are paid into the HSBC bank account from which not only are the workers’ wages and sums payable under the Services Agreement disbursed, but also Gabem’s own expenses. 
94.	The result is something of a mess. It is not clear to me that the HSBC account should be regarded as an account to which clause 7.11 applies.  There seem to me to be three possibilities:-
(i)	all the monies in the account belong beneficially to Gabem.  This seems to be unsustainable: the provisions of clause 7.11 suggest some separation of beneficially owned funds for those held for the PSCs, and the payments to the PSC under clause 5.2.3 (see 7.10.3) would never have been made;

(ii)	all the monies belong beneficially to the PSCs.  This also seems unsustainable: Gabem will receive into the account monies in respect of those contracts when it acts as principal.  There is nothing to suggest that Gabem immediately agrees to surrender its ownership of those sums to the PSC;

(iii)	the account is a mixture of moneys held for the PSCs and moneys held for Gabem; (a) to the extent Gabem acts as agent and receives moneys into the account either it holds those moneys on trust for the PSC and there is no appropriation of Permitted Deductions to Gabem’s ownership because there is no payment of them into a bank account within clause 7.11 of which Gabem is the sole beneficial owner, or possibly that part of the receipt representing the Permitted Deductions becomes held by Gabem beneficially and the remainder remains held on trust for the PSC; (b) to the extent Gabem receives moneys as principal and becomes under an obligation to pay the PSC under clause 5.2.3 the monies remain in Gabem’s ownership.

95.	This leaves to be resolved questions of whether and when ownership of any particular sums changed.  However, whatever the proper analysis of the whole, I believe that the following statement can fairly safely be made:-
(i)	when Gabem pay HMRC (for VAT, NI, PAYE and Corporation Tax) in respect of a Case (c) contract under which it has contracted as principal, those sums are paid out of money owned by Gabem.  That is because they will be paid out of money retained by Gabem from moneys it owes the PSC under clause 5.2.3 which never leaves its ownership.  Those payments are clearly capable of being “payments” within section 559;

(ii)	when Gabem pays the worker out of the account and the payment relates to a Case (c) contract where Gabem has contracted as principal, then that sum is paid out of money belonging to Gabem (but owed to the PSC).  That is because the payment envisaged by clause 5.2.3 has not been made so the ownership of the monies remained with Gabem and its obligation to pay is sufficient to the extent of the payment to the worker (a payment authorised by paragraph 7 of the Schedule to the Services Agreement).  Thus such a payment is capable of being a “payment” within section 559.

96.	It therefore seems to me that, assuming that I am right about the capacity in which Gabem acts under clause 5, at the very least the amounts identified in (i) and (ii) above are paid by Gabem from monies beneficially owned by Gabem and not out of money owned by the PSC. Therefore they can be “payments” within section 559.
97.	Furthermore, in each case they were payments made under the Services Agreement and not under any other agreement: there was no other agreement under which they were made. Accordingly, it is only if that agreement is one relating to construction services that those payments can fall within section 559.
98.	I shall now deal with the application of section 559 in relation to these payments by Gabem separately in relation to each of the three cases identified at paragraph 54 above: (a) if and where Gabem acts as disclosed agent; (b) if and where Gabem acts as ostensible principal; and (c) where Gabem acts as principal with a back-to-back contract with the PSC.
(iii) The application of section 559 in each Case
Case (a) Gabem acts as disclosed agent for the PSC
99.	I shall start by assuming that the payment  by Gabem of Permitted Deductions (Taxes), the worker’s wages, and of dividends are all “payments” for the purposes of section 559.
100.	Each of the payments are made under the Services Agreement. Therefore in order for the payment to fall within section 559 the four conditions identified at paragraph 86 above must be satisfied:
(i)	the Services Agreement must be a contract relating to construction operations (the First Condition);
(ii)	the PSC must be a subcontractor in relation to that agreement (the Second Condition);
(iii)	Gabem must be a “contractor” within Section 559(1)(b) i.e. either a person within 560(2) - which is not applicable - or “a subcontractor under another” contract relating to the construction operations (the Third Condition); and
(iv)	the payments must be within the categories (i) to (iii) of section 559(1) as interpreted  by section 559(7) (the Fourth Condition).
The First Condition:
101.	 Does the Services Agreement “relate to” construction operations? It does not expressly do so. Nor are such operations necessarily contemplated by it (Gabem also acts for PSCs who supply the services of teachers and nurses). But potentially the agreement may have effect when the worker is engaged in construction operations. It provides for an agency relationship which could apply in relation to construction operations and, on my view at least, for possible back-to-back obligations which may relate to construction operations. But when the contract is made between the PSC and Gabem, no particular operations are in mind because the worker who will own and work for the PSC will not yet have been identified.
102.	Section 559(1) uses the words “relating to construction operations” as qualifying the words “a contract” (or “another such contract”) rather than the word “payments”: it does not say “payments relating to construction operations which are made under the contract” or even “payment made under the contract relating to construction operations”. Nevertheless, it seems clear to me that parliament did not intend the CIS scheme to operate in relation to payments to teachers for teaching just because the teacher could also in the future or did in the past perform under the same contract building works. Neither do I believe that the words “contract relating to construction operations” in section 559(1) should be construed having regard only to what was known when the relevant contract was formed. The test in section 559(1) is to be performed at the time the payment is made: at that time does the contract relate to construction operations? It seems to me that if the subject matter passing pursuant to a contract relates at that time to construction operations, then for the purposes of section 559(1) the contract should be treated as relating to construction operations in relation to that subject matter. 
103.	Thus in my judgement the First Condition is satisfied. But neither the second or the third condition will be. 
104.	The Second Condition requires the PSC to be a subcontractor under the Services Agreement; in Case (a) circumstances it will not be since it will owe no duty to carry out, furnish labour or arrange for its furnishing under that agreement - and section 560(1) clearly specifies that it must be under that agreement.
The Third Condition:
105.	Is Gabem a sub-contractor under another such contract? Mr Goodfellow says that  where Gabem acts as agent there is a single contract relating to construction operations and that that contract is between the Agency/User and the PSC: Gabem he says is not a party to that contract and is a party to no contract relating to those operations. Mr Brennan says that Gabem is a subcontractor under the Master Agreement it has with the Agency or User.
106.	Gabem is clearly a party to that Master Agreement but it seems to me that it is not a subcontractor in relation to it in these circumstances. That is for reasons parallel to those set out in relation to Case (a) and the Business Condition at paragraph 67 to 73 above: Gabem is not under any duty in Case (a) to carry out, furnish labour, or arrange for the furnishing of labour, and is not “answerable” for the carrying out of works under the Master Agreement.
107.	Thus in these circumstances I conclude that the Third Condition is not fulfilled. Therefore, in my view, section 559 does not apply in the circumstances of Case (a) and there is no need to consider the Fourth Condition or to consider any further the nature of the payment in this Case.
Case (b) Gabem acts as ostensible principal but as agent for the PSC
108.	Again I start on the assumption that Gabem did make “payments” within section 559 in the circumstances of this Case. Gabem’s payments in this case are under the Services Agreement. In these circumstances Gabem would be a sub-contractor under the contract between it (as agent) and the Agency or User - at least to the extent that the contract relates to construction operations. That is a contract different from the Services Agreement. The Third Condition is therefore satisfied.  
109.	The First Condition is that Gabem must make the payment under a contract relating to construction operations. The payments it makes are under the Services Agreement. Mr Goodfellow says that those payments are not under (and do not discharge any obligation under) a contract relating to construction operations. It seems to me that, for the reasons given in paragraph 102 above, a payment is made under a contract “relating to” construction operations if it is being made in relation to construction operation services supplied by the worker. Thus the First Condition is satisfied. 
110.	The Second Condition is that the PSC is a subcontractor. But it will be such only if it is a sub-contractor in relation to the Services Agreement: that is because “sub-contractor” is defined in section 560 by reference to a particular contract. The fact that X is a sub-contractor under contract A will not make him a sub-contractor for the purposes of section 559(1) unless contract A is the “contract relating to construction operations” in the opening words of that sub-section. Thus the question is: is the PSC under an obligation under the Services Agreement to furnish labour etc?  That question is in the context of an assumption inherent in Case (b) that my conclusions on the effect of clause 4 and 5 were wrong: thus I have to assume either that Gabem was or could act as ostensible principal under authority given by clause 4, or that it was ostensible principal under authority in clause 5.
111.	If, contrary to my conclusion on the effect of Clause 4 of the Services Agreement, Gabem were acting in this Case (b) under clause 4, then the PSC would not be under an obligation “under” that agreement to furnish labour etc; instead its obligations so to do arise under the agreement made on its behalf with the Agency or User.
112.	If, contrary to my conclusion on the effect of clause 5, Gabem were acting pursuant to clause 5 of the agreement (i.e. where clause 5 is regarded as conferring an agency power on Gabem), it seems to me that if clause 5 were simply a term giving Gabem authority to contract in its own name on behalf of the PSC, then the PSC would not be a sub-contractor under the Services Agreement since the PSC would not be obliged to furnish or arrange labour under that agreement. 
113.	Thus I do not see how the PSC could be a sub-contractor under the Services Agreement. The Second Condition is therefore failed. Therefore if, contrary to my view, Gabem acted as ostensible principal and if the payments it made can be treated as made by Gabem, then those payments did not fall within section 559(1).
Case (c) Where Gabem acts as principal with a back-to-back contract with the PSC
114.	In this case there is to my mind no doubt that “payments” are made by Gabem. The payments are made by Gabem under the Services Contract. It is under that contract that the PSC supplies its labour. Thus where the labour relates to construction operations the First Condition is satisfied. In Case (c) circumstances under clause 5 of that contract the PSC is agreeing to supply labour. The PSC is clearly a sub-contractor under the contract. Thus where the labour to be supplied relates to construction operations the Second Condition is satisfied.
115.	 Gabem is also clearly a sub-contractor under a different contract - that it makes with the Agent or User. The Third Condition is therefore satisfied.
116.	The payments made to HMRC and to the worker are made under the Services Agreement but none of them are made to the PSC (the sub-contractor). However,  the Fourth Condition is that payments be made under the contract to:
“(i)	the sub-contactor;

(ii)	a person nominated by the subcontractor or the contractor; or

(iii)	a person nominated by a person who is a subcontractor under another such contract relating to all or any of the construction operations”.

117.	As a result, if the effect of clause 7 and the Schedule to the Services Agreement is that the PSC “nominates” HMRC and the worker, then section 559 will apply to the payments.

118.	(This I note has the rather surprising result that Gabem could not make a gross payment to the Revenue unless the Revenue held a CIS 5 or 6 - because of the effect of section 559(2)).
119.	It seems to me that it is correct to regard HMRC and the worker as nominated by the PSC under the Services Contract. They are named or described in it as persons to whom payments which arise as a result of the contract are made. It is, I think, a proper use of language to say, that if A worked for B, but specified in his contract that monies were to be paid to C, that A has “nominated” C to receive the payment.
120.	In these circumstances therefore it seems to me that section 559 does apply to the payments made to HMRC and the worker, and to the extent of such payments, deductions should have been made, certificates inspected, vouchers written out, and reports made since the requisite section 561 certificates were not available.
(iv)  Section 559(4) Issue: Conclusion
121.	Where, but only where ,the effect of the Services Agreement was to give rise to a back-to-back contract between Gabem and the PSC, Gabem had an obligation to withhold under section 559 or to inspect CIS 4 certificates prepare vouchers and to report accordingly.
122.	Gabem failed in that duty in such circumstances because the PSC’s had neither CIS 4, 5 or 6 certificates and because it did not deduct, prepare vouchers or report as required.
6. The Regulation 42 Issue
(a)	The statutory provisions
123.	Regulation 42 of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 provides:
“(1) This regulation applies to a company which -
(a) is a close company;
(b) is a private company limited by shares; and
(c) either holds a certificate in force under section 561 or has applied for such a certificate.
(2)  Where there is a change in the control of the company by reason of an issue or transfer of shares in the company to a person who was not a shareholder in the company immediately before the issue of transfer, the company shall, within 30 days of the issue or of receiving information as to the transfer, give notice to the inspector of the name and address of the person to whom the shares were issued or transferred.
(3) In this regulation “control” has the same meaning as in section 840 of the Taxes Act.”
124.	Section 840 TA 1988 provides:
“For the purposes of, and subject to, the provisions of the Tax Acts which apply this section, “control”, in relation to a body corporate, means the power of a person to secure -
(a) by means of the holding of shares or the possession of voting power in or in relation to that or any other body corporate; or
(b) by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate,
that the affairs of the first-mentioned body corporate are conducted in accordance with the wishes of that person, and, in relation to a partnership, means the right to a share of more than one-half of the assets, or of more than one-half of the income, of the partnership.”
(b)	Further relevant facts
125.	I find the following additional facts from the evidence before me:
(1)	For a period prior to November 2003 all the shares in Gabem were held by Gabem Group Limited (GGL) and all the shares in GGL were held by Gabem Holdings Limited (GHL):

GHL

GGL

Gabem

(2)	In November 2003 GGL transferred its shares in Gabem to GHL:

GHL

Gabem

GGL

(3)	Chris Jamieson was at both before and after this transfer the beneficial owner of 64.75% of the shares in GHL; and the shareholdings of the other shareholders in GHL were unaffected.
(4)	The Appellant did not notify any change in control to HMRC pursuant to Regulation 42. (The section 138 clearance application in the bundle before me and referred to in paragraph 163(12) and (13) below was clearly not notification for this purpose).
(c)       The Arguments
126.	First, Mr Goodfellow says that there was no change of control. He takes me to Lord Bridge’s speech in Pilkington Bros Ltc v IRC 1982 STC 103 at page 113  - 114. The issue in that case was whether section 29(1)(b)(ii) FA 1973 prevented the surrender of losses between two companies because there were arrangements in place by virtue of which persons could control one of them but not the other. Lord Bridge said (with added emphasis):
“It remains only to notice an argument advanced by counsel for the taxpayer company, which evidently found some favour with the learned judge, although he did not in the end find it necessary to rely on it, based on an anomaly which, it is suggested, would arise from the adoption of the construction contended for by the Crown. We are asked to consider companies A, B and C, where B is the wholly owned subsidiary of A and C is the wholly owned subsidiary of B. Here, if company C surrenders a claim to relief to company A, says counsel for the taxpayer company, on the Crown’s argument company A cannot claim group relief because, by virtue of the arrangements inherent in the group structure, company B is a person who has control of company C but not of company A. It seems to me powerfully arguable that, in applying s 29(1)(b)(ii) to the facts posited, company B is a person who can be ignored. In exercising control of company C, company B must act as instructed by company A. Thus the “person or persons together” in accordance with whose wishes the affairs of company C are conducted are those who control company A. From this it would follow, applying the definition of “control” in  [what is now section 840 TA 88] that the only “person or persons together” who control company C are the same as those who control company A. But I find it unnecessary to express a concluded opinion as to whether this argument is effective to dispose of the suggested anomaly. If the anomaly exists, I cannot see that it lends any support to counsel for the taxpayer company’s argument, since it would arise, according to the circumstances in which the A, B, C, group of companies was constituted, whatever construction was given to “arrangements” in s 29(1)(b)(ii).”
127.	He says that Lord Bridge in the italicised sentence is saying that this is the way control in section 840 should be interpreted - not just in the context of section 29(1)(b)(ii) but generally. On this basis he says that “control” looks to ultimate control and at all relevant times that stayed the same. Implicit in this is that Gabem was never controlled by GGL. As a result, there was no change in control.
128.	I do not regard Lord Bridge as setting out a general rule here for the interpretation of section 840. That to me is apparent from his phraseology: he speaks of ““applying” the definition in section 840” rather than interpreting it, and he applies it having suggested that for the purposes of section 29(1)(b)(ii) that B is a person who can be ignored. The most he is suggesting is simply that for the purposes of that particular provision B should be ignored before section 840 is applied. But of course that raises the question as to whether for the purposes of Regulation 42 a similar approach should be taken. It seems to me that there is nothing in Regulation 42 which suggests that it should: the emphasis on the transfer of the shares in the company suggests a parochial interest in its immediate owner or controller, and in my judgment that there is nothing in the Regulation which suggests that it is not designed to elicit information regarding for example the transfer of a company from a well run subholding company to one which is run by a bunch of cowboys. I conclude that for the purposes of Regulation 42 no such restriction to ultimate control should be read in to section 840 and that it does not follow from Lord Bridge’s sentiments that section 840 is confined to determining ultimate control. Likewise although section 840 is expressed to be subject to the provisions of the Tax Acts which apply it, I see nothing in Regulation 42 which should be treated as constraining its normal meaning.
129.	Then Mr Goodfellow takes me to Steele v EVC International NV [1996] STC 785 where the Court of Appeal considered the meaning of control for the purposes of the introductory words of the definition in section 416 TA 88. The Court of Appeal rejected the idea that the control there being referred to was control over the business transacted by the company (or board control), holding instead that it was control over shareholder meetings. In doing so the court considered the obiter dictum of Walton J in Irving v Tesco Stores (Holdings [1982] STC 881 at 910 where he rejected the submission that section 840 control refers to control only over the shareholder meetings of the company. Walton J came to that conclusion because of the structure of section 840 and the presence of the two limbs which dealt with (a) shareholding and (b) other powers. The Court of Appeal noted that sub-paragraphs (a) and (b) in section 840 were provisions unparalleled in section 416: and this was one of its reasons for holding that the meaning suggested by Walton J did not apply for the purposes of section 416. Mr Goodfellow suggests that, given that the Court of Appeal did not approve Walton J’s obiter dictum, it was open to me to find that GGL had never controlled Gabem and accordingly that there had been no change of control because either GML or Mr Jamieson had at all relevant times been the person who had control over its general meetings, or the board control had never changed.
130.	I find Walton J’s reasoning as to the meaning of “affairs of the company” in section 840 persuasive. I see nothing in Morritt LJ’s judgment in Steele v EVC to cast doubt on it. Given the materially different form of the definition in section 840 from that in section 416 and the context of section 416, treating “affairs of the company” in section 840 as meaning the business of the company as carried on at board level is not inconsistent with treating that expression in section 416 as meaning the affairs at a general meeting (generally carrying with it the power over the business of the company at board level).
131.	Further, I do not believe that section 840 seeks to identify only the person who has ultimate or the most superior control; instead it seems clear to me that where A owns 100% of all rights in respect of B which owns 100% of C, then for the purposes of section 840 A and B will each control the business of C at board level. I reach that conclusion because section 840 supposes that a company as a artificial person can have “wishes”. Those wishes may be given to it by another person, but, having been installed with those wishes they are the wishes, of the company even though they may also be the wishes of another. If company B has power to secure that its wishes are obeyed by the directors of company C because B can exercise voting power etc to achieve that result then the condition of section 840 will be met. The fact that company A can install its wishes into B and thence into C does not diminish B’s power in relation to what must be treated as its own wishes.
132.	In my opinion therefore the effect of the share transfer was that GGL lost control over Gabem although both GHL and Chris Jamieson retained control over it.
133.	Second, Mr Goodfellow says that even if there was a change of control which fell within Regulation 42, Gabem’s failure to report it was not a lack of compliance to which section 565(3) applied. Section 565(3), it will be recalled, provides (with added emphasis) that:
“The company must, subject to [the minor and technical defence in sub-section (10)], 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 period of three years ending with the date of application - the “qualifying period.”]…”
134.	Mr Goodfellow says that the obligation to report a change of ownership is not an obligation “in respect of a period”. He says that one pays PAYE, NI, corporation tax, and renders returns in respect of periods, but the obligation to report in Regulation 42 is not imposed in respect of any period. Thus failure so to report the change does not fall within section 565(3). He accepts that the effect of the words “in respect of periods ending within  the qualifying period” may be to extend the required period of compliance: for if there was a period of one year ending on the first day of that period, and an obligation which had to be fulfilled in respect of every day of that one year period, then effectively the requisite period of good behaviour would to that extent be extended to four years.
135.	Mr Goodfellow raised the same argument in Sub-Contractor v HMRC SPC 553. The Special Commissioner, Dr Avery-Jones, said at paragraph 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.”
136.	Mr Brennan submitted that “in respect of periods” should be construed as picking up obligations triggered in the period or falling within a period. He says it would be remarkable if for example a single fraud could not be taken into account.
137.	It is with reluctance and hesitation that I differ from Dr Avery-Jones.  But it seems to me that the form of words chosen by parliament to limit the period to which the obligations relate is such that it carries with it a limitation on the nature of the obligations imposed.  I reach the conclusion for the following reasons:- 
(i)	 the words “in respect of periods” are used to describe (and limit) the words “obligations imposed” not the words “complied with”.  That is apparent because they appear twice in the sub-section - which requires compliance with Taxes Act obligations and Information Requests where Taxes Act obligations and Information Requests are qualified by those words individually.  This structure is made clearer in the form of the substantially similar condition affecting firms in section 564(3). (In subsection 565(8) the words “in respect of periods ending within the qualifying period” are used differently: they are used there to qualify “comply” rather than “obligation imposed”, or “required…about the business” as they are in section 564(3));

(ii)	       subsections (6) and (7) set out a number of reporting obligations drawn from the Companies Act 1985.  A different form of qualification of such obligations is used in these subsections.  I contrast the words used in subsections (6) and (7) to limit the period for which compliance is required with those used in subsection (3).  In those subsections the legislation requires that the company must have complied with a list of specified Companies Act provisions:

“in so far as those obligations fell to be complied with within the qualifying period”.

There is no mention here of “in respect of” or “periods ending within the qualifying period”. The provisions were enacted at the same time.  The draftsman therefore had in mind a difference between the two phrases.  It is clear that the phrase in (6) and (7) simply relates to the three year period and things to be done within it;

(iii)	       it seems to me that the words “in respect of periods” can have substantive effect different from the words in sub-sections (6) and (7).  Suppose for example a company makes an application for a CIS 5 certificate on 31 December 2006 and has accounting periods (in respect of which it will have Taxes Act obligations) ending on 30 June 2004, 2005, 2006, and 2007. Its accounting periods ending 30 June 2004, 2005, and 2006 will end within the qualifying period; that ending 30 June 2007 will not.  It seems clear that it is intended that obligations in respect of the period ending 30 June 2004 will be relevant for the purposes of section 565(3) but those for the period ending 30 June 2007 will not be; if the subsection had said “…obligations falling to be complied with within the qualifying period” as subsection (6) and (7) do,  the position would have been different. By contrast, obligations “in respect of a period “ may also include those which fall to be complied with after the end of that period (such as paying tax for the period). Such obligations may therefore be different from those falling to be complied within the period;

(iv)	       thus some relevant meaning can be attached to the way in which “in respect of periods” qualifies “obligations”.  The draftsman’s choice of different phrases can have substantive effect.  It should not therefore be ignored;

(v)	      the draftsman could have achieved the effect argued for by Mr Brennan by saying “obligations imposed….falling to be complied with in, or in respect of periods ending in,…”.  I see no reason to read in additional words;

(vi)	       therefore the words “in respect of any period” affect the relevant obligation imposed.  But the effect of using the words to define the relevant period is also to qualify the relevant obligations imposed.  There must be a period to which they relate or in respect of which they are obligations;

(vii)	it does not seem to me that the strict nature of this condition for the issue of a certificate can be called in aid.  The strictness informs the degree of compliance required, not what is to be complied with.  Parliament has spelt out which conditions are to be relevant: it has not for example included any VAT obligations, any Excise duty obligations, or any reporting obligation in relation to NI (subsection (5) deals only with paying NI). There is no reason to suppose that it intended absolutely every tax-related obligation to be complied with.  Since the requirement is strict an interpretation which balances the perceived need for the protection of the Revenue with a clear prescription and delineation of the taxpayer’s duties is more appropriate than one which offers the greatest protection to the Revenue;

(viii)	“period” is not limited to accounting period, or to a PAYE period, but it cannot be permissible to choose any period: you cannot say “the period of 10 years ending on the date before the application”: that would defeat the 3 year limitation; it is clear effect can be given to the provision only if the obligations are somehow defined by the period so ending.

138.	Thus before an obligation can be said to be relevant there must be a period to which it relates or in respect of which it is an obligation.
139.	But is the Regulation 42 obligation “in respect of a period”? It imposes a period of 30 days within which a report must be made. Can that obligation to report be said to be in respect of that period of 30 days rather than merely in respect of the company becoming aware of the change of control? I do not think it can: the 30 days merely sets the period within which the obligation must be complied with not the matter in respect of which the obligation has arisen.
140.	I note in passing that Mr Goodfellow did not argue that this in-respect-of-periods-defence applied to the section 559(4) issue. But in any event the obligations in Regulation 8 to account and in Regulation 40A to render returns are in respect of periods.
(d) Conclusion 
141.	For the reasons set out above it seems to me that before the transfer of its shares Gabem was controlled by Mr Jamieson, by GHL and by GGL, and after the transfer it was controlled by Mr Jamieson and GHL. The effect of the transfer was that GGL ceased to belong to the set of persons who, individually, controlled it. I can see no reason for construing “change” in Regulation 42 to exclude circumstances in which a person loses control without any new person acquiring control, and such circumstances seem to me to fall within the normal meaning of “change” (even though in particular cases the change may not be very significant). I therefore conclude that there was a change in control by reason of the transfer of the shares and that Regulation 42 imposed a reporting obligation with which Gabem did not comply.
142.	But for the reasons above the failure to report did not cause Gabem to fail the condition in section 565(3).
7.  The Section 118 TMA 1970 Argument
143.	Section 118(2) TMA 1970 provides:-
“For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the Commissioners or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after it had ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.”

144.	And Section 119(3) TMA provides:-
“(3) This Act, so far as it relates to income tax or corporation tax, shall be construed as one with the principal Act.”

145.	Mr Goodfellow argues that to the extent that the Revenue acquiesced in any of Gabem failures, or to the extent that Gabem had a reasonable excuse for any of its failures, the effect of section 118 and 119, was that for the purposes of the CIS provisions in the Taxes Act Gabem was to be treated as if it had not failed.
146.	In my opinion the effect of section 119(3) in conjunction with 118(2) is not to make every Taxes Act obligation subject to an acquiescence or reasonable excuse exception. That is for the following reasons. First the injunction in section 119(3) that the TMA be “construed as” one with the Taxes Act is not an injunction to treat the TMA as contained within the Taxes Act or vice versa it merely requires common construction of common provisions. Second, section 118 introduces a deeming for the purposes of the TMA i.e. for the purposes of its provisions: the purposes of the TMA provisions are different from those of the Taxes Act even if construed as one with it: applying the section 118 deeming to the TMA is not the same as “construing” the TMA in accordance with Section 118: thus construing the Taxes Act as one with the TMA does not require the section 118 deeming to be applied to the Taxes Act.
147.	As a result it does not seem to me that section 118 could afford a defence to any of the failures identified earlier in this decision.
8 The Minor and Technical Defence
148.	The strictness of the condition for the issue of a CIS 5 certificate imposed by section 565(3) that a company must have complied with all its Tax and Management Act obligations for the requisite period is mitigated somewhat by section 565(4) which provides:
“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.”
149.	It will be noted that there are two limbs: first that the failure was minor and technical, second that it gave no reason to doubt future compliance. In this section, I deal only with the first limb.
(i) relevant case law
150.	The issue of what may be “minor and technical” has been considered by the High Court in half a dozen cases over the last 3 years, and in 2006 by the Court of Appeal in Arnold v G-Con Ltd [2006] STC 1516. There was before me no dispute about the following principles which I derive from those cases:
(i)	“minor and technical” is a composite phrase to be construed purposively. The purpose which parliament had in mind was strict compliance with tax obligations but some failures might be considered venial (Templeton HMIT v Transform Shop Office and Bar Fitters Ltd [2005] EWHC 1558, approved by the Court of Appeal in Arnold v G-Con);
(ii)	in determining whether or not a failure is minor and technical, compliance in other aspects is irrelevant: the focus is on the failure, not other activities (HMRC v Facilities and Maintenance Engineering Ltd [2006] EWHC 689 Ch);
(iii)	neither what is done nor what is intended to be done to put right the failure in the future is relevant (Hudson v JDC Services 2004 EWHC 602);
(iv)	in determining whether a failure is minor and technical that phrase should not be construed with a view to whether the taxpayer would default in its future obligations. The question is whether the nature of the default made it minor and technical. (Arnold v G-Con);
(v)	the absence of warning from the Revenue that the sub-contractor was at risk of jeopardising its certificate is not relevant (Arnold v G-Con);
(vi)	the previous issue of a certificate where such grant might have been refused is irrelevant. (Arnold v G-Con);
(vii)	the issue as to whether a default is minor and technical is qualitative and quantitative (Hudson Contract Services v HMRC Spc 00496 para 29), and can be viewed in the light of the answer to the question whether the defaults were of any significance (Hudson and CBL).
(viii)	the taxpayer’s culpability is relevant to whether a failure is minor and technical. I shall discuss this point in more detail.
151.	In Cormack v CBL Cable Contractors Ltd [2005] EWHC 1294, 77 TC 239, the General Commissioners had found that the Revenue had acquiesced in arrangements for the late payment of PAYE. Laddie J said at paragraphs 26 - 30 (with emphasis added in paragraph 27):
“26. Mr Eicke accepts that some types of acquiescence would be sufficient to render CBL's defaults minor and technical, but not all would do so. I am not sure where he draws the line between them. In the end I think his argument keeps returning to the size and frequency of the defaults. He says that one should follow the approach adopted by Ferris J in Vicky. If the sums involved in the defaults were large, as he asserts they were here, then they cannot be regarded as minor and technical, no matter how much the Revenue may have acquiesced. Underlying this is the suggestion that the words 'minor and technical' are quantitative. Repeated tax defaults in large sums cannot be minor, no matter what the circumstances. If this is right then it must follow that, even were the Revenue expressly to agree to late payment of tax, if the sums involved are large or more than a once-off the taxpayer must be refused a CIS certificate.

27. I do not accept this argument. It seems to me that the words 'minor and technical' have to be construed in their context. As Lightman J pointed out in Hudson, there are two discrete matters to be considered in applying s 565(4) (or s 562(10) in respect of individuals or s 564(4) in respect of firms). One looks to the past. The other looks to the future. As far as the former is concerned, the underlying question is whether or not the past defaults of the taxpayer have been, to use Lightman J's words, 'of any significance'. Significance in this context includes consideration of whether the defaults demonstrate a cavalier attitude of the taxpayer to his obligations under the tax legislation. Even if defaults are large or numerous in money terms, the circumstances may make them not significant for these purposes. The words 'minor and technical' can have different meanings. There is nothing in the legislation to suggest that they are primarily or exclusively concerned with size and frequency. Some of the liabilities covered by the legislation are not concerned directly with the payment of money. In context 'minor and technical' should be construed in a way which allows them to be used to gauge whether there is a risk that the sub-contractor will default on his tax obligations. If, for example, a company is late in paying a very large tax bill because, wrongly and in breach of its customer's instructions, the bank on which the company's cheque is drawn fails to honour it, the breach should be treated as minor and technical even though, from an accountant's point of view, the sum involved was large and not minor.

28. It seems to me that this approach is consistent with the contents of Inland Revenue Leaflet IR40. … IR40 states:

'We will bear in mind the size of the business. If it is reliant on one person, and that person falls ill for a period of weeks or months, we will take that into account.'

29. This must be because the Revenue understands, correctly in my view, that the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not.

30.   If this is the correct approach, then it seems to me possible for the commissioners to have held that, because of the acquiescence by the Revenue in late payment by CBL, the latter's defaults could be properly regarded as minor and technical. Whether I would have come to the same conclusion had I been in the commissioners' position, is irrelevant….”

152.	In Arnold v G-Con the Court of Appeal considered the judgment of Laddie J in CBL. Chadwick LJ had given permission for the appeal because he thought that the approach of Laddie J in CBL might be difficult to reconcile with that of Mann J at first instance in Arnold v G-Con.
153.	Sir Peter Gibson gave the leading judgement. At paragraph 40 he says:-
“40 Next, I turn to Mr Southern’s submission that the judge did not consider, as he ought to have done, the question of culpability. Mr Southern relies on what Laddie J said in CBL on this point. That judge referred to a passage in IR40 in which the Revenue had stated that it would bear in mind the size of a business, and that, if the business is reliant on one person who falls ill, that would be taken into account Laddie J said (see [2006] STC 38 at [29]):
“This must be because the Revenue understands, correctly in my view, that the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not.”
“Mr Southern submitted that Mann J clearly did not regard the non-compliance by G-Con as culpable, because of his comments on Mrs Hervey as a highly competent businesswoman and one who was entirely honest and straightforward.”
“41. For my part, I accept that culpability may be relevant in a particular case. An example was given in the course of argument that a payment might be delayed because of a failure of the Post Office to deliver the payment in a timely fashion. Another example might be if the sub-contractor’s bank, properly instructed to make a payment, had not carried out its instruction in a prompt fashion. But I do not see that culpability is a matter of relevance in this particular case….The point is simply not a relevant one.”
154.	He then referred to paragraph 27 of Laddie J’s judgement in CBL quoting the passage italicised above. He continued:
“before us, there was some debate as to whether or not the first condition in section 565(4), that the failure was minor and technical, should be construed in a way that it could be used to gauge whether there is a risk that the sub-contractor would default on his future tax obligations. In my judgment, Laddie J erred in principle in his approach. The first condition looks to the past. It looks to whether or not a company has failed to comply with an obligation or request such as is referred to in sub-s (3) of section 565. The first condition requires a judgment to be made in the first place by the Revenue, and in the second by the General or Special Commissioners if there is an appeal from the Revenue’s decision, as to whether the failure is minor and technical. The second condition looks to the future. The first condition should not, in my judgment, be construed in such a way as to pre-empt the quite separate second condition. There is no justification that I can see for so doing. Accordingly, I do not accept that Mann J made any error on that point.”
155.	This is the authority for the proposition I set out as (iv) above in paragraph 150. It is clear to me that in this paragraph Sir Peter Gibson is directing himself solely to Laddie J’s statement that the words “minor and technical” should be construed in a way which allows them to be used to gauge future risk of default. Sir Peter Gibson continued:
“44. I have to say that the correctness of the decision in CBL therefore seems to me to be open to serious doubt. I would add that I have no less doubt as to the correctness of the decision of the General Commissioners as well … it is impossible to say what constituted the “matter of fact acquiescence … I have serious doubt as to whether the Commissioners did reach a correct conclusion and, as I have said, Laddie J’s decision seems to me to be open to question because of the way he approached the question of construction.”
156.	Mr Goodfellow noted that Sir Peter Gibson did not say that acquiescence by the Revenue was irrelevant; he merely said that he doubted that there was acquiescence. I agree there is no hint here or in the other judgements of the Court of Appeal that acquiescence by the Revenue is irrelevant. But the extent and weight of its relevance is left at large.
157.	There is no disapproval by the Court of Appeal of Laddie J’s reference to culpability in paragraph 29 (which Sir Peter Gibson echoes) or of his comment in paragraph 30 of his judgement that acquiescence by the Revenue could be a basis for holding that defaults could be minor and technical. Hughes LJ at paragraph 48 also expressly says that the taxpayer’s culpability is a relevant factor.
158.	Therefore I must construe “minor and technical” in such a way as to regard culpability as relevant to whether a default is “minor and technical”. I have to say that there seems in this approach to be some hint of a “reasonable excuse” defence. But the test is different.
159.	Therefore in assessing whether a default is minor and technical I should have regard to a taxpayer’s culpability, and in having regard to that, I believe I can also have regard to whether and to what extent the Revenue acquiesced in a default. But it seems clear to me that the mere fact of acquiescence is not enough: acquiescence is only relevant to culpability. And culpability is a subjective thing. If the Revenue rolled over backwards in their acquiescence but the taxpayer did not know about it or take it into account, it would have no effect on the taxpayer’s culpability (although it might mean that the Revenue’s view was that the relevant issue was minor or technical); conversely if the Revenue did not acquiesce, but somehow or other the taxpayer reasonably believed that it had, then that could make the taxpayer, in appropriate circumstances, so lacking in culpability as to have a minor and technical defence.
160.	In this case there are three aspects which may bear upon whether or not the taxpayer was culpable in relation to a default:
(i)	whether the taxpayer was under the impression that the Revenue had acquiesced in the default;
(ii)	whether the taxpayer can be considered less culpable to the extent that it relied upon professional advisers;
(iii)	whether a failure to comply with an obligation is less culpable if the existence of the obligation was unclear, difficult or uncertain in the sense that the law was fairly open to divers opinions, or if the application of the law to the taxpayers’ circumstances was not clear.
161.	I shall return to each of these later on, but for the moment I note only that each of them might go to the degree of culpability of the taxpayer, and as a result none would necessarily provide a complete defence.
 (ii) Minor and Technical: application to the section 559(4) issue
162.	Mr Goodfellow submits that, if Gabem did default in relation to the Section 559(4) Issue, the default was minor and technical. He says that Gabem’s lack of culpability for that breach, and the lack of obviousness of an obligation to deduct etc are reasons for the breach being minor and technical. He says that Gabem were not culpable because the Revenue acquiesced in the default or because Gabem reasonably believed it had. 
Further Findings of Fact
163.	At this stage therefore I need to set out further findings of fact:-
(1)	Gabem took professional advice from the accountants Baker Tilly, James Cowper & Co (from 2004) and the solicitors, Penningtons in the relevant period.

(2)	The only reference to CIS in Baker Tilly’s meeting notes is a short comment made at a meeting in 2006.

(3)	Gabem relied on the professional advice it received throughout the relevant period. It’s professional advisers may have relied upon correspondence and other dealings with the Revenue, but Gabem did not rely directly on the Revenue.

(4)	Until about mid-2003 GGL carried on a business similar to that Gabem currently carries on but, rather than providing and maintaining single person PSCs, it provided and administered mainly composite service companies each of which had a number of workers as its shareholders and employees, each such worker holding a special class of share entitling him or her to his ‘share’ of the composite’s profits.  GGL then operated some 600 composite companies.  GGL applied for and obtained a CIS 6 Certificate in relation to this business.

(5)	In 2001 GGL applied for a CIS 5 Certificate in respect of its business.  The disadvantage of a CIS 6 Certificate is that it is personal to one officer of the company and has to be presented personally.  A CIS 5 Certificate can be used more flexibly.  Both are certificates within section 561.

(6)	In the course of its application GGL had correspondence with the Revenue.  There was some conflict between the approach originally taken by the Revenue’s offices when the office dealing with GGL changed.  The Kensington office had accepted that GGL needed the CIS 6 Certificate; Windsor office had suggested that it needed one for each composite company (as it would if section 559(1) applied for payments to such companies). Christopher Jamieson wrote to the Revenue on 16 May 2001 requesting that a CIS 5 Certificate be issued to GGL and implicitly suggests that CIS Certificates should not required for all the service companies.  He said that he hoped the information given was enough to enable the Revenue “to issue one CIS 5 Card in the name of [GGL] to cover all Gabem companies”.

(7)	On 23 July 2002 Mr Bishop of the Revenue wrote to GGL indicating that the Revenue would renew GGL’s CIS 5 Certificate but expressing doubts over whether it satisfied the Business Condition.  The letter indicates that Mr Bishop needed details of the arrangements under which GGL operated including copies of the contracts with Agency/Users and those between GGL and the composite companies.  He said inter alia that possession of this information would enable him to give guidance on whether the CIS scheme should “be operated by any of the companies associated with GGL”.

(8)	There was then a number of meetings and exchanges of correspondence with various offices of the Revenue (including one with Chris Birnie of the Revenue in early 2003).  These did not all relate to CIS issues but explanations of GGL’s business and copies of relevant documentation were provided at those meetings. But it was not until 3 April 2003 that the correspondence reveals that the Revenue had a detailed understanding of the legal structure of Gabem’s business.  On that date a letter from Chris Birnie of the Revenue to the Revenue technical support team reveals a fairly comprehensive understanding and attaches copies of relevant agreement.  (I note however that the Services Agreement he attaches  is naturally the pre-2003 version on which there is no clause 5: GGL is allowed to act as agent only.)  I find that it is only from early 2003 that Gabem could reasonably expect the Revenue to have had a fair idea of its operations but that it was not clear even from then that Gabem or its advisers could expect the Revenue to be aware of the effect of clause 5 of the Services Agreement.

(9)	In June 2003 there was a reorganisation of the Gabem Group.  this is discussed in paragraph (12) below.  Following the reorganisation, Gabem and GGL made applications for CIS 5 Certificates which were granted by the Revenue for the period July 2003 to June 2006.

(10)	There appears to have been no further correspondence between Gabem and HMRC in relation to the CIS scheme certificate until Gabem made it application for the renewal of its certificate which is the subject of this appeal.

(11)	The Appellants have asked me to find that after 2003 HMRC considered that GGL and Gabem passed the Business Condition and did not consider that section 559(1) required deduction from payments to the PSCs.  I decline so to find.  It seems to me quite possible on the evidence before me that the Revenue permitted Gabem to retain its CIS 5 Certificate because they were unsure about the issue, because it was administratively convenient that the certificate would continue, or because they were disorganised, inefficient or confused.  During the course of the hearing I declined to issue a direction that further disclosure be ordered from the Respondents in relation to these issues.  They seem to me to be for the reasons alluded to below irrelevant to the decision I had to make.
	
(12)	On 27 May 2003 Baker Tilly made an application under section 138 TCGA in relation to a restructuring of the Gabem Group. At that stage GGL was owned by Christopher Jamieson (70%) and Charles Donald (30%). The letter described a proposal for the imposition of a holding company, GHL, (which would own a Gabem (at that time not trading)) above GGL. 

(13)	The letter explained the proposal that GHL, which prior to the transactions described in the letter had Trudy Gordon, Charles Donald and Richard Blake as three equal shareholders, would acquire the issued share capital of GGL for an issue of shares to Mr Jamieson and Mr Donald (so that after the issue Mr Jamieson and Mr Donald would hold 64.75% and 27.75%, of the capital respectively):

GHL

GGL

Gabem
(New)

The letter also explained that much of the business of GGL would be   transferred to Gabem.

The letter concluded that after this period GGL’s business would be transferred to Gabem. The letter made no reference to a transfer of Gabem to GGL or to the later transfer in November 2003 of Gabem back to GHL.

(14)	The first letter to Gabem (rather than GGL) or its advisers which raised the section 559(4) issue is the Respondents refusal of 23 June 2006.

(15)	Miss Gordon told me and I accept, that from 2005 onwards Gabem had had risk management workshops with its advisers. At those workshops  CIS was recognised as one of the major risks and in particular was appreciated by Baker Tilly as such. Baker Tilly advised orally at those meetings. Baker Tilly, however, never advised that the PSC’s needed CIS4’s or that section 559 might apply to the payments made by Gabem.
164.	Mr Goodfellow submits that the management of Gabem and GGL took professional advice relating to its CIS compliance obligations. None of those advisers advised that there was any deduction obligation in respect of the payments it made. He says that Mr Bishop’s letter of 23 July 2002, the provision of information by Gabem, the meeting with Mr Birnie, the continuation of GGL’s CIS 5, the renewal of its CIS 5, and the grant of the CIS 5 to Gabem in June 2003 all led Gabem reasonably to believe that there was no Section 559(4) Issue: no one had come back and said “do you not have obligations under section 559(4) in relation to the payments you make?”; the point was not even raised until 2006. The lack of any hint from the Revenue or from Gabem’s advisers that this was an issue indicated that Gabem were not culpable in relation to this issue.
The Revenue’s Acquiescence
165.	I remind myself that the issue is what Gabem knew about what it had told the Revenue and what the Revenue had said to Gabem; not what the Revenue actually had knowledge of or said. There was nothing in the correspondence before me to suggest that the Revenue had expressly indicated that there was no Section 559(4) Issue. There was no express acquiescence. Neither do I believe that someone who knew that this was a possible issue could reasonably have regarded the correspondence received by Gabem as indicating an implicit acceptance by the Revenue that there was no issue. The nearest the dialogue gets to anything like that is Mr Jamieson’s letter in 2001 referring to the “all the Gabem companies” and the subsequent grant of the certificate; and the 23 July 2002 letter from Mr Bishop to GGL in which Mr Bishop said that once he had received and considered the information he was asking for, he would consider revoking the certificate. But the first of those made only an oblique reference to this issue (and was in relation to the position before the clause 5 addition in 2003), and in relation to the second, whilst at that stage it might be reasonable to consider that HMRC would after the passing to it of further information (and therefore by April 2003 at the latest) possessed of sufficient information to understand Gabem’s operation, the failure to revoke the certificate or to raise the issue could have had so many reasons other than that the Revenue had accepted that there was no problem, that it would not in my view be reasonable to conclude that the Revenue had either concluded that there was no issue or that it had acquiesced in the default.
166.	Further, the information possessed by HMRC seems not to have included the Services Agreement with the new clause 5. This could have reasonably been considered to be likely to affect or to have changed their view of the position.
167.	As a result, in my opinion, the only relevant reliance which Gabem can place on its dealings with the Revenue is that the Revenue did not alert it to the issue: since Gabem was not aware of the issue it cannot be treated as having been told “it was ok” by the Revenue; and if Gabem had been aware of the issue it could not reasonably have taken the correspondence as saying “it is ok”.
168.	Mr Goodfellow says that the question whether GGL could have a CIS 5 Certificate and the composites could continue without any CIS card or a certificate was directly raised with the Revenue, in Mr Jamieson’s letter of 2001. But I do not think that letter is enough reasonably to lead to the view that the Revenue had acquiesced: the letter was written in relation to GGL, it was written 2½ years before Gabem stepped into GGL’s shoes, it was written before clause 5 appeared, there is no record of any reasoned response or explicit acceptance by the Revenue of the point, and the later letter from Mr Bishop in 2002 indicated that doubts remained in the Revenue’s mind.
169.	And I have in mind that the mere fact of the failure by the Revenue to alert Gabem to the issue is not relevant to whether Gabem’s failure was minor and technical (see paragraph 150 above).
Gabem’s advisers’ advice
170.	Mr Goodfellow says that reliance on professional advisers can exculpate a breach of an obligation. He relies on Morritt J in R v Sevenoaks General Commissioners & IRC ex parte Thorne [1989] STC 560 at 556g-567d. There Morritt J held that for the purpose of determining whether the taxpayer had a “reasonable excuse”, reliance on what his bank had told him could be relevant. Recently in Mrs M.A. Rowland v HMRC SPC 548 the Special Commissioner found that reliance on professional advisers could found a reasonable excuse.
171.	In this case the situation is not that Gabem’s advisers advised explicitly that there was no Section 559(4) Issue but that they appear to have made no mention of the possibility. It was clear to me that Gabem took, and relied upon, advice from Baker Tilly, James Cowper & Co and Penningtons in relation to its business, and that they would have known that CIS compliance was very important to its business.
172.	It seems to me that this lack of advice is relevant to Gabem’s culpability. However there was no evidence that Gabem had requested a detailed formal review of its compliance from its advisers or any form of opinion that given its contracted documentation and other relevant facts, its procedures were compliant. Had such an opinion expressly been sought, and had that opinion indicated no concern then Gabem would in my view have been significantly less culpable. I am not suggesting that there is any magic in a formal opinion, but Gabem’s business involved the application of technical rules and formal legal structures: in these circumstances a considered view of the effect of the structures might be more reasonably expected. And I do wonder, if the provisions of clause 5 of the Services Contract had been before the advisers when formally opining on CIS compliance, whether alarm bells would have rung or the terms of that contract been made more explicit. The adage about playing with fire comes to mind; in a technical business a very formal technical approach would recommend itself. Clearly Gabem also had other technical issues to deal with - the applicability of the small companies rate, the proper deductibility of expenses, the IR 35 legislation; all these must have occupied its advisers’ minds as well. But I do not see that being busy about one’s business in one direction makes a failure in another direction less culpable. I think it would be reasonable to expect it not simply to have taken general advice but to have sought to express formal advice on their CIS structure. Thus it seems to me that the lack of advice does not wholly exonerate Gabem from any failure.
173.	Mr Goodfellow asks me to find as fact that the management at Gabem at all material times believed that there was no need for the PSCs to have separate CIS 4 cards or CIS 5 or 6 certificates. He says that such a belief was based upon (1) the circumstances surrounding Chris Jamieson’s 2001 letter, (2) HMRC’s issue of a CIS 5 to GGL without qualification, (3) Mr Bishop’s letter of 23 July, (4) the absence of cancellation following provision of information to the Revenue in 2002/2003, (4) the renewal of GGL’s and the grant of Gabem’s certificate, and (5) compliance checks by HMRC in the remainder of the qualifying period.
174.	I am unable to draw from this basis the conclusion which Mr Goodfellow asks me to. The most in my view that could be found is that the Gabem management were not aware that there was a possible Section 559(4) Issue: those facts do not support an inference that the management believed either that there was no requirement for CIS 4 certificates or that there was a possibility that they might be required but the Revenue had indicated that they were not required in terms of sufficiently clear to enable the management to believe that there was no need for such certificates. Neither was there any evidence that Gabem’s management believed that the new clause 5 had been brought to the attention of the Revenue.
Lack of Obviousness
175.	Mr Goodfellow says that the Section 559(4) Issue is a difficult one. The reasoning depends upon whether, and if so, how, Gabem acts as an agent; whether the payments Gabem makes are payments to a subcontractor or its nominee is not immediately obvious; and whether they were made under a contract relating to construction operating are all question to which there is not an immediately apparent answer. Those are technical questions.
176.	Mr Brennan says that whether or not the point is difficult is not relevant to the question. He says that the taxpayer is always at liberty to seek professional advice or a ruling from the Revenue. He says that the quality of a failure is not to be judged from the complexity of the legislation. Mr Brennan says that for example whether or not the Revenue found the Section 559(4) Issue a difficult point is irrelevant. He says that whether a point is made minor and technical is one for me, not a question of what the Revenue or anyone else thought.
177.	It seems to me that lack of legal certainty can be relevant to whether a failure is minor and technical. If different advisers (or even different courts) take different views on the application of a particular statutory provision to the circumstances of a taxpayer then I think that the issue is properly described as a technical one. If, a taxpayer in reliance on such advice, or on the decision of a court in circumstances similar to its own, takes one view in its tax compliance, and subsequently a court or a different court takes another view, its resultant lack of compliance could fairly be said in my view to be “minor and technical”.
178.	Even with the benefit of the tutelage of Mr Brennan and Mr Goodfellow I have not found the Section 559(4) Issue an easy one. That is because of the difficulty I have had in descrying the true role of Gabem in relation to the PSCs and the true nature of the payments it makes under the Services Agreement. Further my conclusion that in certain circumstances Gabem was required to deduct from payments to be made to HMRC and provide vouchers etc to HMRC having inspected HMRC’s CIS 4 is one which is surprising.
179.	It seems to me therefore that to some extent at least this is a technical issue and probably one therefore which an ordinary taxpayer could be forgiven for having overlooked and which for such a taxpayer could be said to have been minor and technical. This seems particularly the case in relation to the payments to HMRC. I can see no way in which a failure to deduct tax from payments to HMRC and to account for that tax to HMRC separately, to seek to inspect a CIS 4 from HMRC or to prepare vouchers and reports in respect of such payments could ever be described as anything else than minor and technical however large the relevant payments.
180.	But in the context of Gabem’s business, the failure to deduct etc in relation to payments to the workers, even though it may rest upon technicalities of the law, does not seem to me to be minor. The proper classification of payments by Gabem is close to the heart of its operations. And I have a real doubt whether, in the composite sense of “minor and technical”, that such a failure qualifies as such simply because of the difficulties I have experienced in reaching a conclusion of the issue. But I believe it goes some way towards such classification.
Conclusion
181.	Thus I am left with the question as to whether the fact that the advisers did not address this issue, coupled with the difficulties I have found with the technicalities is enough to conclude that any Section 559(4) Issue failure was minor and technical.
182.	If the test was whether Gabem had a reasonable excuse for these defaults I would find that it did. But the test is different and I think more stringent. Overall, and not without some hesitation and regret, I find that these failures taken together were significant and cannot be termed minor and technical. The effect of the failure was to fail to deduct etc for a period of some years and the circumstances reflect that Gabem to some degree took its eye off the ball in relation to the issue and was thus not wholly blameless.
(iii)	Minor and Technical: application to the Regulation 42 issue
183.	I have no doubt that if I was wrong in holding that Gabem did not fail the condition in section 565(8)  by reason of its failure to notify a change of control pursuant to Regulation 42, then this default was minor and technical.
184.	In my opinion the contents of, and the sending of the s138 clearance letter to, the Revenue are irrelevant to this question. That letter made no mention of the transfer of Gabem by GGL to GHL and could not reasonably have been assumed to have provided the Revenue with the requisite notice. Neither was there any evidence that that application letter was, at the time notice should have been given, regarded by Gabem as having provided the requisite notice. It was as irrelevant to the question as to whether notice had been given as it is to the question of whether the failure to give notice was minor and technical.
185.	 Mr Brennan points out that who controls a certificate holder is important. Section 561(7) permits the Revenue to make compliance by shareholders with the relevant conditions a further condition for issue of a certificate if there is a change in control of a company. The person who control a company may affect the use - or abuse - of a certificate. Thus he says that the obligation to report under Regulation 42 is not minor.
186.	It seems to me that the significance of the failure must be judged by reference to the circumstances and effects of the failure. This was a single failure to comply. It was a failure which in fact put at risk no future reporting or payment obligation. It was a failure to report the loss of control by one person, not the gaining of control by another. The person who lost control was not a company of special standing - such as a regulated entity or a highly capitalised company or a company of especially high reputation; the company and the other person who retained control remained the same. It was a failure which resulted in no reduction in payments to the Revenue. Gabem had not been told by its advisers it should report and  I do not find that it had been told to report and had then failed to do so deliberately: Gabem did not exhibit special culpability in its failure. Control is important and the Revenue rightly need to know when it changes, but a change of control in these circumstances was minor, the obligation to report technical, and the failure minor and technical.
9. Reason to doubt
187.	The taxpayer escapes from a failure using section 565(4) in circumstances where the failure is minor and technical only if it is also the case that the failure “does not give reason to doubt that” the taxpayer will comply with future Taxes and Management Act obligations.
188.	Mr Goodfellow rightly points out that this is not a test of general expectation or doubt, but instead a test of whether the particular failure gives reason to doubt. I must therefore consider the alleged failures separately.
189.	It seems to me that it cannot be simply the failure which is to be considered in applying this condition but the circumstances surrounding the failure: a mere failure however small or large will not on its own provide any reason to take a particular view of the future.
(a) 	the section 559(4) issue failure
190.	If I was wrong and Gabem’s Section 559(4) Issue failure was minor and technical then the statute raises the further question as to whether that failure gives reason to doubt future compliance.
191.	The decision against which the appeal is made makes no mention of the issue, but in contrast to the wider issues which may arise under the Reason to Expect test which I discuss below, consideration of this issue flows naturally and automatically from a minor and technical finding and by its nature is limited to the production by the failure on doubt rather than any more general issues. It therefore seems proper for me to venture a view upon the issue.
192.	I do not believe that Gabem’s failure in relation to the section 559(4) Issue gives reason to doubt future compliance. It seems to me that this was a particular oversight which was not indicative of any systemic failure to take proper care or any cavalier attitude towards compliance. Thus if I had held that the failure was minor and technical I would have found that section 559(4) did not apply in whole.
 (b) 	the Regulation 42 issue failure
193.	Gabem failed to comply with Regulation 42 when its shares were transferred from GGL to GHL That failure, however, gives me no cause to doubt that Gabem will comply with the requests or obligations described in section 565(3), or the obligations in section 565(5) and (6): there was nothing in the circumstances of this failure or in nature which suggested a cavalier attitude towards proper compliance or lack of proper concern which would make me doubt future compliance.
10.	Reason to expect
194.	There is a difference between the Reason to Doubt test and the Reason to Expect test. It is not simply that an applicant with a “past” has to jump a higher hurdle; he has instead to jump an extra hurdle: and I can envisage circumstances where an applicant could jump either of them but not the other: it is quite possible to have reason to expect a pupil to get four As at A level but yet have doubts as to whether he will because of an occasion on which he failed to do quite that well in a mock exam; and also possible that a failure in a mock French exam because of a cold would give no reason to doubt future performance but yet not to expect success because of an inability to master Latin. Under this heading I simply have to ask myself: is there reason to expect future good compliance by Gabem?
195.	I find the following additional facts:-
(1)	Miss Gordon is now responsible for CIS compliance. She takes this role seriously. She discharges it by appointing others to advise rather than becoming involved in the detail. Although conscientious she is not (as some of the mistakes in her witness statement showed) someone who is assiduously scrupulous as to, and painstakingly interested in, every detail.

(2)	Gabem have employed an in house lawyer to work on the legal details. They continue to take advice from Penningtons and now take advice on CIS compliance from KPMG. These are reputable firms.

(3)	Mr Stokes is responsible for other aspects of Gabem’s tax compliance. He is competent and straightforward. He relies on professional advisers for technical advice.

(4)	Gabem’s accounting systems are sufficiently sophisticated to produce the accounting information needed for its compliance with Taxes Act obligations. It submits some 27,000 corporate tax returns each year.

(5)	Since the refusal to renew its CIS 5 certificate and the raising of the Section 559(4) Issue, Gabem have made applications for CIS 4 certificates for most of its PSCs. This required some 56,023 applications. It also requires a vast number of monthly vouchers, (some 20,000). The Revenue have had difficulties providing application forms and vouchers but Gabem have pressed ahead. Some of the PSCs are not involved in construction industry contracts - PSCs for teachers and nurses for example. Some of Gabem’s CIS 4 applications have been for such companies - companies which do not need CIS 4s. Gabem took a cautious view. It decided to apply for a CIS 4 if there was a possibility that the company was in the CIS scheme. Gabem have been making effects to identify whether a PSC is engaged in the construction industry, and putting in place procedures to apply for CIS 4s and to apply the CIS scheme only in relation to PSCs involved in the construction industry.

(6)	Gabem’s invoices in cases where they suspect CIS applies (or otherwise) now bear a strip indicating to the Agency/User that they think it applies (or not) but invites the Agency/User to take a different view.

196.	Mr Brennan says that the Appellant does not appear to have in place systems to comply with its obligations. It appears not to be able to identify whether payments are within or without the construction industry scheme. He says that the scatter gun approach of making 56,000 CIS 4 applications is not evidence of a serious attempt to comply with it s obligations but simply an attempt to oppress HMRC. It evinces he says a cavalier attitude not a responsible one, and the company’s new strap line on its invoices confirm that it does not know what it is doing rather than that it is likely to be compliant.
197.	In Subcontractor v HMRC Spc 553, it was argued that in hearing an appeal against the issue of a certificate, the tribunal had to put itself into the shoes of HMRC and decide for itself whether the statutory conditions were met. Dr Avery Jones held that this was an unworkable approach. He said that he did not consider that that was his task on an appeal which was to review the reasons which are stated for the refusal: his appellate jurisdiction was restricted to considering the reasons for refusal given by HMRC and replacing the answers with his own if appropriate. He therefore refused to instigate a wide ranging enquiry into all the relevant facts and limited himself to the reasons given by HMRC for refusal together with any reason subsequently coming to light in the representation. I agree with this approach.
198.	The Respondents’ letter refusing renewal of Gabem’s CIS 5 certificate made no reference to the Reason to Expect test although the writer did say:
“I should point out here that, as we have not fully explored all matters, there may be factors not indicated above that would also lead to the conclusion that a CIS 5 certificate should not be issued.”

199.	I do not regard that as a decision that the Reason to Expect test is not satisfied.
200.	Nevertheless issues arose in representations, and in evidence before me which were relevant to this issue. Mr Brennan’s submission exposed those issues. I will therefore indicate whether on the evidence before me this test was satisfied.
201.	In my judgement it was. Although Gabem’s  56,023 applications may have been over cautious and even oppressive they did not prevent the approach they took being one which gave reason to expect CIS compliance. The initial inability to weed out the teacher from the builder did not prevent an expectation of compliance so long as the CIS scheme was applied in cases of doubt - which appears to have been the case. Thus I find no weight of evidence not to expect compliance.
202.	But I also find reason to expect compliance (and reasons which are not vitiated by evidence to the contrary). Those reasons are the competence and knowledge of Mr Stokes, the attitude and serious approach of Miss Gordon, the taking of new professional advice, the steps put in place after the refusal, and the relative sophistication of Gabem’s systems. I find that there is reason to expect that Gabem will in respect of periods ending after the 3 years ending with the date of Gabem’s application comply with all such obligations as are referred to in section 565(2) to (7) and with such requests as are referred to in section 565(3) to the extent that the evidence before me might be argued to suggest otherwise.
10.	Conclusion
203.	I apologise for the length of this decision. In an attempt to produce it more quickly I have left exposed thinking which otherwise would have been omitted or condensed. I conclude:
(i)	that when Gabem contracts as principal under the authority of clause 5 of the Services Agreement it does not contract as ostensible principal;
(ii)	that there are contracts which relate to construction operations in which it so contracts and in relation to which it is therefore a sub-contractor;
(iii)	that since it does so contract it satisfies the Business Condition;
(iv)	but that since it does so contract it also makes payments under the Services Agreement (the back-to-back contract with the PSC), which are payments within section 559 because the Services Agreement is in this situation a contract relating to construction operations under which the PSC is a sub-contractor, and the payments are made to a nominee of the PSC;
(v)	that since Gabem did not comply with the obligations to withhold, inspect and report in relation to those payments it failed the Compliance condition in section 565(3); and
(vi)	that it was not, at least so far as concerns the payments made to the worker, saved by the minor and technical defence in section 565(4),
and accordingly that the CIS 5 certificate ought to be refused. Therefore I dismiss the appeal.
204.	If I was wrong about the capacity in which Gabem acted when it acted under the authority in clause 5 so that it acted on this hypothesis as ostensible principal, then I would have found:
(i)	that it did satisfy the Business Condition;
(ii)	that the payments it made were not within section 559 and accordingly that there was no failure to comply with the related deduction, inspection and reporting requirements;
(iii)	that either there was no relevant failure to satisfy the section 565(3) condition in relation to the 2003 change of control, or that such failure was minor and technical;
(iv)	that if there was a failure it gave no reason to doubt future compliance; and
(v)	that there was reason to expect that Gabem would comply with its relevant obligation in the future,
and therefore I would have allowed the appeal.

CHARLES HELLIER

SPECIAL COMMISSIONER
RELEASE DATE: 8 January 2007

SC 3120/06

Authorities referred to in skeletons etc. and not referred to in the decision:

Hudson v JDC Services Ltd [2004] EWHC 602 (Ch);
Templeton (HMIT) v Transform Shop Office and Bar Fitters Limited [2005] EWHC 1558 (Ch);
Steeden v Carver (HMIT) [1999] STC (SCD) 283;
Jones and Another v Stones [1999] 1 WLR 1739, CA;
Habib Bank Ltd v Habib Bank AG Zurich [1981] 1 WLR 1265;
R (Unilever) v IRC (CA) [1996] STC 681;
HMRC v Facilities Maintenance Engineering Ltd [2006] EWHC 2659 (Ch);
Barclays Bank Plc v Commissioners of Customs and Excise (No. 2) [1991] VATTR 466;
Countrywide Insurance Marketing Ltd v Commissioners of Customs and Excise [1993] VATTR 277;
Curtis Edington & Say Ltd v Commissioners of Customs and Excise (1994) VAT Decision 11966;
Ex parte Delhasse; In re Megevand (1878) 7 Ch D 511;
Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199;
Montgomerie and Others v UK Mutual SS Assn Ltd [1891] 1 QB 370;
The Transcontinental Underwriting Agency SRL v Grand Union Insurance Co Ltd and Another [1987] 2 Lloyd’s Rep. 409;
Said v Butt [1920] 3 KB 497;
Cooke & Sons v Eshelby (1887) 12 App. Cas. 271;
Commissioners of Customs and Excise v Pools Finance [1952] 1 A11 ER 775;
Motor Union Insurance Company Ltd v Mannheimer VG [1933] 1 KB 812;
Shaw v Vicky Construction 75 TC 26;
R v IRC ex p Preston [1985] AC 835;
R v CIR ex p MFK Underwriting Agencies Ltd & Others [1990] 1 WLR 1545;
R (on the application of Wilkinson) v CIR [2005] 1 WLR 1718;
Hudson Contract Services v HMRC [2005] STC (SCD) 485.