No mercy

The Court of Appeal has ruled in the case of G-Con Ltd vs Arnold (HM Inspector of Taxes) that subcontractors that want to obtain or renew a CIS certificate will have to be on their best behaviour over tax compliance. Little latitude will be granted to those that cannot show a more or less unblemished record. G-Con, a small electrical and plumbing contractor, was set up in 2002. In four months it had been granted a CIS certificate, even though at that stage, it could not come near to showing that it had been tax-compliant for the qualifying period of three years. Similarly, 11 months later, the CIS certificate was renewed for a further year, still despite the fact that the three-year period had not been met.

A year later, the Revenue refused a renewal on the grounds that G-Con had been consistently late in paying PAYE and NI contributions. However, the pattern of late payments had been more or less similar during the periods when a certificate had been issued and when it was refused. G-Con appealed to the general commissioners, who allowed it on the grounds that the breaches had been "minor and technical".

Section 565(3) of the act says applicants for CIS certificates "must, subject to sub-section (4), have complied with all obligations imposed … under the Tax Acts". Sub-section (4) provides a let-out from this. It says a company shall be treated as having satisfied sub-section (3) if the Revenue is of the opinion that the failure is "minor and technical" and further, that the failure does not give reason to doubt that there will be future compliance with tax obligations.

The Revenue appealed against the restoration of G-Con's CIS certificate. Judge Mann allowed the appeal and overruled the commissioners, holding that it could not reasonably be concluded that the late payments could be regarded as minor and technical, given that 23 monthly instalments of PAYE varying from £4500 to £7000 were between six and 40 days late.

Three months later, Judge Laddie came to a different conclusion about how the minor and technical loophole should be applied in Cormack vs CBL Cable Contractors Ltd. There, CBL had not only paid PAYE and NIC late but had a record

of other failures, too. Nonetheless, the commissioners considered the Revenue's refusal to renew the CIS certificate to be unreasonable and that the failures could be regarded as minor and technical.

The Revenue appealed. Judge Laddie dismissed that appeal and refused to change the commissioners' decision. He decided that the 'minor and technical' let out should be interpreted to gauge whether a sub contractor would default on his tax obligations. In this case, he said it was open to the commissioners to have decided that the failures were minor.

The approaches taken by the two judges were plainly at odds. G-Con was given permission to appeal by Lord Justice Chadwick because the two approaches were difficult to reconcile, and consistency of approach was of obvious importance to the construction industry.

So when can the minor and technical let-out be called upon? The answer in G-Con's case was not if you have a record of late tax and NI payments, even if the Revenue has not imposed interest charges, or penalties, or in any other way complained about the late payments. The fact that the Revenue had issued no warning about the CIS certificate being put in jeopardy was also irrelevant, according to the Court of Appeal.

The leading judge, Sir Peter Gibson, made it clear that in considering whether a failure was minor and technical, you could not look at the tax record overall, nor set the particular failure against other areas in which there was a good record of tax compliance. You simply had to look at the quality of the particular failure giving rise to the refusal of the certificate.

It was also irrelevant that a certificate had previously been granted or renewed when it might have been refused. The court held that the decision of Judge Mann was right and that Judge Laddie had erred in principle, and the correctness of the CBL decision was open to serious doubt.

The G-Con decision means that in practice the availability of the minor and technical let-out will not be open except in the case of trivial failures.