The Construction Industry Scheme

The Construction Industry Scheme (CIS) originated in the Finance Act of 1971 and was designed to clamp down on the practice prevalent at the time of subcontractors evading the payment of tax.
The current regime is contained within Chapter IV of Part VIII of the Income and Corporation Taxes Act 1988. Contractors are required to deduct a proportion of all payments that they make to subcontractors in respect of labour and to pay over that proportion to the Inland Revenue, unless the subcontractor possesses a current CIS certificate.
Under the provisions of the Act, CIS certificates will be issued to subcontractors, effectively excluding them from the regime, where they can demonstrate that there is no substantial risk of
tax evasion.
Section 565 of the Act sets out the conditions that must be satisfied by companies so that they may obtain a CIS certificate. Under that Section, a company must have complied with all obligations imposed on it by the tax Acts for three years immediately prior to the application for the CIS certificate and must have complied with any requests that the tax authorities may have made in respect of the com-pany's accounts.
Section 565(4) provides a limited exception to these requirements and affords a let out from the consequences of non-compliance in a strictly limited class of case, such that any company that has failed to comply with these requirements will nevertheless obtain its CIS certificate if the Inspector of Taxes is satisfied that the failure is "minor and technical".
The recent case of Her Majesty's Inspector of Taxes
-v- JDC Services examined these provisions. The Inspector of Taxes had refused to issue a CIS certificate to JDC Services as a consequence of its rather poor tax history. During the period prior to the application, JDC had been late 31 times in making payments of PAYE and CIS deductions. It had been consistently late in filing its tax returns and up to a year late in clearing payments of corporation tax.
Despite that history and despite the fact that the CIS was devised to operate in such circumstances with the effect that companies such as JDC would be bound by the requirements of the scheme, JDC successfully appealed to the General Commissioners for Tax in Basildon, Essex. The Commissioners agreed that, as
a matter of law, JDC's non-
compliance with the tax requirements was not of a minor or technical nature.
Nevertheless, the Commis-sioners noted that JDC had made considerable and sustained efforts to bring its tax affairs up to date. Arrears of some £100,000 of tax had been paid off in instalments over two and a half years by arrangement with the tax authorities. The Commissioners recorded that they believed JDC was now a well run company, whose directors had made every effort to overcome their indebtedness. Relying upon assurances given by the company's directors and accountants, it was considered that JDC would be in a position to pay its future taxation on the due dates.
In short, according to the Commissioners, JDC had demonstrated that it was professional and that it had taken significant and determined measures to ensure that its tax affairs were put in order, thereby fulfilling its agreement with the Inland Revenue. Accordingly, the Com-missioners overturned the refusal of the Inspector of Taxes and granted a CIS certificate to JDC.
It seems that decision was unsatisfactory to the Inspector of Taxes, who commenced proceedings to have the decision reviewed in the High Court. Mr Justice Lightman reviewed the relevant statutory provisions and noted that the clear policy of the legislation was to require the holder of a CIS certificate to have a good record of compliance with the tax obligations, with no failure in the past of any significance. He noted that the Commissioners themselves had expressly held that JDC's failures were not minor or technical, but despite this had granted JDC a CIS certificate.
As a statutory reviewing body, the Commissioners of Taxes were entitled to consider afresh whether the applicant was or was not entitled to a CIS certificate. The decision of the Commissioners, therefore, could not be successfully challenged on the grounds that it was not free to substitute its own judgment. Nevertheless, that judgment had to be sound in law. Mr Justice Lightman recorded that there were two specific requirements that the Commissioners were bound to take into account.
First, JDC would have to satisfy the court that its past failure to comply with the tax obligations was minor and technical. Since the Commissioners had expressly held that JDC's failures were not minor or technical, the appeal should have been dismissed. The decision of the Commissioners was accordingly flawed by error of law on that ground alone.
Second, under Section 565(4) of the Act, in the case of a company that had failed in the past to comply with its tax obligations, the company would be required to establish that the past failure did not give reason to doubt that there would be compliance in the future.
The Commissioners had failed to address this particular point and on that ground also, their decision could not stand. Accordingly, the decision of the Commissioners to grant JDC Services a CIS certificate was wrong. Mr Justice Lightman overturned that decision and quashed the CIS certificate that had been issued.