[2011] UKFTT 199 (TC)

TC01068

Appeal number TC/2010/04709

Construction industry scheme -- withdrawal of gross payment status -- Finance Act 2004 - whether HMRC have discretion to withdraw gross payment status - whether discretion exercised - jurisdiction of Tribunal to review HMRC decision - appeal allowed

FIRST-TIER TRIBUNAL

TAX 

	JOHN SCOFIELD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE)							ANNE REDSTON (TRIBUNAL MEMBER)

Sitting in public at 45 Bedford Square, London WC1 on 20 January 2011

Keith Gordon and Ximena Montes Manzano, Counsel, for the Appellant

Nicola Parslow, Appeals and Review Unit, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This is an appeal against the cancellation of registration for gross payment in respect of the Construction Industry Scheme ("CIS"). We first heard this appeal on 14 July 2010. We adjourned the appeal for further argument on the meaning of section 66 Finance Act 2004. This decision relates to the issues considered at that adjourned appeal. 
Background
2.	HMRC wrote to the Appellant, Mr Scofield, on 29 January 2010 notifying him that his gross payment status under the CIS was being cancelled pursuant to section 66 Finance Act 2004. That letter identified ten compliance failures. By the time of the hearing on 14 July 2010, HMRC had accepted that eight of those were, in fact, problems relating to allocation of those payments by HMRC and were not compliance failures at all. HMRC also accepted that, as regards one other compliance failure, Mr Scofield had a reasonable excuse for that failure and that it should, therefore, be disregarded.
3.	At the time of the first hearing there was, therefore, one compliance failure which formed the basis for the cancellation of gross payment status. This related to the late payment of income tax (self-assessment second payment on account) of £10,094.65 which was due on the 31 July 2009 but was not paid until 4 September 2009. The fact that this payment of income tax was made over 30 days late was accepted by both parties.
4.	When we first heard this appeal on 14 July 2010 we decided ([2010] UKFTT 377 (TC)) that Mr Scofield did not have a reasonable excuse within the meaning of paragraph 4 (4) Schedule 11 Finance Act.
5.	In the course of the hearing we observed to Mr Shea, who represented HMRC at the first hearing, that section 66 (1) Finance Act 2004 appeared to give HMRC a discretion whether to cancel Mr Scofield's registration for gross payment. In particular, we drew attention to the words in section 66 (1) which provided:
"The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if it appears to them that –
(a) if an application to register the person for gross payment were to be made at that time the Board would refuse so to register him...."
6.	Mr Shea submitted that HMRC had no discretion under section 66 (1). As we recorded in our decision, he confirmed that (at paragraph 37):
" once the computerised records indicated that there had been one or more compliance failures, HMRC's role was limited to determining whether there had in fact been a compliance failure within the meaning of the statutory provisions and whether there had been a reasonable excuse for any failures. In practice, usually because of lack of information at that stage, it was often difficult for HMRC to decide the question of 'reasonable excuse'."
7.	We should perhaps, at this stage, explain that if a taxpayer has a "reasonable excuse" for a compliance failure paragraph 4 (4) of Schedule 11 Finance Act 2004 allows the failure to be disregarded.
8.	Mr Shea applied for the hearing to be adjourned for further legal argument on this point. We granted Mr Shea's application, adjourned the hearing for further argument on this and other related points. Our directions were as follows:
"The appeal will be listed for further argument on the questions whether:
(a) HMRC have a discretion whether to cancel registration for gross payment under s. 66 (1) Finance Act 2004; and 
(b) if we conclude that such a discretion exists:
(i) whether HMRC failed to exercise any such discretion;
(ii) the consequences of a failure to exercise any such discretion; and 
(iii) the nature of the Tribunal's jurisdiction under s.67(4) Finance Act 2004 to review a determination of HMRC under s.66(1) Finance Act 2004."
Statutory provisions
9.	The CIS was originally introduced in the 1970s to counteract perceived evasion of tax by self-employed workers in the building industry. Under the CIS a person making payments to a subcontractor is obliged to deduct an amount (effectively on account of tax) from the payment. The Scheme has been revised on several occasions and the relevant provisions are now contained in the Finance Act 2004 and regulations enacted thereunder. These provisions came into effect on 6 April 2007. In short, the requirement to deduct on account of tax is removed if the subcontractor is registered for gross payment with HMRC.
10.	The relevant statutory provisions are set out below. We have set these provisions out more extensively than would usually be the case because we consider it important that the provisions of section 66 (1) which are in dispute should be seen in their statutory context. The relevant provisions are as follows: 
57  Introduction
(1)     This Chapter provides for certain payments (see section 60) under construction contracts to be made under deduction of sums on account of tax (see sections 61 and 62).
(2)     In this Chapter “construction contract” means a contract relating to construction operations (see section 74) which is not a contract of employment but where—
(a)     one party to the contract is a sub-contractor (see section 58); and
(b)     another party to the contract (“the contractor”) either—
(i)     is a sub-contractor under another such contract relating to all or any of the construction operations, or
(ii)     is a person to whom section 59 applies.
(3)     In sections 60 and 61 “the contractor” has the meaning given by this section.
(4)     In this Chapter—
(a)     references to registration for gross payment are to registration under section 63(2),
(b)     references to registration for payment under deduction are to registration under section 63(3), and
(c)     references to registration under section 63 are to registration for gross payment or registration for payment under deduction.
(5)     To the extent that any provision of this Chapter would not, apart from this subsection, form part of the Tax Acts, it shall be taken to form part of those Acts.
58  Sub-contractors
For the purposes of this Chapter a party to a contract relating to construction operations 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 (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.
59  Contractors
(1)     This section applies to the following bodies or persons—
(a)     any person carrying on a business which includes construction operations;
60  Contract payments
(1)     In this Chapter “contract payment” means any payment which is made under a construction contract and is so made by the contractor (see section 57(3)) to—
(a)     the sub-contractor,
(b)     a person nominated by the sub-contractor or the contractor, or
(c)     a person nominated by a person who is a sub-contractor under another such contract relating to all or any of the construction operations.
(2)     But a payment made under a construction contract is not a contract payment if any of the following exceptions applies in relation to it.
(3)     This exception applies if the payment is treated as earnings from an employment by virtue of Chapter 7 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (c 1) (agency workers).
(4)     This exception applies if the person to whom the payment is made or, in the case of a payment made to a nominee, each of the following persons—
(a)     the nominee,
(b)     the person who nominated him, and
(c)     the person for whose labour (or, where that person is a company, for whose employees' or officers' labour) the payment is made,
is registered for gross payment when the payment is made.
But this is subject to subsections (5) and (6).
(5)     Where a person is registered for gross payment as a partner in a firm (see section 64), subsection (4) applies only in relation to payments made under contracts under which—
(a)     the firm is a sub-contractor, or
(b)     where a person has nominated the firm to receive payments, the person who has nominated the firm is a sub-contractor.
(6)     Where a person is registered for gross payment otherwise than as a partner in a firm but he is or becomes a partner in a firm, subsection (4) does not apply in relation to payments made under contracts under which—
(a)     the firm is a sub-contractor, or
(b)     where a person has nominated the firm to receive payments, the person who has nominated the firm is a sub-contractor.
(7)     This exception applies if such conditions as may be prescribed in regulations made by the Board of Inland Revenue for the purposes of this subsection are satisfied; and those conditions may relate to any one or more of the following—
(a)     the payment,
(b)     the person making it, and
(c)     the person receiving it.
(8)     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 is to be taken to be made under the contract; and if—
(a)     the obligation is to make a payment to a person (“A”) within paragraph (a) to (c) of subsection (1), but
(b)     the payment discharging that obligation is made to a person (“B”) not within those paragraphs,
the payment is for those purposes to be taken to be made to A.
61  Deductions on account of tax from contract payments
(1)     On making a contract payment the contractor (see section 57(3)) must 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.
(2)     In subsection (1) “the relevant percentage” means such percentage as the Treasury may by order determine.
(3)     That percentage must not exceed—
(a)     if the person for whose labour (or for whose employees' or officers' labour) the payment in question is made is registered for payment under deduction, the percentage which is the basic rate for the year of assessment in which the payment is made, or
(b)     if that person is not so registered, the percentage which is the higher rate for that year of assessment.
62  Treatment of sums deducted
(1)     A sum deducted under section 61 from a payment made by a contractor—
(a)     must be paid to the Board of Inland Revenue, and
(b)     is to be treated for the purposes of income tax or, as the case may be, corporation tax as not diminishing the amount of the payment.
(2)     If the sub-contractor is not a company a sum deducted under section 61 and paid to the Board is to be treated as being income tax paid in respect of the sub-contractor's relevant profits.
If the sum is more than sufficient to discharge his liability to income tax in respect of those profits, so much of the excess as is required to discharge any liability of his for Class 4 contributions is to be treated as being Class 4 contributions paid in respect of those profits.
(3) – (7)....

11.	Section 63  Finance Act 2004 deals with the provisions relating to registration of subcontractors. Section 63 provides as follows: 
“(1)     If the Board of Inland Revenue are satisfied, on the application of an individual or a company, that the applicant has provided—
(a)     such documents, records and information as may be required by or in accordance with regulations made by the Board, and
(b)     such additional documents, records and information as may be required by the Inland Revenue in connection with the application,
the Board must register the individual or company under this section.
(2)     If the Board are satisfied that the requirements of subsection (2), (3) or (4) of section 64 are met, the Board must register—
(a)     the individual or company, or
(b)     in a case falling within subsection (3) of that section, the individual or company as a partner in the firm in question,
for gross payment.
(3)     In any other case, the Board must register the individual or company for payment under deduction.”
64  Requirements for registration for gross payment
(1)     This section sets out the requirements (in addition to that in subsection (1) of section 63) for an applicant to be registered for gross payment.
(2)     Where the application is for the registration for gross payment of an individual (otherwise than as a partner in a firm), he must satisfy the conditions in Part 1 of Schedule 11 to this Act.
(3)     Where the application is for the registration for gross payment of an individual or a company as a partner in a firm—
(a)     the applicant must satisfy the conditions in Part 1 of Schedule 11 to this Act (if an individual) or Part 3 of that Schedule (if a company), and
(b)     in either case, the firm itself must satisfy the conditions in Part 2 of that Schedule.
(4)     Where the application is for the registration for gross payment of a company (otherwise than as a partner in a firm)—
(a)     the company must satisfy the conditions in Part 3 of Schedule 11 to this Act, and
(b)     if the Board of Inland Revenue have given a direction under subsection (5), each of the persons to whom any of the conditions in Part 1 of that Schedule applies in accordance with the direction must satisfy the conditions which so apply to him.
(5)     Where the applicant is a company, the Board may direct that the conditions in Part 1 of Schedule 11 to this Act or such of them as are specified in the direction shall apply to—
(a)     the directors of the company,
(b)     if the company is a close company, the persons who are the beneficial owners of shares in the company, or
(c)     such of those directors or persons as are so specified,
as if each of them were an applicant for registration for gross payment.
(6)     See also section 65(1) (power of Board to make direction under subsection (5) on change in control of company applying for registration etc).
(7)     In subsection (5) “director” has the meaning given by section 67 of the Income Tax (Earnings and Pensions) Act 2003 (c 1).
65  Change in control of company registered for gross payment
(1)     Where it appears to the Board of Inland Revenue that there has been a change in the control of a company—
(a)     registered for gross payment, or
(b)     applying to be so registered,
the Board may make a direction under section 64(5).
(2)     The Board may make regulations requiring the furnishing of information with respect to changes in the control of a company—
(a)     registered for gross payment, or
(b)     applying to be so registered.
[(3)     In this section references to a change in the control of a company are references to such a change determined in accordance with section 995 of the Income Tax Act 2007.]

12.	Section 66 Finance Act 2004 permits HMRC to cancel a person's registration for gross payment. It will be seen that section 66(1)(a) allows HMRC to cancel gross payment status if an application for gross payment status would have been refused at that time. 
13.	Section 66 provides, so far as is relevant :
66  Cancellation of registration for gross payment
(1)     The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if it appears to them that—
(a)     if an application to register the person for gross payment were to be made at that time, the Board would refuse so to register him,
(b)     he has made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or
(c)     he has failed to comply (whether as a contractor or as a sub-contractor) with any such provision.
(2)     Where the Board make a determination under subsection (1), the person's registration for gross payment is cancelled with effect from the end of a prescribed period after the making of the determination (but see section 67(5)).
(3)     The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if they have reasonable grounds to suspect that the person—
(a)     became registered for gross payment on the basis of information which was false,
(b)     has fraudulently made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or
(c)     has knowingly failed to comply (whether as a contractor or as a sub-contractor) with any such provision.
(4)     Where the Board make a determination under subsection (3), the person's registration for gross payment is cancelled with immediate effect.
(5)     On making a determination under this section cancelling a person's registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation.
(6)     Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (1), the person must be registered for payment under deduction.
(7)     Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (3), the person may, if the Board thinks fit, be registered for payment under deduction.
(8)     A person whose registration for gross payment is cancelled under this section may not, within the period of one year after the cancellation takes effect (see subsections (2) and (4) and section 67(5)), apply for registration for gross payment.
(9)     In this section “a prescribed period” means a period prescribed by regulations made by the Board.
14.	Section 67 Finance Act 2004 provides an appeal mechanism in respect of the cancellation of gross payment status and describes the jurisdiction of the Tribunal in subsection (4). Section 67 provides:
67  Registration for gross payment: appeals
(1)     A person aggrieved by—
(a)     the refusal of an application for registration for gross payment, or
(b)     the cancellation of his registration for gross payment,
may by notice appeal . . ..
(2)     The notice must be given to the Board of Inland Revenue within 30 days after the refusal or cancellation.
(3)     The notice must state the person's reasons for believing that—
(a)     the application should not have been refused, or
(b)     his registration for gross payment should not have been cancelled.
(4)     The jurisdiction of the [tribunal] on such an appeal [that is notified to the tribunal] shall include jurisdiction to review any relevant decision taken by the Board of Inland Revenue in the exercise of their functions under section 63, 64, 65 or 66.
(5)     Where a person appeals against the cancellation of his registration for gross payment by virtue of a determination under section 66(1), the cancellation of his registration does not take effect until whichever is the latest of the following—
(a)     the abandonment of the appeal,
(b)     the determination of the appeal by the [tribunal], or
(c)     the determination of the appeal by the [Upper Tribunal or a court].
(6)     . . .
15.	Section 64 Finance Act 2004, above, sets out the requirements that have to be met by an applicant seeking registration for gross payment. Section 64 (4) provides that where an individual applies for gross payment registration, it must satisfy the conditions in Part 1 of Schedule 11 of Finance Act 2004. Part 1 of Schedule 11 provides for three tests which the subcontractor must satisfy, as follows:
-- paragraph 2: "the business test"
-- paragraph 3: "the turnover test"
-- paragraph 4: "the compliance test"
It was common ground that the "business test" and the "turnover test" were satisfied in this case. However, HMRC considered that the “compliance test” in paragraph 4, while satisfied on initial registration, was not satisfied at the date of a subsequent review.
16.	The relevant provisions of Part 1 of Schedule 11 are as follows:
1 (1)     In the case of an application for an individual to be registered for gross payment, the following conditions must be satisfied by the individual.
   (2)     ...
The business test
2  The applicant must satisfy the Inland Revenue, by such evidence as may be prescribed in regulations made by the Board of Inland Revenue, that he is carrying on a business in the United Kingdom which—
(a)     consists of or includes the carrying out of construction operations or the furnishing or arranging for the furnishing of labour in carrying out construction operations, and
(b)     is, to a substantial extent, carried on by means of an account with a bank.
The turnover test
3 (1)     The applicant must satisfy the Inland Revenue, by such evidence as may be prescribed in regulations made by the Board of Inland Revenue, that the carrying on of the business mentioned in paragraph 2 is likely to involve the receipt in the year following the making of the application of an aggregate amount by way of relevant payments which is not less than the amount specified in regulations made by the Board as the minimum turnover for the purposes of this sub-paragraph.
(2)     In sub-paragraph (1) “relevant payments” means payments under contracts relating to, or to the work of individuals participating in the carrying out of, any operations which—
(a)     are of a description specified in subsection (2) of section 74; but
(b)     are not of a description specified in subsection (3) of that section,
other than so much of the payments as represents the direct cost to the person receiving the payments of materials used or to be used in carrying out the operations in question.
(3)     The Board may make regulations for the purpose of enabling a person who does not satisfy the condition in sub-paragraph (1) to be treated as satisfying that condition in such circumstances as may be prescribed.
The compliance test
4 (1)     The applicant must, subject to sub-paragraphs (3) and (4), have complied with—
(a)     all obligations imposed on him in the qualifying period (see paragraph 14) by or under the Tax Acts or the Taxes Management Act 1970 (c 9), and
(b)     all requests made in the qualifying period to supply to the Inland Revenue accounts of, or other information about, any business of his.
(3)     An applicant or company that has failed to comply with such an obligation or request as—
(a)     is referred to in sub-paragraph (1), and
(b)     is of a kind prescribed by regulations made by the Board of Inland Revenue,
is, in such circumstances as may be prescribed by the regulations, to be treated as satisfying the condition in that sub-paragraph as regards that obligation or request.
(4)     An applicant or company that has failed to comply with such an obligation or request as is referred to in sub-paragraph (1) is to be treated as satisfying the condition in that sub-paragraph as regards that obligation or request if the Board of Inland Revenue are of the opinion that—
(a)     the applicant or company had a reasonable excuse for the failure to comply, and
(b)     if the excuse ceased, he or it complied with the obligation or request without unreasonable delay after the excuse had ceased.
  (7)     There must be reason to expect that the applicant will, in respect of periods after the qualifying period, comply with—
(a)     such obligations as are referred to in sub-paragraphs (1) to (6), and
(b)     such requests as are referred to in sub-paragraph (1).
(8)     Subject to sub-paragraphs (3) and (4), a person is not to be taken for the purposes of this paragraph to have complied with any such obligation or request as is referred to in sub-paragraphs (1) to (5) if there has been a contravention of a requirement as to—
(a)     the time at which, or
(b)     the period within which,
the obligation or request was to be complied with.

17.	It will be noted that paragraph 4(3) allows certain defaults to be ignored as specified in regulations. The regulations referred to in paragraph 4(3) above are contained in the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2045) ("the Regulations"). Paragraph 32 (Table 3) of these Regulations states that a failure to pay income tax by the due date is ignored for the purposes of the compliance test, providing payment is made within 28 days. Only one such disregard is allowed in a twelve month period.  
18.	Paragraph 14 Schedule 11 Finance Act 2004 defines the "qualifying period" as a period of 12 months ending with the date of the application in question.
Legal principles -the discretion issue
19.	This appeal gives rise to a question of statutory interpretation. The issue is whether the words used in section 66 (1) allow HMRC to exercise a discretion when making a determination cancelling a registration for gross payment or whether, in making that determination, no discretion exists and the cancellation is automatic. Mr Gordon, appearing for Mr Scofield, favours the former interpretation and Mrs Parslow, appearing for HMRC, favours the latter.
20.	It may be helpful at the outset to review some basic rules of statutory interpretation.
21.	First, an Act of Parliament must be read as a whole. Sometimes, if there is an ambiguity, the scheme of the Act (or, if there is a discrete part of the Act, that part) may resolve the meaning of the statutory words: see e.g. per Lord Halsbury in IRC v Priestly [1901] AC 208 at 213.
22.	Secondly, the statutory words under consideration must be construed in context: see Viscount Simonds in A-G v Prince Ernest Augustus of Hanover [1957] AC 436 at 463.
23.	Thirdly, legislation should be construed purposively. In Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 Lord Nicholls, delivering the judgment of the judicial committee, said (at 11):
"As Lord Steyn explained in IRC v McGuckian [1997] STC 908 at  915, [1997] 1 WLR 991 at 999, the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. Until the Ramsay case, however, revenue statutes were 'remarkably resistant to the new non-formalist methods of interpretation'. 
The Ramsay case ([1981] STC 174, [1982] AC 300) liberated the construction of revenue statutes from being both literal and blinkered." 
24.	His Lordship continued by quoting with approval the "influential speech"of Lord Wilberforce. First ([1981] STC 174 at 179, [1982] AC 300 at 323), on the general approach to construction:
"A subject is only to be taxed on clear words, not on 'intendment' or on the 'equity' of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are 'clear words' is to be ascertained on normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: see Inland Revenue Comrs v Wesleyan and General Assurance Society [1946] 2 All ER 749 at 751, 30 Tax Cas 11 at 16 per Lord Greene MR and: Mangin v Inland Revenue Comrs [1971] 1 All ER 179 at 182, [1971] AC 739 at 746 per Lord Donovan)." 

25.	Fourthly, the statutory history of the provision may be used as an aid in construing a later version of the statutory provisions: see Baylis (HMIT) v Roberts [1989] STC 693 and the decision of Peter Gibson J and the Court of Appeal in R v HM Inspector of Taxes, ex p Lansing Bagnall Ltd [1986] STC 117 and 453 respectively.
26.	Fifthly, statutory provisions must be read and given effect in a way that is compatible with the provisions of the Convention for the Protection of Human Rights: section 3 Human Rights Act 1998.
27.	Finally, in Pepper v Hart [1992] STC 898 at 923 Lord Browne-Wilkinson, allowing the taxpayer to refer to Hansard in construing a taxing statute, said:
"I therefore reach the conclusion, subject to any question of parliamentary privilege, that the exclusionary rule should be relaxed so as to permit reference to parliamentary materials where:
(a) legislation is ambiguous or obscure, or leads to an absurdity;
(b) the material relied on consists of one or more statements by a minister or other promoter of the Bill together if necessary with such other parliamentary material as is necessary to understand such statements and their effect;
(c) the statements relied on are clear.
Further than this, I would not at present go."
28.	Section 66 (1) uses the word "may". A quick glance at Stroud's Judicial Dictionary of Words and Phrases or Halsbury’s Laws of England will disclose many authorities which discuss whether "may" is permissive or whether it imposes an obligation. We hope it is not disrespectful to the learning displayed in these cases if we summarise them as follows. The word "may" is usually permissive, conferring a power and a discretion and not imposing an obligation. However, the statutory context or the legislative history of the provision in question can, exceptionally, mean that the word "may" is mandatory -- in other words it imposes a duty upon the authority in question to take the specified action.
29.	The learned author of Stroud's Judicial Dictionary of Words and Phrases (fifth edition) has summarised the position as follows:
"MAY (1) Though dicta of eminent judges may be cited to the contrary, it seems a plain conclusion that "may," "it shall be lawful," "it shall and may be lawful," "empowered," "shall hereby have power," "shall think proper," and such like and phrases, give, in their ordinary meaning, and enabling and discretionary power. "
30.	In the leading case of Julius v Lord Bishop of Oxford (1880) 5 App Cas 214 at 222 - 223 Earl Cairns LC said:
"The words “it shall be lawful” are not equivocal. They are plain and unambiguous. They are words merely making that legal and possible which there would otherwise be no right or authority to do. They confer a faculty or power, and they do not of themselves do more than confer a faculty or power. But there may be something in the nature of the thing empowered to be done, something in the object for which it is to be done, something in the conditions under which it is to be done, something in the title of the person or persons for whose benefit the power is to be exercised, which may couple the power with a duty, and make it the duty of the person in whom the power is reposed, to exercise that power when called upon to do so. Whether the power is one coupled with a duty such as I have described is a question which, according to our system of law, speaking generally, it falls to the Court of Queen's Bench to decide, on an application for a mandamus. And the words “it shall be lawful” being according to their natural meaning permissive or enabling words only, it lies upon those, as it seems to me, who contend that an obligation exists to exercise this power, to shew in the circumstances of the case something which, according to the principles I have mentioned, creates this obligation."
31.	These words were quoted or referred to with approval by Peter Gibson J and the Court of Appeal in R v HM Inspector of Taxes, ex p Lansing Bagnall Ltd (above) and by Knox J in Baylis (HMIT) v Roberts (above) and the expression "it shall be lawful" was regarded as having the same meaning as the word "may".
32.	In ex p Lansing Bagnall Ltd  the words "... there may be apportioned..." were held to confer a general discretion to apportion income of a close company and that they did not impose an obligation on the Inland Revenue to exercise the powers of apportionment. Accordingly, the notices of apportionment issued by the Inland Revenue, on the basis that they had no discretion in the matter, were invalid and were quashed. In that case, Peter Gibson J and the Court of Appeal considered earlier versions of the legislation in dispute.
33.	In Baylis (HMIT) v Roberts Knox J held that the legislative history of the provision in question indicated that the words "he may be charged" did not confer a general discretion on the Inland Revenue. In addition, in that case, Knox J considered the statutory provision to be a quantification provision with the primary liability being imposed under another provision.
Submissions of the parties -- the discretion issue
34.	Mr Gordon submitted that the words used in section 66 (1) ("may at any time make a determination") were clear. They were clearly permissive words that granted HMRC a discretion whether to cancel gross payment status. Mr Gordon noted the way in which the drafting of the CIS provisions in the Finance Act distinguished between the word "may" and "must".
35.	During the previous hearing, HMRC had argued that the word "may" in section 66 (1) might, in some way, be limited to the phrase "at any time". Mr Gordon argued that this submission in fact suggested that a discretion did in fact exist. If cancellation of gross payment status was, as HMRC argued, automatic it seemed odd that HMRC would then have a discretion as to when it should implement the cancellation. It was to be expected that a compulsory deregistration would be effected as soon as possible. The words "at any time", Mr Gordon submitted, simply allowed HMRC to revisit a contractor's file at any time of the compliance failure came to light.
36.	In the present case, Mr Gordon noted that in the present case eight out of ten of the alleged failures were in fact allocation failures and were not compliance failures that all. Section 66 (1) only requires that it should "appear" to HMRC that there had been a compliance failure. If cancellation of the registration were automatic HMRC would be obliged to deregister a subcontractor without regard to the actual facts. This appeared to have been a problem in the present case. 
37.	The provisions of section 67 also, in Mr Gordon's view, indicated that cancellation of registration was discretionary. Section 67 (3) provided that the notice of appeal shall state the reasons why the appellant believes the registration should not be cancelled. Mr Gordon contrasted that this with other cases where the jurisdiction of the Tribunal is circumscribed (e.g. regulation 72B Income Tax (Pay As You Earn) Regulations 2003 SI 2003/2682). Mr Gordon submitted that this permitted arguments to be advanced on reasons other than whether or not the alleged compliance failures occurred. 
38.	Mr Gordon pointed out section 67 (4) allows the Tribunal "to review any relevant decision" taken by HMRC in the course of their functions, including their decision to cancel registration for gross payment status. Without this extension, it could be argued that the Tribunal's jurisdiction was limited to considering the grounds of appeal raised by the taxpayer. However, the extended wording expressly provided that the Tribunal may judicially review the decision-making process (as well as the decision itself). Mr Gordon submitted that this was a further indication that the legislation conferred a discretion on HMRC and that it is amenable to review by the Tribunal.
39.	Mrs Parslow submitted that the legislation should be given its ordinary meaning construed as a whole and the individual words within section should be read in context. Since there was doubt as to the plain meaning of the words ("may at any time make a determination"), it was permissible to look at Hansard. In this case, however, there were no Hansard entries. In addition, since there was doubt as to the plain literal meaning of the words, it was permissible to apply a purposive construction to support HMRC's interpretation that the words did not confer a discretion. Mrs Parslow referred to HM Inspector of Taxes v Transform Shop Office and Bar Fitters Ltd (2005) EWHC 1558 (CH) where Hart J said at paragraph 14:

“The purpose which Parliament plainly had in mind in the legislation was to procure a strict compliance with tax obligations by making such compliance the price of obtaining a certificate”.

40.	It should be noted that in these comments Hart J was addressing the provisions of section 565 (4) Income and Corporation Taxes Act 1988, in relation to a previous version of the CIS legislation. Immediately after the sentence quoted above, Hart J continued saying:
"Parliament also recognised that failures to achieve such strict compliance might be, in the context of the grant of such certificates, venial."
41.	Mrs Parslow also referred to the decision of this Tribunal in Ductaire Fabrications Ltd v HMRC [2009] UKFTT 350 (Judge Green and Mr Cherry) where the tribunal said at paragraph 18:
“The Tribunal did also consider the Appellant’s submission that withdrawal of the gross status would have an adverse effect on the business. However, the purpose of Parliament in creating the legislation was to procure strict compliance with tax obligations by making such compliance the price of obtaining a certificate and there could be an unfair competitive advantage to allow the gross payment status to continue despite clear failures."
42.	Mrs Parslow accepted that in both cases the question whether a discretion existed under section 66 (1) was not under consideration.
43.	Mrs Parslow cited the judgment of Lewison J in Barnes v Hilton Main Contractors [2005] STC 1532, referring to Ferris J in Shaw v Vicky Construction Ltd, where Lewison J said (at 1544 - 45) in the context of discussing the issue of proportionality:
" Ferris J in the Vicky case came to the conclusion that the package of measures has an objectively justifiable aim, namely to recover tax from those engaged in the construction industry. One possible solution to the problem would have been to require all contractors to submit to tax deductions when being paid by an employer. That might have been legislative overkill. Another might have been to require all sub-contractors to submit to deduction, but Parliament did not do that. Instead it provided a route by which sub-contractors who could demonstrate a good track record would be permitted to receive payment in gross. Even then Parliament did not say that any failure to comply with obligations would prevent the sub-contractor from receiving payment in gross. Minor and technical failures do not count if the taxpayer can also show that minor and technical failures give rise to no doubt about future compliance."
44.	Whilst this case concerns the exception for minor and technical failures contained in an earlier version of the CIS legislation, Mrs Parslow submitted that the same principle should be applied to the current legislation. The purpose of the legislation was to limit registration for gross payment to those subcontractors who had demonstrated compliance with their tax obligations. Nonetheless, Mrs Parslow noted that it had been provided that some compliance failures could be disregarded (e.g. Regulation 32 of the Income Tax (Construction Industry Scheme) Regulations SI 2005/2045 and Regulation 2 of the Income Tax (Construction Industry Scheme) (Amendment No 2) Regulations SI 2008/1282).
45.	As regards the disputed words in section 66 (1) ("may at any time make a determination"), Mrs Parslow submitted that the words must be taken together. In her submission the word "may" qualified, or had to be read as applying to, the phrase "at any time". The correct way to read the legislation was that the word "may" permitted the Board, as the custodian/guardian of the legislation (in accordance with Section 1 Taxes Management Act 1970, as amended by the Commissioners for Revenue and Customs Act 2005), "at any time" to review the behavioural compliance of a subcontractor.
46.	Mrs Parslow said that a compliance test would usually be run in relation to each subcontractor every 12 months (although the compliance test could be run on other occasions if information in the hands of HMRC so required). The normal practice was not to review an earlier decision within 12 months. This was the way that HMRC's computer was programmed. In her submission section 66 (1) afforded the Board a wide discretion as to, first, whether  it exercises its right to run a compliance test and, secondly, the time at which it chooses to run the test. HMRC's computer program generated determinations cancelling registration for gross payment status automatically. 
47.	The determination would be triggered by the number and type of defaults in the 12 month test period (which had a five-day grace period built-in as a safety net). An officer of the Board would review the case if there was an appeal. In short, Mrs Parslow submitted that, to the extent that section 66 (1) permitted HMRC to exercise a discretion, that discretion was exercised by virtue of the way in which HMRC’s computer program had been written. 
48.	In addition, The Board could alter the parameters of the program. Mrs Parslow noted that the Income Tax (Construction Industry Scheme) (Amendment No 2) Regulations SI 2008/1282, Regulation 2, allowed HMRC to disregard outstanding amounts of less than £100. This Regulation came into force on 3 June 2008, after the 6 April 2007 commencement date of the primary CIS legislation in the Finance Act 2004. Mrs Parslow submitted, as we understood it, that the making of these Regulations (and presumably their incorporation into HMRC’s computer program) constituted an exercise of discretion by HMRC, albeit through delegated legislation.
49.	Section 66 (3) also contains identical wording ("may at any time make a determination cancelling a person's registration for gross payment"). In this case, the provision deals with a situation in which HMRC has reasonable grounds to suspect that a person obtained registration on the basis of false information, or has fraudulently provided an incorrect return or provided incorrect information or has knowingly failed to comply with any provision. Mrs Parslow argued that one would not expect HMRC to have a discretion in such serious situations. She contrasted the mandatory obligation on HMRC to register a person for gross payment status where the conditions had been met (section 63).
50.	At the original hearing, Mrs Parslow noted that the Tribunal had contrasted the language of section 66 (1) with section 65 (1). The latter section, which allows HMRC to make a direction in the case of a change control of a company registered for gross payment, also uses the word "may". Mrs Parslow noted, however, that the phrase "at any time" was not used in conjunction with the word "may".
51.	Mrs Parslow repeated her submission that the CIS provisions in the Finance Act 2004 distinguish between provisions which simply used the word "may" (e.g. section 65 (1)) and those which use the expression "may at any time" (e.g. section 66 (1) and (3)). In its decision in relation to the earlier hearing, where this argument was also raised, Mrs Parslow noted that the Tribunal observed that the natural reading of the modal verb "may" would be that it qualified the words " make a determination" rather than the adverbial phrase "at any time". If the Tribunal was correct that, as a grammatical matter, "may" qualified the verb "make", then on a plain and literal meaning "may" could mean that "HMRC has permission to/is empowered to" make a determination, but not as a matter of discretion.
52.	An alternative way of looking at this grammatical argument, according to Mrs Parslow, was that the adverbial phrase "at any time" might in fact qualify the main verb ie "make". In that case, the sentence could be rephrased as follows: "HMRC may make the determination at any time". Mrs Parslow submitted that, in this case, "may" should be read as meaning "must" and "at any time" should be taken to mean that the determination can, as a matter of fact, be made at any time.
53.	Mrs Parslow referred to Words and Phrases Legally Defined (third edition) where it is stated that "may" is a permissive or enabling expression, but that there are cases in which, for various reasons, as soon as the person who is within the statute is entrusted with the power it becomes his duty to exercise it. She referred to the Australian case of Johnson's Tyne Foundry Pty Ltd v Shire of Maffra [1949] ALR 89 at 101 per Williams J:
" 'May', unlike 'shall', is not a mandatory but a permissive word although it may acquire a mandatory meaning from the context in which it is used, just as 'shall' which is a mandatory word may be deprived of the obligatory force and become permissive in the context in which it appears."
54.	Mrs Parslow also referred to Re Eyre & Leicester Corporation [1892] 1 QB 136 at 142 -- 143 and R v Barlow (1693) 2 Salk 609 at 609, where it was held that the word "may" was construed as imposing an obligation.
55.	Furthermore, it was not axiomatic, Mrs Parslow said, that "may" means "discretion" or "discretionary". According to the Concise Oxford Dictionary the second meaning given to "may" is "permission". Permission, in plain English, could mean "allow" in the sense of "enable" or "give power to".
56.	Finally, Mrs Parslow accepted that the Tribunal has full appellate jurisdiction in this appeal pursuant to section 67 (4) Finance Act 2004
Discussion -- the discretion issue
The ordinary and natural meaning of the words
57.	We consider that, in the first place, the disputed words in section 66 (1) should be given that ordinary and natural meaning. The words "the Board may at any time make a determination" seem to us, on their face, to be permissive. There is a requirement that it must appear to the Board that the requirements of sub-paragraphs (a)-(c) of subsection (1) must be satisfied, but we construe those requirements as a condition to the exercise by the Board of its power to make a determination.
58.	In particular, we reject Mrs Parslow's submission that "may" refers principally to the phrase "at any time". This is not, in our view, the natural way of reading the introductory wording of section 66 (1). Mrs Parslow was essentially submitting, in relation to this linguistic point, that those introductory words should read as follows:
"the Board of Inland Revenue must make a determination (and may make such determination at any time) cancelling a person's registration for gross payment ...."
59.	It seems to us that if the disputed introductory words of section 66 (1) are given their natural meaning, the modal auxiliary verb "may" should be taken to qualify both the verb "make" and the adverbial phrase "at any time". This has result that those words make perfect sense, in accordance with accepted principles of English grammar, without the need to rewrite or manipulate, or to impose any gloss on, the language used by Parliament. 
The statutory context
60.	The statutory context is an important aid to the construction of any statutory provision. The context may, in some cases, suggest that a word may have a different meaning from its ordinary and natural meaning. For present purposes, the words of Earl Cairns LC in Julius v Lord Bishop of Oxford, quoted earlier in this decision, articulate the principle very clearly.
61.	The CIS provisions are contained in Part 3 Chapter 3 of the Finance Act 2004. There were previous versions of the CIS, but in response to complaints from the construction industry the Government published a consultation document entitled "The Inland Revenue and the Construction Industry:  Working together for a New Scheme" in November 2002. The CIS provisions in the Finance Act 2004 represented the Government's response to the consultation process. These provisions were regarded as a new scheme, although in a number of respects some of the provisions were clearly based on the earlier legislative versions of the scheme. We shall examine the legislative history of section 66 (1) later in this decision. The important point, for present purposes, is that the Finance Act 2004 provisions represent a self-contained code. It is to this code that we now turn in order to examine the statutory context of section 66 (1).
62.	Even a cursory review of Part 3 Chapter 3 of the Finance Act 2004 will reveal that the drafting of the CIS provisions distinguishes carefully between the use of the word "may" and the word "must".
63.	Some examples may make the picture clearer. 
64.	Section 62 deals with the treatment of sums deducted by contractors. Section 62 (7) provides the regulations under this section "may contain such supplementary, incidental or consequential provision as appears to the Board to be appropriate." The use of the word "may", in such circumstances, would hardly seem, at first sight, to merit a mention. It is a commonplace piece of drafting which is repeated in countless numbers of statutes. A public body is empowered to make appropriate provision in regulations pursuant to a piece of primary legislation. It is particularly common in tax statutes. But there is no obligation on the public body to make regulations in a particular way, other than that they must be supplementary, incidental or consequential. It is simply an enabling power.
65.	More significantly, however, section 62 (3) (b) and (d), in the context of dealing with how sums deducted under section 61 from payments made by contractor are to be treated, specify in both cases that "regulations must provide" (emphasis added) for sums deducted to be treated in a particular way if the sub-contractor is a company. It is plain that the draftsman intended that there should be an obligation on the Board in making regulations on this topic to ensure that the regulations have a particular effect. This was made clear by using the word "must provide" in contrast to the normal formula "may contain such ... provision as appears to the Board to be appropriate."
66.	In addition, section 62 (1) provides that a sum deducted from a payment by contractor ... "must be paid" to the Board (emphasis added). This is plainly (and understandably) intended to place an obligation on the contractor to account to HMRC for sums deducted (effectively on account of tax) and the sense of obligation is conveyed by the word "must".
67.	Section 63 deals with registration for gross payment or for payment under deduction. Section 63 (1) provides that if the Border are satisfied that the applicant has provided the relevant documents, records and information "the board must register the individual or company" (emphasis added). 
68.	Furthermore section 63 (2) provides that if the requirements of subsections (2), (3) or (4) of section 64 are met, "the Board must register" (emphasis added) the individual or company for gross payment. 
69.	Section 63 (3) states that the Board "must register" (emphasis added) the applicant for payment under deduction in any other case. 
70.	Once again, the mandatory requirement of registration (provided any necessary conditions have been fulfilled) is expressed by the word "must". This is particularly important because the conditions referred to in section 63 (2) include, inter alia, the compliance test contained in Part 1 of Schedule 11 of the Finance Act 2004. It is the failure of the compliance test which enables HMRC to cancel registration for gross payment under section 66 (1). The contrast in wording between section 63 (2) and section 66 (1) is to be noted.
71.	Section 64 specifies the requirements that have to be satisfied for registration for gross payment in the case of an individual, a company (and a company or an individual which is a partner in a firm). In each case (in five places) the statute says that the applicant "must satisfy" (emphasis added) certain conditions set out in Schedule 11. It is plain that it is a mandatory requirement that an applicant for gross payment status should satisfy the requirements of Schedule 11. The mandatory nature of is expressed by the word "must".
72.	 In addition, section 64 continues, in subsection (6), by referring to section 65 (1) which it describes  as a "power of Board to make direction under section 64 (5)". Section 65 (1) states that the Board "may make a direction" under section 64 (5). In this provision, therefore, the reference to a "power" of the Board specifically recognises that the word "may", at least in this provision, is intended not to impose an obligation but to confer a power. Thus, within the same section the draftsman has carefully and unmistakably distinguished between an obligation and the power by the respective use of the word "must" and "may".
73.	The words of section 66 (1) have already been recited in this decision and there is no need to repeat them here. Nonetheless, section 66 (3) uses exactly the same introductory wording as section 66 (1) ("The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment"). The provision continues to require that the Board must have reasonable grounds to suspect that the person has been registered for gross payment on the basis of false information, has fraudulently made an incorrect return or provided incorrect information, or has knowingly fail to comply with certain provisions. Where the Board make a determination under section 66 (3) the cancellation of registration for gross payment status is effective immediately.
74.	Section 66 (5) provides that:
"On making a determination under this section cancelling a person's registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation." (Emphasis added)
75.	The requirement that the Board must without delay give notice stating the reasons for the cancellation is a mandatory requirement (see Radford and Robinson v HMRC [2010] UKFTT 31 (TC)) and a failure to comply with the requirement renders the determination ineffective. Once again, the mandatory nature of the obligation is expressed by the word "must".
76.	Section 66 continues, in subsection (6), by providing that where a person's registration for gross payment is cancelled by virtue of a determination made under subsection (1), the person "must be registered for payment under deduction" (emphasis added). The requirement is plainly mandatory and once more the obligatory requirement is conveyed by the word "must".
77.	In contrast, section 66 (7) provides that where a person's registration for gross payment is cancelled by virtue of a determination under subsection (3) (ie for false information, fraudulent returns etc) the person "may, if the Board thinks fit, be registered for payment under deduction." In this case the Board is clearly under no obligation to register a person for payment under deduction. Instead, the Board is given a power to register the person. The Board may choose to exercise this power or it may refrain from doing so. The discretionary nature of this power is expressed by the word "may". It seems to us particularly telling that, in the same section as one in dispute, Parliament has carefully distinguished between a mandatory obligation and the discretionary power by using respectively the words "must" and "may". This can hardly be an accident.
78.	We should note for completeness that section 66 (8) provides that a person whose registration progress payments is cancelled "may not" reapply for registration for gross payment within a year of cancellation. In this context, "may not" means that there is no permission to reapply for registration. We consider that the use of the word "may" in subsection (8) is consistent with its use in subsection (1). 
79.	Moreover, as explained above, in section 66 the drafter has used the word "may" four times and the word "must" twice. HMRC’s submissions would ask us to believe that the word "may" was intended to mean "must"  (or, at least, a power with an obligation to use that power) in section 66 (1) (and, according to Mrs Parslow's submissions, subsection (2)) but to have a different meaning elsewhere in the same section. This would be a strange conclusion, which of itself suggests that it cannot be right.
80.	The appeal provisions of section 67 provide in subsection (1) a person who was refused registration progress payment or whose registration progress payment is cancelled "may by notice" (emphasis added) appeal. In this case, "may" is clearly permissive because there is obviously no obligation to appeal. Section 67 (2) specifies that the notice of appeal "must be given to the Board" (emphasis added) within 30 days after the refusal of cancellation. This is clearly a mandatory requirement because failure to appeal within the relevant time limit would require permission for an appeal to be brought out of time.
81.	Finally, Schedule 11 Part 1 paragraphs 1 (1), 2, 3 (1), 4 (1) and (5) (a) and (b) (6) all place mandatory requirements on an individual applicant using the word "must". Parts 2 and 3 contain similar mandatory requirements for firms and companies.
82.	The conclusion that we draw from this detailed study of 3 Chapter 3 of the Finance Act 2004 is that Parliament has taken considerable care when using "must" and "may" to distinguish between the two words. The former is invariably used to impose a mandatory obligation. The latter is invariably used to confer a power or permission. Importantly, the two words are sometimes used in contrast to each other. We therefore take the view that the context overwhelmingly points to the conclusion that the words "may at any time make a determination" in section 66 (1) confer a power and do not impose an obligation.
83.	In reaching this conclusion we have considered the contextual argument put forward by Mrs Parslow in relation to section 66 (3). Once again the introductory words of this provision state that the Board "...may at any time make a determination cancelling a person's registration for gross payment". Section 66 (3) then continues to require that the Board should "have reasonable grounds to suspect that the person" became registered on the basis of false information, has fraudulently made an incorrect return or provided incorrect information, or has knowingly fail to comply with certain provisions. Mrs Parslow submitted that in such circumstances it would not be expected that HMRC should have a discretion, but rather that they should be under an obligation to cancel the person's registration.
84.	We do not consider this a compelling argument. Quite apart from the reluctance to construe a statutory provision by reference to other anomalies, it is to be noted that where a registration is cancelled under section 66 (3) such cancellation has immediate effect (section 66 (4)). The cancellation of a registration under section 66 (1) takes effect after 90 days. Moreover, where a registration is cancelled under section 66 (3) HMRC has a discretion whether to register the person for payment under deduction, whereas someone deregistered under section 66 (1) has a right to be registered for payment under deduction. Clearly, the sanction under section 66 (3) is a more severe one. It is not inconceivable, given the severity of the consequences, that Parliament might have wished HMRC to use its discretion to consider whether, on the facts of an individual case, such consequences were merited.
85.	Moreover, when we review the legislative history of section 66 later in this decision, it becomes clear that both subsections (1) and (3) were originally derived from the same statutory provision. In our view, this explains why the same introductory wording was used for both subsections.
Purposive interpretation
86.	Mrs Parslow submitted that in cases of ambiguity purposive interpretation of the relevant statutory language was permitted. We see things rather differently. We consider that a purposive interpretation of statutory language is simply one of the normal canons of statutory interpretation. It is not limited to cases of ambiguity but it is intended to identify the clear meaning of the statutory provision. As Lord Wilberforce said in Ramsay [1981] STC 174 at 179:
"There may, indeed should, be considered the context of the scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded."
87.	There is no doubt that the purpose of the CIS legislation is to prevent evasion of tax. The default rule whereby contractors make payments to subcontractors is that payments must be made under deduction. CIS registration for gross payment is granted in cases where the applicant can show a good compliance record. We would not, however, go further than that. Hart J, in HM Inspector of Taxes v Transform Shop Office and Bar Fitters Ltd (2005) EWHC 1558 (CH) referred (at paragraph 14) to "strict compliance with tax obligations" when considering the "minor and technical" exception under a previous version of the CIS legislation. In Barnes v Hilton Main Construction [2005] STC 1532 Lewison J said (at 1544 -- 45):
 "[Parliament] provided a route by which sub-contractors who could demonstrate a good track record would be permitted to receive payment in gross. Even then Parliament did not say that any failure to comply with obligations would prevent the sub-contractor from receiving payment in gross. Minor and technical failures do not count if the taxpayer can also show that minor and technical failures give rise to no doubt about future compliance."
88.	It is important when approaching guidance given by these authorities as to the purpose of statutory provisions not to fall into the trap of treating the guidance as a substitute for the statutory language which we have to interpret. Whilst Hart J refers to "strict compliance" and Lewison J refers to "a good track record" they are fundamentally making the same point. Gross payment registration is confined to compliant taxpayers. However, there are always different degrees of non-compliance with tax obligations. There can be repeated failure to make either a return or a tax payment on time and such failures can be the result of negligence or can be intentional. There can be a failure which is an isolated or one-off occurrence. Perhaps the failure can be the result of an honest mistake which did not amount to a reasonable excuse (within the meaning of paragraph 4 (4) Schedule 11 Finance Act 2004). 
89.	The general purpose of statutory provision can be easily enough identified. However, we do not think that that purpose can be so finely calibrated to assist us in this case. Certainly, registration for gross payment is a reward for compliance, yet it does not seem inconsistent with this general objective for HMRC to be given some discretion to take into account the type of non-compliance involved in a particular case (and perhaps its consequences).
90.	For these reasons, we do not consider that interpreting purposively the opening words of section 66 (1) leads to a different conclusion from the one suggested by the plain words used by the statute when considered in their statutory context.
Hansard
91.	We were in some doubt whether it was permissible, in this case, to refer to Hansard. Mr Gordon's primary submission was that the wording of section 66 (1) was clear and unambiguous. The word "may" was, in accordance with its normal meaning, permissive and not obligatory. However, Mr Gordon accepted that in some circumstances "may" could have a mandatory meaning and, in such circumstances, it may be appropriate to refer to Hansard.
92.	Mrs Parslow initially accepted that the word "may" in section 66 (1) was ambiguous. Indeed, her submission in relation to purposive construction suggested that purpose of construction was required where there was ambiguity - a submission with which, as indicated above, we disagree. There was, however, she said, nothing in Hansard which was relevant.
93.	On this basis, we considered that we could refer to Hansard. We had previously examined Hansard and found a relevant extract. We handed this extract to the parties. On examining the extract Mrs Parslow, rather too late in our view, changed her submission and instead argued that the word "may" was unambiguous and in the relevant statutory context had to be construed as imposing a mandatory requirement on the Board to make a determination.
94.	The final position, therefore, was that the primary submission of both parties was that the language of section 66 (1) was unambiguous, but both parties argued for completely different meanings. In those circumstances, we considered that our original decision that we could refer to Hansard, as a guide to the interpretation of the statutory provision, remained correct.
95.	In referring to Hansard we have borne in mind the three requirements set out in Pepper v Hart [1992] STC 898 at 923 by Lord Browne-Wilkinson which we have quoted earlier in this decision.
96.	In columns 856-858 of the debate of 27 April 2004 in relation to the Finance Bill 2004 an amendment was moved to Clause 66 of the Bill ("Cancellation of Registration for Gross Payment"). This was the provision which was eventually enacted as section 66 (1) Finance Act 2004. The proposed amendment related to what is now section 66 (1) (b) which allows the Board to cancel a person's registration for gross payment if he has made an incorrect return or provided incorrect information for the purposes of the CIS legislation or regulations made under it. The amendment (number 40) proposed to add at the end of section 66 (1) (b) the words: "twice within a period of five years." In other words, there had to be two incorrect returns in a five year period before the Board were entitled to cancel a person's registration.
97.	The amendment was moved by Mr Laws who said as follows:
"The aim of the amendment is to clarify one small aspect of the construction industry scheme, and clause 66 in particular. The concern is that subsection (1) (b) appears to be quite draconian, as just one error could lose a subcontractor his certificate. The preferable alternative suggested in the amendment is that an error in two returns in a five year period would trigger the loss of the certificate. Another alternative is to introduce the concept of some type of serious error, although that introduces subjectivity and presumably the Government would need to define "seriousness" in terms of the amount of money lost.
Subsection (8) provides that, if the gross payment registration is cancelled, the person may not reapply for gross payment status within one year of the cancellation taking effect. The subcontractor must, however, be registered for payment under deduction. I hope that the Paymaster General will clarify whether the draconian interpretation of subsection (1) (b) is merited, or whether we are missing something that will satisfy us that our concerns are not justified."
98.	The Paymaster General (Ms Dawn Primarolo) replied:
"The hon. Gentleman asks for reassurance about the regulations-making powers. I think that he interprets in an unnecessarily draconian fashion the conditions under which registration would be withdrawn.
The clause provides for regulation-making powers. The regulations, which are subject to discussion, will require the return to contain a declaration to the Inland Revenue. Without wishing to anticipate exactly what the industry may say, I think that I can assure the Committee that the declaration will be subject to the ‘two strikes’ point that the hon. Gentleman made. It will require the contractor to confirm that he has properly considered employment status.
Therefore, I do not think that the hon. Gentleman need worry. I wonder whether he will consider looking at the regulations when the consultation has been completed. I will happily forward them to him, so that you will be able to reassure himself and those outside the Committee, who clearly have a concern."
99.	  Mr Laws then withdrew the amendment. However, he then tabled a further amendment in relation to periodic returns by contractors. Mr Laws said:
"I seek clarification about the intention of the clause, in particular the requirement to say that a contract was not a contract of employment. The Paymaster General will understand why people are concerned about having to sign up to that requirement and the uncertainty that there may be in some circumstances. The Amendment invites her and the Government to make a judgement about the intention and the information available, rather than pursue a particularly draconian approach. I hope that she can reassure us that this provision will be interpreted sensibly, too."
100.	  Ms Primarolo replied:
"Again, as with the gross payments to which amendment number 40 referred, what is important on the question of the declaration is that we have a workable scheme. On both the gross payment and a declaration, we are seeking, in conjunction with the industry, to ensure that we have regulations and rules that are achievable and carry a disincentive for those who seek deliberately not to comply but that, equally, are sensitive enough to recognise that sometimes errors are genuinely made. It will be important to ensure that in the operation of the scheme and the regulations -- this applies to the declaration as well is to gross payments -- that balance is correctly achieved."
101.	  This final comment by the Paymaster General recognised that "in the operation of the scheme" and the regulations it would be important to ensure the correct balance between providing a disincentive for those who deliberately seek not to comply, on the one hand, and sensitivity to recognise that "sometimes errors are genuinely made", on the other hand.
102.	  As noted above paragraph 32 of the Regulations does provide some relaxation of the compliance test. Nonetheless, the Paymaster General was plainly envisaging the correct balance being struck not just by the Regulations but also "in the operation of the scheme". It is plain that these comments - indeed the Paymaster General made the point specifically in her reference to amendment number 40 - refer not just to the concern relating to the periodic returns made by contractors but also to the concern expressed about the potentially draconian effect of section 66 (1) (b). It should also be noted that there is no statutory defence in respect of genuine errors. A genuine error, without more, would not constitute a "reasonable excuse" within the meaning of paragraph 4 (4) of Schedule 11.
103.	  Overall, these comments by the Paymaster General are clear enough to suggest that some element of discretion ("sensitive enough") was envisaged in relation to the operation of the provisions permitting the Board to cancel registration for gross payment. We do not consider these extracts from Hansard to be determinative (certainly not in the way that the debates in Hansard influenced the outcome in Pepper v Hart) and we do not base our decision upon them. We consider instead that these comments are at least consistent (and certainly not inconsistent) with the ordinary and natural meaning of the introductory words of section 66 (1), as read in their statutory context, viz that they confer a discretion on HMRC.
104.	  In addition, we have also considered the Explanatory Notes published by HM Treasury to accompany the Finance Bill 2004. The relevant extract in relation to Clause 66 (1) reads as follows:
"Sub-section (1) allows the Board to cancel registration for gross payment where the person's application for gross status would fail, if made at that time.  That means that gross status can be cancelled where the person fails either the compliance or turnover test, at any time, once registered.  The Board may also cancel the registration where the person has made an incorrect return or provided incorrect information under the scheme, or where he has failed to comply with any provision of the scheme." (Emphasis added)
105.	  It will be noted that the Exclamatory Note states that the provision "allows" the Board to cancel registration for gross payment. This is clearly permissive. It does not suggest that the Board is required or obliged to cancel registration.  As to the propriety of  having recourse to Explanatory Notes, see: Westminster City Council v National Asylum Support Service [2002] UKHL 38 where Lord Steyn said at paragraph 5: 
“Insofar as the Explanatory Notes cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed, such materials are therefore always admissible aids to construction.”  
The legislative history
106.	  As with Hansard, we have some doubts about the propriety of construing the relevant provisions of the Finance Act 2004 by reference to earlier legislation. It seems to us that Part 3 Chapter 3 Finance Act 2004 was a complete revision of the earlier legislation. It is true that some of its provisions were reproduced in almost identical terms from the provisions found in the Income and Corporation Taxes Act  1988 ("ICTA 1988"), but other provisions were considerably changed. The correct approach, in our view,  should be that put forward by the House of Lords in Inland Revenue Commissioners v Joiner [1975] STC 657 in relation to consolidation Acts. We appreciate that the CIS provisions of the Finance Act 2004 were not strictly a consolidation or even a codification. Nonetheless, because a number of the statutory provisions contained in the Finance Act 2004 are plainly derived from earlier versions of the CIS legislation, we consider that the appropriate principles can apply by analogy. In Joiner Viscount Dilhorne said (at 664):
"The process of consolidation would lose much of its point if, whenever a question as to its construction arose, reference had to be made to the individual Acts consolidated. Only when the consolidation Act itself gives no guidance as to its proper interpretation, should it be permissible in my opinion to refer to the earlier Acts. Here in my view the consolidation Act did give such guidance, but we were referred to and we did consider the Acts consolidated and in my view their provisions indicate that the opinion I have formed on consideration of the 1970 Act alone is correct."
107.	  Lord Diplock approached the question in a slightly different manner (at 666-667):
"The modern practice of parliamentary draftsmen in preparing for adoption by Parliament legislation to effect a change in the existing law, particularly when the subject-matter of the law is one, such as taxation, in which legislative changes are frequent, is to express the changes to be effected in the form of amendments to the language of particular provisions in earlier statutes dealing with the same subject matter. This method of drafting becomes progressively more cryptic as amendments to previous amendments follow one another in successive statutes. The need to refer to and fro and back and forth between ever-increasing numbers of different statutes in order to discover what a particular provision of any of those statutes means reaches a point at which the difficulty of finding out what the law is may have the practical consequence of depriving the citizen of his right to know, in advance of a decision of your Lordships' House which must needs be ex post facto, what the legal consequences will be of a course of conduct which he contemplates adopting.
The purpose of a consolidation Act is to remove this difficulty by bringing together in a single statute all the existing statute law dealing with the same subject-matter which forms the general context in which the particular provisions of the Act fall to be construed, so that it will no longer be necessary to seek that context in a whole series of amended and re-amended provisions appearing piecemeal in earlier statutes.
This is the only purpose of a consolidation Act; this is the only 'mischief' it is designed to cure. It is true that a consolidation Act is not intended to alter the law as it existed immediately before the Act was passed, but to treat this absence of intention as justifying recourse to the previous legislation repealed by the consolidation Act in order to ascribe to any of the provisions of that Act a meaning different from that which it would naturally bear when read only in the context of the other provisions of the consolidation Act itself, would be to defeat the whole purpose of this type of legislation—to allow the absence of a tail to wag the dog.
So the primary rule of construction of a consolidation Act is to examine the actual language used in the Act itself without reference to any of the statutes which it has repealed. If this examination leads to the conclusion that, when read in the context of the other provisions of the Act, the language in which a general description of some factual situation is expressed is more apt to include than to exclude the particular factual situation found to exist in the case for decision or vice versa, the duty of the court is to ascribe to that language the more apt meaning and to give effect to it accordingly. It is only where such an examination of the actual language of the general description has led to the conclusion that it is no more apt to include than to exclude the particular factual situation, that it is permissible for a court of construction to have recourse to the repealed legislation in order to see if its meaning was clearer, and, if it was, to ascribe to the corresponding provision of the consolidation Act a meaning which would not involve an alteration in the previous law."
108.	  The CIS provisions were, as we understand it, introduced in the Finance Act 1971. The relevant provisions in section 30 of that Act were as follows:
"30(2) Where the Board are satisfied, on the application of any person, that he is carrying on a business which consists of or includes the carrying out of construction operations and that he has a permanent place of business in the United Kingdom and either
 (a) that, in respect of any period ending within the three years preceding his application, he has been required to make a return of his income or requested to supply to the inspector accounts of, or other information about, his business and that in respect of all such periods he has complied with any obligation imposed on him under the Taxes Acts and with any such request ; or
 (b) if no such obligation was imposed on him and no such request was made in respect of any such period, that there is reason to expect that he will comply with any such obligation or request in respect of other periods; 
they shall issue to him a certificate excepting him from section 29 of this Act. 
(3) An application under subsection (2) of this section may be made on behalf of a firm and a certificate issued on such an application shall be in the name of the firm. 
(4) The Board may, at any time, cancel a certificate under this section if it appears to them that it was issued on information which was false or that by reason of a change of circumstances they would refuse an application for such a certificate if made by the person to whom, or on behalf of the firm to which, the certificate was issued or that that person or firm has permitted it to be misused ; and may by notice in writing require that person or firm to deliver it to the Board within the time specified in the notice." (Emphasis added)
109.	 It will be seen that section 30 (4) is the forerunner of section 66 (1) and (3) Finance Act 2004. It will also be noted that section 30 (2) is the provision from which section 63 (1) Finance Act 2004 is derived. We observe that section 30 (2) appears to impose a mandatory obligation ("shall issue") on the Board to issue a certificate to an applicant if the relevant conditions are satisfied. In contrast, however, section 30 (4) provides that the Board "may, at any time, cancel a certificate". Once again, the drafter of the provision seems consciously to be distinguishing between the mandatory "shall" in relation to the issue of a certificate and the permissive "may" in relation to its cancellation. We shall see how, in later versions of the CIS legislation, "shall" is changed to "must" in accordance with modern drafting techniques. 
110.	  In addition, it is perhaps worth observing that the drafter used the phrase "at any time" in commas. This suggests to us that Mrs Parslow's submission that "may" qualified "at any time" in section 66 (1) was incorrect or at least in this earlier version the drafting was intended to mean that the auxiliary verb qualified the main verb "cancel".
111.	  It will be observed that, to some extent, section 30 (4) contains elements of what is now section 66 (1) and section 66 (3). This may well explain why, in the Finance Act 2004, the introductory language of both those provisions is the same, thus answering Mrs Parslow's submission in relation to the interaction of those two subsections of section 66. In any event, so far as relates to section 60 (1), the introductory language of section 30 (4) is for all material purposes the same. 
112.	The CIS provisions were then re-enacted in the Finance (No 2) Act 1975. Section 70 of the Act provided:
"70.(1) A person is excepted from section 69 of this Act in relation to payments made under a contract if a certificate from section under this section has been issued to that person and is in force when the payment is made, but 
(a) where the certificate has been issued to a person who becomes a partner in a firm, that person is not excepted in relation to payments made under contracts under which the firm or, where a person has nominated the firm to receive payments, the person who has nominated the firm, is a sub-contractor (as defined in section 69(2) of this Act) ; and 
(b) where a certificate has been issued to a person as a partner in a firm, that person is excepted in relation only to payments made under contracts under which the firm or, where a person has nominated the firm to receive payments, the person who has nominated the firm, is a sub-contractor (as so defined). 
(2) If the Board are satisfied, on the application of an individual or a company, that−
(a) where the application is for the issue of a certificate to an individual (otherwise than as a partner in a firm), he satisfies the conditions set out in Part I of Schedule 12 to this Act; 
(b) where the application is for the issue of a certificate to a person as a partner in a firm, that person satisfies the conditions set out in Part II of that Schedule if he is an individual or, if a company, the conditions set out in Part IV of that Schedule and, in either case, the firm itself satisfies the conditions set out in Part III of that Schedule; 
(c) where the application is for the issue of a certificate to a company, the company satisfies the conditions set out in Part IV of that Schedule and, if the Board have given a direction under subsection (4) below, each of the persons to whom any of the conditions set out in Part I of that Schedule applies by virtue of the direction satisfies the conditions which so apply to him,
the Board shall issue to that individual or company a certificate excepting that individual or company (or, in a case falling within paragraph (b) above, that individual or company as a partner in the firm specified in the certificate) from section 69 of this Act. 
(3) References in paragraphs (a), (b) and (c) of subsection (2) above to an individual, a company or a firm satisfying conditions set out in any Part of Schedule 12 to this Act include, in relation to a condition which may, by virtue of a provision in that Part, be treated as being satisfied, references to that individual, company or firm being treated as satisfying that condition. 
(4) Where it appears to the Board, on an application made under subsection (2) above by a company, that the company− 
(a) was incorporated on a date within the period of three years ending with the date of the application; or 
(b) has not carried on business continuously throughout that period; or
(c) has carried on business continuously throughout that period but the business has not at all times in that period consisted of or included the carrying out of construction operations; or 
(d) does not at the date of the application hold a certificate which is then in force under this section; the Board may direct that the conditions set out in Part 1 of Schedule 12 to this Act or such of them as are specified in the direction shall apply to the directors of the company and, if the company is a close company, to the persons who are the beneficial owners of shares in the company or to such of those directors or persons as are so specified as if each of them were an applicant for a certificate under this section. 
(5) The Board may at any time cancel a certificate which has been issued to a person and is in force under this section if it appears to them that−
(a) it was issued on information which was false; 
(b) if an application for the issue of a certificate under this section to that person were made at that time, the Board would refuse to issue a certificate; or 
(c) that person has permitted the certificate to be misused ; and may by notice in writing require that person to deliver the certificate to the Board within the time specified in the notice. 
(6) A person aggrieved by the refusal of an application for a certificate under this section may, by notice in writing given to the Board within thirty days after the refusal, appeal to the General Commissioners or, if he so elects in the notice, to the Special Commissioners; and the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section other than a decision that an individual, a company or a firm is or is not to be treated as satisfying a condition set out in any Part of Schedule 12 to this Act." (Emphasis added)
113.	  Once again, it will be observed that, to some extent, section 70 (5) contains elements of what is now section 66 (1) and section 66 (3). The use of the mandatory "shall" in section 70 (2) in relation to the issue of a certificate will be noted. Again, section 70 (5) uses, in contrast, the permissive words "may at any time cancel a certificate" (this time without commas around the phrase "at any time") in the circumstances therein provided.
114.	  There was, however, a significant provision enacted in paragraph 3 Schedule 12 Part 1. Paragraph 3 provided:
"(1) The applicant must, subject to sub-paragraph (2) below, have complied with all obligations imposed on him by or under the Income Tax Acts or the Taxes Management Act 1970 in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of, or other information about, any business of his in respect of periods so ending. 
(2) An applicant who has failed to comply with such an obligation or request as is referred to in sub-paragraph (1) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that in all the circumstances the failure ought to be disregarded for the purposes of his application for a certificate under section 70 of this Act." (Emphasis added)
115.	  The language in paragraph 3 (2) is significant because it shows that the Board had a discretion to disregard certain compliance failures in an initial application for a certificate under section 70. In considering whether to cancel a certificate under section 70 (5) (b) it was provided that the Board may at any time cancel a certificate if it appears to them that "if an application for the issue of a certificate under the section to that person were made at that time, the Board would refuse to issue a certificate ...." In other words, the discretion contained in paragraph 3 (2) of Schedule 12 in relation to an initial application for a certificate carried over, so to speak, to the discretion whether to cancel the certificate. This, in our view, makes it clear that section 70 (5), the forerunner of section 66 (1) Finance Act 2004, permitted the Board to exercise a discretion.
116.	  Schedule 8 Finance Act 1980 amended paragraph 3 (2) Finance (No 2) Act 1975 as follows:
"3 (2) An applicant who has failed to comply with such an obligation or request as is referred to in sub-paragraph (1) 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 paragraph (7) will be satisfied ...." (Emphasis added)
117.	   Thus, paragraph 3 (2) was amended to substitute the "minor and technical" test for the opinion of the Board. Section 70 (5) was not changed in any material respect so that, if the analysis in paragraph 115 above is correct, the Board's discretion in relation to the cancellation of a certificate remained unchanged. It should be noted that the "minor and technical" test was removed, and the reasonable excuse provisions were introduced in the paragraph 4 (4) Schedule 11 Finance Act 2004.
118.	   In 1988 the CIS legislation contained in the Finance (No 2) Act 1975, as amended, was consolidated into ICTA 1988. Section 70 (5) became section 561 (8). There was one change of note. The Finance Act 1982 had amended the CIS legislation in the Finance (No 2) Act 1975 to include companies (see Schedule 8 paragraph 13). An additional provision with added to what became section 561 (8) which allowed the Board to cancel a certificate ("the Board may at any time cancel a certificate... if it appears to them that") if:
"(d) in the case of a certificate issued to a company, there has been a change in the control of the company and information with respect to that change has not been furnished in accordance with regulations under section 566 (2) ...."
119.	  Otherwise, section 561 (8) did not materially amend the earlier provisions.
120.	  There is one further point to note about the CIS provisions of the Finance (No 2) Act 1975 and ICTA 1988. In section 70 (2) of the former and section 561 (2) of the latter, where an applicant for the issue of a certificate satisfied the various conditions, the legislation provided that the Board "shall issue... a certificate". When these provisions were re-enacted in the Finance Act 2004 (section 63) "shall" was changed to "must". 
121.	  This change reflects the modern approach to statutory drafting which tends to avoid the use of the word "shall" as being ambiguous, preferring instead the word "must". For present purposes, however, it is clear that in updating the drafting of the previous enactments, the draftsman changed the wording of a provision which was regarded as mandatory in order to make the mandatory meaning clearer. There is no doubt that the word "shall" in section 561 (2) (and, we consider, in earlier enactments) was mandatory: see the judgment of Lightman J in Hudson v JDC Services Ltd [2004] STC 834 (at 842g). Conspicuously, the draftsman did not seek to change the wording of what became section 66 (1) since it was presumably considered that its discretionary meaning was clear and that it was not intended to have a mandatory meaning.
122.	  For the above reasons, we consider that the legislative history of section 66 (1) makes it very clear that it was intended to confer a discretion on the Board. Certainly, there is nothing in the legislative history which suggests a mandatory obligation being imposed on the Board. 
123.	 Finally, we noted Mrs Parslow’s argument that the word “may” did not necessarily mean "discretion", but rather "permission”, which in turn means "allow" in the sense of "enable" or "give power to". We were unable to see a distinction between HMRC having the "discretion" to decide a matter, and it having the power so to decide. We are fortified in our view by the fact that the Oxford English Dictionary defines "discretion" in this context as the "liberty or power of deciding, or of acting according to one's own judgement".
Our conclusion on the interpretation of Section 66(1)
124.	  As we indicated at the outset, the primary question with which we are faced is one of statutory interpretation. We have, therefore, considered the correct statutory construction of the introductory words used in section 66 (1) at considerable, perhaps even tedious, length. In carrying out this review, we have used the main relevant principles of statutory interpretation. Our conclusion is that both the natural meaning of the words used in section 66 (1) and the various principles and aids to statutory interpretation which we have applied indicate that the words "The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment…" are permissive and confer a discretion on HMRC. There is no compelling reason, in our view, why these words should be construed to impose a mandatory requirement on HMRC.
125.	  Furthermore, as we shall see later in this decision, the cancellation of registration for gross payment can have very serious adverse consequences for a subcontractor. For many contractors it is very much easier to pay gross to a subcontractor who is registered for gross payment than to deduct and account for deductions to HMRC. Indeed, many contractors will only engage subcontractors who are registered for gross payment. The cancellation of gross payment status means, in many cases, a subcontractor will find it more difficult to obtain work. 
126.	  In addition, the deduction from contract payments made to a subcontractor whose registration for gross payment is cancelled is likely to have serious adverse cash flow consequences for the subcontractor.
127.	  It seems to us, therefore, quite understandable that Parliament intended that, before a subcontractor faced such serious consequences, some element of discretion might need to be applied. Indeed, we think that this is the thrust of the comments made by the Paymaster General to which we have already referred. At the very least, conferring a discretion on HMRC in these circumstances does not lead to an absurd or perverse result. On the contrary, as we have said, the result seems to us perfectly sensible. It does not reward non-compliance. In exercising their discretion HMRC may perfectly properly conclude that more serious or aggravated forms of non-compliance should lead to a cancellation of the registration. A discretion, however, allows HMRC to permit a subcontractor to retain the registration where the failure (assuming there is no reasonable excuse) falls in a grey area which exists between the failures permitted by Regulation 32 and the more serious forms of non-compliance.
128.	  We are not oblivious to the desire for standardisation and computerisation which HMRC understandably and commendably wish to achieve in administering our complex tax system. The use of technology in, for example, monitoring compliance greatly promotes efficiency. Nonetheless, when Parliament confers a discretion for the purpose, we suggest, of protecting individual taxpayers from too insensitive an application of black letter rules, that discretion must be exercised even though it may require the necessary allocation of (more expensive) human resources.
  Did HMRC exercise its discretion in this case?
129.	  Mrs Parslow, in her oral submissions, argued that by programming its computer in a particular way and by making Regulations (such as amendments to Regulation 32) HMRC had exercised its discretion under section 66 (1). We understood this to be an alternative to her main submission that no discretion existed.
130.	  We find this argument hard to understand. At the first hearing Mr Shea informed us that the aim the review conducted was to establish whether the compliance failures identified by the computer were, indeed, correctly identified.
131.	  Mrs Parslow seemed to be suggesting that in some way HMRC's computer program provided some further layer of discretion by virtue of it having been programmed in such a way that additional latitude (above and beyond the tests contained in the primary and secondary legislation) had been built in. She mentioned an additional five day grace period but gave very little additional detail.
132.	  We do not consider this argument to be correct. Where Parliament confers a discretion on a public body that public body must exercise the discretion in accordance with the normal rules of public law. A public body, such as HMRC, cannot fetter a discretion bestowed by statute. The public body must give reasoned consideration on an individual basis as to how the power or discretion should be exercised (see eg R v LCC, ex p Corrie [1918] 1 KB 68). There is nothing to prevent a public body adopting policies or practices which indicate factors it may take into account in exercising its discretion, as long as these policies or practices do not themselves become a rule preventing consideration of individual circumstances: see e.g. R v Port of London Authority ex p Kynoch Ltd [1919] 1 KB 176 at 184, British Oxygen Co Ltd v Minister of Technology [1971] AC 610 and A-G (ex rel Tilley) v Wandsworth London Borough Council [1981] 1 All ER 1162.
133.	  In our view, nothing that Mrs Parslow said indicated that consideration was given whether to exercise a discretion in Mr Scofield's individual circumstances. No evidence has been brought forward by HMRC to indicate that any discretion has been exercised. We therefore find that no discretion was exercised in his case.
134.	  For completeness, we should also address a further point made by Mrs Parslow. In argument, she suggested that because an HMRC official would routinely review an appeal against a determination made under section 66 (1) and could accept the appeal, this was in an example of HMRC exercising its discretion. 
135.	  In our view, it is no such thing. Our conclusion on the correct interpretation of section 66 (1) is that HMRC have a discretion whether to make a determination cancelling registration for gross payment. They must exercise that discretion in deciding whether to make a determination. They cannot make a determination without exercising the discretion. It is not enough that subsequently, once a determination has been made and an appeal lodged, they may decide to rescind the determination. By that stage the determination has already been made. By accepting an appeal, HMRC is exercising a discretion to accept the appeal not whether to make the determination in the first place.
136.	   In any event, the determination will usually have been made because "it appears" to HMRC (or at least to its computer) that an application for registration for gross payment would be refused. At that stage, as Mr Shea noted at the earlier hearing, HMRC will usually have little or no information about whether or not the taxpayer had a "reasonable excuse" (paragraph 4 (4) Schedule 11) for the compliance failure(s). This information will usually only come after a determination has been made. The review will often consider information, made available after the determination has been made, concerning the question of "reasonable excuse". We return to this point in paragraph 141 below because it seems to us that the current procedure is unsatisfactory.
Consequences of failure to exercise the discretion in section 66 (1)
137.	  Mr Gordon submitted that a failure to carry out the decision-making process correctly renders the purported decision void. He therefore asked us to allow his client's appeal on that basis.
138.	  We agree. In order to make a determination under section 66 (1), HMRC must exercise its discretion. If it does not exercise its discretion it has not made a determination for the purposes of the statute. The determination is invalid and has no effect. See also per Lord Reid in Anisminic Ltd v Foreign Compensation Commission  [1969] 2 ac 147 at 170 and per Lord Irvine LC in Boddington v British Transport Police [1999] 2AC 143 at 158.
139.	   The CIS code contained in the Finance Act 2004 requires a determination under section 66 to fulfil various requirements. Apart from the discretion issue, the determination must be given to the subcontractor "without delay" and it must give the subcontractor "notice stating the reasons for the cancellation" (otherwise, presumably, the subcontractor, in appealing against the cancellation, would not be able to state his reasons for believing that his registration for gross payment should not have been cancelled in accordance with section 67 (3)). Failure to comply with these requirements also renders the determination invalid: see Radford and Robinson v HMRC [2010] UKFTT 31 (TC). There is no reason why a failure to exercise discretion in making a determination should be treated any differently.
140.	   Accordingly, we conclude that because HMRC's determination in respect of Mr Scofield was invalid we should allow this appeal.
141.	  We also note that section 66(1) Finance Act states that the Board may make a determination cancelling gross registration:
 “if it appears to them that−
(a) if an application to register the person for gross payment were to be made at that time, the Board would refuse so to register them.”
142.	  The Board would refuse to register an individual applying to be registered who failed the compliance test (paragraph 4, Schedule 11, Finance Act 2004). The compliance test is, however, not failed if the Board “are of the opinion that” the applicant “had a reasonable excuse for failure to comply” (paragraph 4, Schedule 11, Finance Act 2004). It is only when it appears to the Board that the compliance test would have been failed, that HMRC may withdraw gross payment status. 
143.	  As we understand the position (see paragraph 136 above), what happens in practice is as follows. If HMRC record a compliance failure which falls outside the tolerance limits given in the Regulations, they issue a determination withdrawing gross payment status. At this stage they can have no information on which to base an opinion as to whether or not the individual has a reasonable excuse. It is only after the issue of the determination that they ask the taxpayer for this information. If, having received the individual’s submission, HMRC consider that it constitutes a reasonable excuse, the determination is withdrawn. 
144.	  This seems to us to be procedurally flawed. The statute requires that the issue of reasonable excuse is considered before the determination is issued and not afterwards. It is not clear how HMRC can reasonably form an opinion that the compliance test has been failed if it has made no enquiry about whether there was a reasonable excuse for the compliance failure(s). However, this point was not argued before us, and does not form the basis of our decision. 
Unreasonableness and Proportionality
145.	 Mr Gordon submitted, in the alternative, that the Tribunal should remake the original decision and, in so doing, exercise the discretion that should have been exercised by HMRC.
146.	   In the light of our decision to allow the appeal on the basis that HMRC's determination was invalid, it is not necessary to consider the submission in detail. However, certain additional evidence was adduced which we consider should be recorded in the context of the submissions made.
147.	  Mr Gordon submitted that in Mr Scofield's case cancellation of registration for gross payment would be excessive and disproportionate. It would be an unjust and unreasonable outcome in the Wednesbury sense: see Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.
148.	   He drew attention to the fact that the late payment of Mr Scofield's income tax (the second payment on account of his 2008/09 liability) meant that he had suffered an interest charge (at an annual rate of 2.5% over the Bank of England base rate). He further submitted that in the case of Mr Scofield, quite apart from the adverse cash flow effect of the loss of gross payment status, it would be likely to lead to the loss of the taxpayer's business and, possibly, the loss as well of the business of his own subcontractors.
149.	  Mr Gordon accepted our earlier finding that Mr Scofield did not have a reasonable excuse within the meaning of paragraph 4 (4) Schedule 11. Nonetheless, he submitted the following facts should be taken into account in the exercise of the Tribunal's discretion:
(a)	the payment of income tax was only four working days outside the extended period permitted by Regulation 32;
(b)	this was one isolated failure out of a large number of compliance obligations to which Mr Scofield was subject) monthly CIS obligations for his own workers, quarterly VAT returns and payments, income tax returns and payments). There had not been any other compliance failures before or after the one in issue;
(c)	in this case, HMRC's own record-keeping had also been defective - with eight alleged failures being attributed to HMRC error. In addition, HMRC's failure to exercise its discretion represented a further breach of a statutory protection given to taxpayers; and
(d)	when Mr Scofield's compliance record was considered in the round it did not suggest that he lacked the discipline to operate a business in a professional manner. Mr Gordon referred to the Exclamatory Notes to Finance Build 2004, clause 57 which stated that the purpose of the legislation was to prevent "those who lack the discipline required to operate a business in a professional manner from obtaining gross payment status".
Additional evidence
150.	  Mr Scofield's accountant, Mr Bright K Amedoah, submitted a witness statement which was accepted as his evidence in chief and gave oral evidence. The material part of Mr Amedoah's evidence is set out below and we find the following facts.
151.	  He confirmed that Mr Scofield was a subcontractor in the construction industry. He is a decorator and general builder. Mr Scofield subcontracts his work from main contractors who could give the contracts to any subcontractor if they can save any costs in awarding such contracts. If Mr Scofield were to lose his gross payment status it would mean more administrative work to the main contractors in trying to do more work in deducting the 20% from payments made to Mr Scofield. The main contractors would therefore prefer to give the contract to other subcontractors who are registered for gross payment. Mr Scofield would therefore lose most of his contracts and possibly have to close his business.
152.	  In addition, Mr Amedoah confirmed that he had written to The William Pears Group, a building contractor which subcontracts work to Mr Scofield and which supplies Mr Scofield with a large proportion of his work. In a letter dated 14 January 2011 addressed to Mr Amedoah, The William Pears Group wrote as follows:
"We understand that your client, Mr Scofield, is due to attend a Court Hearing next week to discuss his CIS payments.
Our Group only use CIS accredited contractors and, as such, should Mr Scofield lose his CIS accreditation then we would no longer be able to utilise his (or his subcontractors) services."
153.	 Plainly, Mr Amedoah's evidence was mainly hearsay. To the extent that the evidence consisted of hearsay, we evaluated it as such. However, we did not understand HMRC to contest it. Mrs Parslow did, however, rightly object to such parts of Mr Amedoah's evidence that constituted statements of law and we have disregarded those parts of his evidence. We accept, however, and find as a fact that the William Pears Group were likely no longer to use Mr Scofield if his registration for gross payment was cancelled.
154.	  Mrs Parslow drew attention, in cross examination, to a statement in Mr Amedoah's witness statement to the effect that Mr Scofield's self-assessment return for the year ended 5 April 2008 was filed online one 6 January 2009. She pointed out that Mr Scofield would have then known that he had a liability to pay income tax on 31 July 2009. Mr Amedoah agreed that this would have been the case.
155.	  Mr Scofield gave oral evidence. He confirmed that he worked in the construction industry. His main clients, who provided most of his work, were The William Pears Group, Hamways, Sinton-Andrews, Baileys and two others. About 70% of his work came from The William Pears Group.
156.	 Mr Scofield said that he did work under general maintenance contracts. He would do everything from changing lightbulbs to installing new bathrooms. Most of his work was in the private sector. When the tenants left a property he would go in and make whatever repairs and renovations were required. He engaged six to eight subcontractors.
157.	  He said that if he lost his registration for gross payment he would lose his work from The  William Pears Group and most of his subcontractors would lose their jobs. The William Pears Group provided about 70% of his work.
158.	  Under cross-examination, Mr Scofield accepted that he was aware or should have been aware when he filed his tax return on 6 January 2009 that the income he returned on their return was set as tax payments for the next year. He accepted that he knew that he would have a liability on 31 July 2009 and that, although he had the funds on 4 August 2008, he paid late.
159.	  In re examination, Mr Scofield considered that he would be unable to work if he lost his registration for gross payment.
160.	  We accept Mr Scofield's evidence. We considered him to be a reliable and honest witness. We specifically find as a fact that, if Mr Scofield were to lose his registration for gross payment, he would in all probability lose his livelihood and that most of the subcontractors would lose their jobs.
161.	  Mrs Parslow referred us to the decision of Lewison J in Barnes v Hilton Main Construction Ltd [2005] STC 1532 in which Lewison J held that the CIS scheme contained in ICTA 1988 was compliant with the Convention for the Protection of Human Rights and Fundamental Freedoms 1950 and contained a considerable measure of proportionality.
162.	   Mr Gordon replied that in Barnes the Court was not considering the exercise of a discretion by a public body.
163.	 The application of the Convention and the Human Rights Act 1998 is a complex area. The point was not fully argued before us and we are therefore reluctant to decide this issue, particularly because of our decision, that the determination made by HMRC on 29 January 2010 was invalid, makes it unnecessary for us to do so. Nonetheless, as we have noted above, we thought it right to record the evidence presented to us and our findings in relation thereto.
164.	  In addition, it is also unnecessary for us to reach a conclusion on Mr Gordon's submission that HMRC's determination was Wednesbury unreasonable. Moreover, we would not wish, without further legal argument, to determine whether as a matter of common law it was open to the Tribunal to consider whether, in exercising a discretion under section 66 (1), HMRC, as a public body, must exercise that discretion proportionately: see per Lord Steyn in R (Daly) v Home Secretary [2001] 2 AC  532 at 547, Huang v Secretary of State for the Home Department [2001] UKHL26 and De Freitas v Agriculture Secretary [1999] 1 AC 69.
Jurisdiction of the Tribunal
165.	  HMRC accepted, in accordance with the decision of Lightman J in Hudson v JDC Services Ltd [2004] 834, that this Tribunal had full appellate jurisdiction under section 67 Finance Act 2004.
166.	  We consider that, in addition to being able to substitute our view for that of HMRC, we also have a supervisory jurisdiction to review a decision taken by HMRC under certain CIS provisions of Finance Act 2004: section 67 (4) expressly includes "jurisdiction to review any relevant decision taken by the Board of Inland Revenue in the exercise of their functions under section 63, 64, 65 or 66". Our powers are, however, limited to allowing or dismissing the appeal.
Conclusion
167.	  For the reasons given, we have decided that the determination of HMRC of 29 January 2010 was invalid because HMRC failed to exercise a discretion as required by section 66 (1) Finance Act 2004. Accordingly, we allow this appeal.
168.	  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

GUY BRANNAN

TRIBUNAL JUDGE
RELEASE DATE: 24 March 2011