Beech Developments (Manchester) Ltd & Ors v Commissioners for His Majesty's Revenue and Customs

Factual and Procedural Background

This appeal arises from a decision by Judge Fordham dismissing a judicial review claim brought by six related entities collectively referred to as "Beech". The dispute concerns the interpretation of regulations governing the Construction Industry Scheme ("CIS"), specifically the interaction between Regulation 9 and Regulation 13 of the Income Tax (Construction Industry Scheme) Regulations 2005 ("CIS regulations").

Beech comprises six companies within the same group that made payments to another group entity, Company A, which acted as the main contractor. For CIS purposes, Beech entities were "contractors" and Company A was a "sub-contractor". Beech did not operate the CIS regime correctly, failing to make required deductions. Following an HMRC enquiry, Company A obtained gross payment status, but HMRC issued determinations in March 2019 for tax years 2016-2019 requiring Beech to account for over £5.4 million, later reduced to under £2.5 million excluding interest.

Beech appealed the determinations, but the appeal was stayed pending resolution of judicial review proceedings. Regulation 9, which allows HMRC to direct that a contractor is not liable to pay an excess amount under certain conditions, was not invoked by Beech before the determinations. Beech only raised Regulation 9 after the determinations were issued, and HMRC refused to consider the claim, prompting the judicial review.

Legal Issues Presented

1. Whether HMRC has the power under Regulation 9 of the CIS regulations to issue a direction relieving a contractor from payment liability in respect of amounts that have already been the subject of a determination under Regulation 13.
2. Whether a direction under Regulation 9 may be made after a Regulation 13 determination has been issued but before the determination becomes final and unchallengeable.
3. The proper interpretation of the interaction between Regulation 9 and Regulation 13(3) of the CIS regulations, particularly the meaning and effect of the second limb of Regulation 13(3).
4. The scope of appeal rights and remedies available to contractors under the CIS regulations and the Taxes Management Act 1970 ("TMA 1970") in relation to refusals of directions under Regulation 9 and determinations under Regulation 13.
5. The availability and limits of HMRC's powers to withdraw or adjust determinations under the TMA 1970.

Arguments of the Parties

Appellant's Arguments

• The judge erred in relying on public law principles to dismiss the claim where the issue was a denial of statutory power by HMRC to act under Regulation 9(5).
• The judge misunderstood the preclusive effect of the first limb of Regulation 13(3), which only prevents inclusion in a determination of amounts covered by a Regulation 9(5) direction, but does not prevent inclusion of other amounts.
• Liabilities to HMRC should not be discretionary or dependent on HMRC’s discretion; it is improper to allow HMRC to retain sums where the tax liability has been fully discharged.
• The judge misinterpreted HMRC’s collection and management powers under s.5 Commissioners for Revenue and Customs Act 2005 and wrongly assumed HMRC might withdraw determinations at will.
• HMRC lacks power to withdraw a determination once served due to statutory limitations under s.30A(4) TMA 1970 and relevant case law.
• The interpretation that a Regulation 9 direction may be made after a Regulation 13 determination and before its finality should be preferred to preserve appeal rights and avoid unjust enrichment to HMRC.

Respondent's (HMRC) Arguments

• Regulation 13(3) is symmetrical: just as a determination may not include amounts covered by a Regulation 9(5) direction, a direction cannot be made in respect of amounts already subject to a determination.
• HMRC’s prior practice and the First-tier Tribunal’s decisions support that no direction under Regulation 9 can be made after a determination under Regulation 13.
• HMRC may withdraw a determination under its collection and management powers, providing a remedy for contractors.
• There is no statutory requirement that Regulation 9 must be invoked before a determination is made, though HMRC’s practice encourages this.
• Any appeal against refusal of a direction under Regulation 9(5) is limited to condition A and must be raised before determination; condition B claims require judicial review.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed examination of the statutory framework governing the CIS, including the Finance Act 2004, the CIS regulations, and the Taxes Management Act 1970. The key interpretative focus was on Regulation 13(3) of the CIS regulations, which states that a determination "must not include" amounts covered by a Regulation 9(5) direction and that directions under Regulation 9 do not apply to amounts determined under Regulation 13.

The court found merit in the judge’s initial interpretation that the first limb of Regulation 13(3) precludes a determination including amounts subject to a direction. However, the court rejected the symmetrical reading of the second limb that a direction cannot be made in respect of amounts already determined. The court noted the difference in wording ("must not include" vs "do not apply") and the practical implications of HMRC’s interpretation, which would preclude any Regulation 9 direction after a determination, effectively nullifying appeal rights and allowing HMRC to potentially retain sums unjustly.

The court emphasized that a direction under Regulation 9 is final and cannot be varied or revoked, whereas a determination under Regulation 13 is provisional, subject to appeal and adjustment, and only becomes final once the appeal process concludes or time limits expire. This asymmetry undermines the supposed symmetry in Regulation 13(3).

The court also considered the appeal mechanisms under the CIS regulations and TMA 1970, noting that the First-tier Tribunal has jurisdiction to direct HMRC to make a Regulation 9 direction when condition A is refused, but no such appeal right exists for condition B, which must be challenged by judicial review. The court found no statutory basis for HMRC’s position that Regulation 9 must be invoked before a determination, nor for their practice of refusing to consider Regulation 9 claims post-determination.

The court was persuaded by the appellant’s argument, supported by relevant case law, that HMRC does not have an unfettered power to withdraw determinations once served, and that the statutory code in the TMA 1970 governs the adjustment of determinations. The court declined to decide definitively on HMRC’s withdrawal powers in this appeal but proceeded on the basis that no such power exists outside the statutory framework.

Further, the court found that HMRC’s reliance on their collection and management powers to justify their interpretation was unconvincing and inconsistent with their own conduct and the statutory scheme. The court highlighted principles of legality and access to justice, referencing authority that tax liabilities must be imposed by law and not by administrative discretion or concession.

Consequently, the court concluded that Regulation 9 directions can be made after a Regulation 13 determination has been issued, provided the determination remains capable of adjustment, and that such directions must be reflected in the determination as per the first limb of Regulation 13(3). The court held that previous First-tier Tribunal decisions denying this power were incorrect.

Holding and Implications

The appeal is allowed. The court quashed HMRC’s decision refusing to consider Beech’s claim under Regulation 9(4) of the CIS regulations and ordered HMRC to reconsider the claim in accordance with the court’s interpretation.

The direct effect is that contractors may seek a Regulation 9 direction relieving them of payment liability even after a Regulation 13 determination has been made, so long as the determination is not final. This preserves appeal rights and prevents HMRC from retaining amounts where the underlying tax liability has been discharged.

No new precedent beyond the interpretation of the CIS regulations and related statutory provisions was established, but the decision overturns prior First-tier Tribunal authority and clarifies the interaction between Regulation 9 and Regulation 13, ensuring fairness and access to justice within the CIS framework.