Construction Update June 2010
SAFE AS HOUSES – SCOTTISH GOVERNMENT PUBLISHES HOUSING PAPER
It is predicted that over the next 25 years the number of households in Scotland is set to increase by more than a fifth to 2.8 million (an increase of an additional 19,000 households per year). With this in mind, as well as the usual hot topics of carbon reduction and housing policy, a new paper entitled ‘Housing: Fresh, Thinking, New Ideas’ was published by the Scottish Government on 24 May this year. The paper seeks to pose elemental questions about the ways in which homes in Scotland can be better built, allocated, funded and managed and sets out the Scottish Government’s vision for future housing policy.
The Paper is split into 5 main chapters and looks at:
-
the evidence for housing needs and asks where the Government’s priorities should lie;
-
new ways of generating investment in affordable housing;
-
existing housing and how they could be best used to support greater housing outcomes;
-
the main issues of the quality of homes including carbon emission reduction; and
-
how each of the main players in the housing sector can assist in addressing the challenges.
The questions posed by the Paper are wide and varied and include:
-
What is the appropriate balance between Government support for house building (through subsidies and incentives) and support for individuals through housing benefit?
-
How can the Government best use tightly constrained public funding to bring additional resources for housing?
-
How can we improve the design and sustainability of the places we build to improve our health, wellbeing and environmental impact?
-
What can we do to help partners find, prepare and develop land and provide infrastructure? And how can it be funded with reduced resources?
The publication of the Paper is the starting point for a general discussion on Scottish housing policy. Towards the end of the year the Scottish Government will publish a paper setting out our housing policy proposals.
Housing & Communities Minister, Alex Neil MSP, spoke very passionately at the Homes for Scotland annual lunch 2010 about his discussion paper and it appears this is high on the Scottish Government’s agenda.
The Paper can be viewed at: www.scotland.gov.uk/Resource/Doc/312740/0098899.pdf
The ongoing debate is linked to a website where members of the public can contribute: http://housingdiscussion.scotland.gov.uk/
ARE YOU IN THE HOUSING GRANTS ACT EXCLUSION ZONE?
The Housing Grants, Construction and Regeneration Act contains provisions which are to be inferred into ‘a construction contract’. More specifically only ‘construction operations’ forming part of such a contract are subject to the provisions of the Act. Section 105(1) of the Act sets down a description of what ‘construction operations’ are whereas section 105(2) specifies those which are specifically excluded.
Over the last few years courts throughout the land have struggled with the lack of clarity within the exclusions set out in the Act, however the recent case of Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture has provided useful guidance on interpreting those exclusions.
The case circled around a sub-contract between the JV and Cleveland for works undertaken at a liquefied natural gas terminal (with the gas being offloaded from ships and pumped into the national gas pipeline).
A dispute arose over a failure (by the JV) to pay a sum from the final account. The matter proceeded to adjudication. Cleveland’s primary position was that all sums stated in the final account were covered by the terms of the Act and were due. As an alternative, they asked that the adjudicator find the relevant sum due, should she only have jurisdiction to consider the part of the account which concerned ‘construction operations’. The adjudicator considered the whole dispute and the matter proceeded to court for enforcement proceedings.
The judge had to consider three issues. Those issues (and the courts view) were as follows:
1. The first two points were (a) Could all the work forming the disupted sum be described as "construction operation" as defined in the Act and (b) Does any of the work, and if so, what parts, fall within the exclusions set out in the Act?
Many did, however the part of the works regarding steelwork to piperacks etc fell within the description (in exclusions) of ‘steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is…the production, transmission, processing or bulk storage…of gas’. Accordingly these were not subject to the Act. The judge also stated that the courts required to look broadly at the works being performed when determining if they were excluded (and not look at them in too much detail).
2. Was the adjudicator's decision enforceable if part of the works were excluded under the Act?
The judge found that an adjudicator’s decision was either valid and enforceable or not and the court had no desire to unravel such decisions, finding that as there was no such distinction (between those operations covered by the Act and those not) in the adjudicator’s decision, it was unenforceable.
It should be noted that this was an English case and would only have persuasive authority in the Scottish courts.
A NEW BEGINNING FOR ARBITRATION
“We stand at the threshold of what will prove to be a new Golden Age of arbitration in Scotland.”
Well, that’s what the Chartered Institute of Arbiters think, but then again they would say that.
Commentators have long argued that arbitration in Scotland had been in need of an update. For many years it has been made up of outdated case law and statute, making the legal position unclear to those who followed and practiced it. As such, many parties chose alternative methods of dispute resolution (such as adjudication).
From June 7th 2010, the arbitration provisions in Scotland are governed under the new Arbitration (Scotland) Act 2010 and the integrated Scottish Arbitration Rules. The Act applies to all non-statutory arbitrations and will apply to statutory arbitrations at a later point in time (statutory arbitrations being those which are referred to arbitration directly by way of legislation).
In our December 2009 ebulletin we set out the main provisions of the Act. The Act sets out a new set of rules for arbitration. Some of these are mandatory and apply to all arbitrations, others are default rules which will apply unless specifically excluded.
The Act is heralded by some as a new beginning for domestic and international arbitration in Scotland. A Scottish Arbitration Centre has been proposed in order to encourage non-domestic arbitrations being heard in Scotland.
Termed ‘cutting edge’ and ‘innovative’ by commentators, it is hoped that the Act will portray arbitration as a far more attractive form of dispute resolution for Scotland than at present.
If nothing else, parties in commercial transactions will require to revise their arbitration clauses to deal with the new terminology and this will be an opportunity for parties to consider whether arbitration is the best option. They should also delete any of the default clauses that they do not wish to apply.
GRAND DESIGNS
The Commission for Architecture and the Built Environment (CABE) recently published a report entitled ‘Simple and Better’.
The Report argues that a minimum design standard for homes should be introduced. CABE argue that the industry should have a clear and consistent set of standards and house purchasers should receive a guarantee that homes are of a good enough standard everywhere.
The Report states that management for these minimum standards should be carried out by way of condensed regulation for planning and building regulation systems.
Whilst it is unlikely that CABE’s proposals will be adopted into Governmental policy, it is worth reviewing some of the points raised in the Report because these suggest ways to improve housing design. They are however unlikely to be adopted given procedures are already in place for minimum design standards, i.e. Building Regulations and the Code for Sustainable Homes.
The Report critiques the current forms of regulation in place, namely the Building Regulations and the Code for Sustainable Homes, which it states as being a restrictive form of legislation, as discussed in our December ebulletin article entitled ‘Sustainability – we know what we need to do but don’t do it’.
The Report emphasises that those in the construction and house building sectors find that the current raft of regulations are ineffective and overlap in different areas. The Report also states that there is consensus between many in the construction industry that common policies and practices inadvertently conspire to push design quality down the agenda. The interaction of a planning system which isn’t always as good as it can be, with builders who don’t achieve consistently good results, increases the risk that design quality will be an unintended casualty.
Ultimately the Report advocates the need for simpler regulation and argues that a minimum design standard should be introduced for all new homes in Britain. This would mean the industry having a clear and consistent set of standards with the consumer and communities getting a guarantee of a certain standard of home. The Report states that projects such as the Building Schools for the Future are an example of this, having led to measurable improvements in design quality – not just meeting the standards but exceeding them.
To view the full report please visit: http://www.cabe.org.uk/publications/simpler-and-better
CIS GROSS PAYMENT APPROVAL – A CAUTIONARY TALE
A recent Tax Tribunal case highlights the risks of breaching the rules for entitlement to gross payments under the Construction Industry Scheme (CIS). Late tax returns or payments in other areas can be disastrous. Any excuses put forward must be well founded, and HMRC will ignore the possible consequences for the business of losing gross payment status.
When a contractor pays a subcontractor for construction operations within the ambit of the CIS, the payer is obliged to withhold tax from the payment unless the subcontractor has been approved by HM Revenue & Customs (HMRC) to receive gross payments. The rate of deduction is currently 20% if the payee is registered with HMRC as a subcontractor, otherwise 30%. For many subcontractors, HMRC approval for gross payments is essential to the survival of the business. Some contractors will only appoint subcontractors which have gross payment approval. Also when there is a chain of subcontractors on a particular project, if a subcontractor had to suffer a 20% deduction from payments due from its contractor, but had to pay out in full to an approved subcontractor further down the chain, the cash flow effect could cause huge problems for the business.
The rules for getting HMRC approval for gross payment are tight, and they are operated strictly by HMRC. One of the conditions for approval is that the subcontractor has not had more than three defaults in its tax record in the past 12 months. Defaults include failure to file a tax return or make a tax payment within 14 or 28 days of the deadline. For a business in the construction industry, there could be monthly CIS contractor’s returns and payments, monthly PAYE payments and an annual return, and an annual corporation tax return and payment – in all, nearly 40 obligations per year. It is essential to monitor all of them to ensure good compliance.
Enderbey Properties Ltd had been approved by HMRC for gross payments. However HMRC ran a compliance check and withdrew approval, on the grounds that if the company had then applied for approval it would not have been granted because the compliance tests were failed. Enderbey fell well short of the mark on PAYE, as it had only made 3 out of 12 payments in the year under review, and two of them had been over 14 days late.
Enderbey appealed against the withdrawal of HMRC approval, claiming it had a reasonable excuse for the defaults. The principal reason was cash flow problems arising from contracts with an associated company which in turn had not been paid by its own customers. However no evidence of those customers’ late payments was given to HMRC or the Tribunal, and the Tribunal noted that the associate company had been able to make arrangements with its suppliers and other creditors to carry on in business. The Tribunal did not consider that this was a reasonable excuse for the PAYE failures. Two subsidiary excuses, problems with a book-keeper and with software, were also insufficient.
The Company also put up a defence of proportionality – that withdrawal of gross payment approval might put the company out of business, because its largest customer would only deal with subcontractors holding gross payment approval. The Tribunal, relying on a previous High Court decision, ruled that it was not entitled to take such a factor into account.
So the company’s appeal failed and the HMRC approval was withdrawn. While the PAYE failures in this case were extreme, the case nevertheless illustrates the dangers of not keeping all of a subcontractor’s tax affairs up to date. The unsympathetic response to the company’s possible demise is also a stark warning to others.
WASTE NOT WANT NOT
The market for quality gypsum recycling is set to grow, which should result in a reduction in construction waste, as the Scotland Environment Protection Agency (SEPA) confirms its position that waste plasterboard processed in accordance with the correct specification will no longer be regarded as waste. The move is an attempt to encourage more businesses to increase the amount of materials they are recycling, sending a strong message to the building industry in particular, that SEPA takes the issue of construction waste very seriously.
The decision to support the manufacture of gypsum from waste plasterboard is aimed at reducing pollution from landfill. When gypsum comes into contact with biodegradable waste in landfill, toxic hydrogen sulphide gas is produced with a strong odour. However if producers separate the gypsum for recovery and recycling, it can then be used to replace virgin gypsum in plasterboard, cement and soil conditioners.
The recently published PAS 109 ‘Specification for the production of recycled gypsum from waste plasterboard’ is a WRAP initiative which specifies minimum requirements for the recycling process itself. PAS 109 covers the selection, receipt, handling of inputs, specification of product grades and the storage, labelling, dispatch and traceability of the products that are produced from that process. It also specifies requirements for a quality management system to ensure the recycled gypsum being produced is consistently fit for its intended uses.
SEPA states clearly that when sold and made ready for dispatch to any of the three end-uses in plasterboard, cement or soil conditioners, PAS 109 compliant gypsum will cease to be regarded as waste. Therefore the subsequent storage, movement and use will avoid waste legislation requirements.
An added bonus for recyclers is that the PAS 109 will enable recyclers who adopt it to produce, and users to procure, a quality assured material. This will increase confidence in the use of recycled gypsum, leading to growth in existing markets and the development of new markets.
The full SEPA position statement may be viewed via the following link: http://www.sepa.org.uk/waste/waste_regulation/guidance__position_statements.aspx
The PAS 109 specification for recycled waste plasterboard is available for download by clicking on the link below:
http://www.wrap.org.uk/recycling_industry/information_by_material/plasterboard/pas109.html
The matters covered in this ebulletin are intended as a general overview and discussion of the subjects dealt with. They are not intended, and should not be used, as a substitute for taking legal advice in any specific situation. Semple Fraser LLP will accept no responsibility for any actions taken or not taken on the basis of this publication.
for further information please contact: kirsteen milne