CIS compliance mistake: a costly lesson for contractors

The First Tier Tax Tribunal (“FTT”) recently dismissed an appeal in favour of HMRC, relating to a company’s compliance with the Construction Industry Scheme (“CIS”) relating to payments made of around 3.6 million.

Evancast (Kent) Ltd (“EK”) a construction company, engaging up to 150 subcontractors who were subject to the CIS scheme, appealed to the FTT against HMRC’s decision not to grant relief under Regulation 9 (5) of the Income Tax (CIS) Regulations 2005, in response to a claim made under 9 (3) (Condition A) of the Regulations.

EK utilised the services of a company called Langdale & Goodfellow (“LG”) to process payments and make the appropriate CIS deductions to subcontractors on its behalf. However, over a period of time LG had failed to make CIS payments to HMRC in respect of the subcontractors payments.

It was confirmed EK did not carry out any CIS verification checks in respect of LG’s CIS payment status. No checks were ever made by EK or its accountant. It had carried out virtually no "due diligence" on LG in relation to how LG would operate and account for CIS payments. nor did it obtain any detailed information on LG, other than relying on the verbal recommendation received. To make matters worse, there was no written contract in place between EK and LG.

EK confirmed it had not looked at HMRC CIS guidance but argued ‘reasonable care’ had been taken in forming its decision. This was based on the genuine belief that CIS did not apply because LG only provided ‘administrative and payroll services’. In their view the services were administrative and not construction. It assumed LG was not within CIS. There was no contract for construction and as such no deduction or verification was required on payments made to LG.

EK relied on its overall compliance history, it argued any CIS issues should have been picked up by the accountant. EK also assumed it would be notified if any action regarding CIS was required. It contended that this was a genuine mistake and it could not be expected to read all HMRC guidance.

HMRC submitted that the error was not made in good faith nor did HMRC accept that reasonable care had been taken. It was argued that if in fact reasonable care had been taken, EK would have looked at the CIS guidance or at least contacted HMRC for specific advice but this was not the position here. EK had not proactively asked for advice about the correct operation of CIS, in HMRC’s opinion a reasonable level of diligence was not carried out.

The CIS guidance states “where a worker is supplied to a contractor by or through an agency and the worker carries out construction operations under the terms of a contract they have with the agency, the agency supplying the worker will be a subcontractor as far as the contractor is concerned. The contractor must always apply the scheme when making payment to the agency.”

It was submitted by HMRC that “a prudent and reasonable business with experience in engaging subcontractors, would have made itself aware of its responsibilities and put into place adequate procedures to ensure compliance with the Regulations.”

The FTT agreed with HMRC that EK had failed to take reasonable care to comply with section 61 of the Finance Act 2004, as it failed to meet its CIS obligations. The case was dismissed and EK was not entitled to any relief.

This case highlights not only the importance of ensuring a company is meeting its CIS obligations but also the importance of ensuring thorough due diligence is carried out when engaging with companies who process any CIS payments to subcontractors on its behalf. Companies should always ensure that contracts are put in place to reflect the contractual position and make it clear where the tax liability rests and the responsibilities of each party.

This includes any third party, including payroll companies, agencies, intermediaries, labour providers, commercial contractors or any business that describes itself as taking away ‘any hassle from processing of payments to reduce time constraints,’ ‘removing the risk of errors on payments’ or ‘we can protect your company from any employment status or CIS issues’’.

If you require any help ensuring a construction business remains compliant with its CIS and contractual obligations, or assistance in ensuring that any third party processing payments to self-employed subcontractors is in fact meeting their tax and employment status obligations as advertised, please contact us!