Construction Industry Scheme: the importance of ‘reasonable care’

In recent months, there have been a couple of interesting cases come through the First Tier Tax Tribunal (FTT) that highlight the complexities of the CIS legislation and its operation for contractors. These cases centre around Regulation 9 (3) of the Income Tax (Construction Industry Scheme) Regulations 2005, so let’s look at this in more detail before delving into the two cases.

What is Regulation 9 (3) and why is it important?

Where a contractor is found liable to CIS tax, Regulation 9 (3) allows them to seek relief from HMRC on the grounds that:

• They’ve taken reasonable care to comply with the CIS legislation, and either; the failure to comply arose from either an error in good faith, or a genuine belief that the scheme did not apply

This provision is important, because it provides a gateway to allow HMRC to direct that the contractor is not liable to the unpaid tax under provisions 9 (4) or 9 (5) – effectively disposing with the liability from the contractor.

Ruling against: Evancast (Kent) Ltd v HMRC

The situation

In this case, Evancast (the contractor) used the services of a third-party company to pay its subcontractors. Effectively, this third party engaged workers and supplied them to Evancast, who utilised their skills and abilities on construction projects. Therefore:

• They took the view that the third party was a payroll company/agency supplying workers and making payments to subcontractors
• They didn’t operate the CIS on payments to this company, believing that its services did not fall within the scheme

HMRC’s decision

HMRC conducted an enquiry and determined that Evancast was liable to just short of £1m in under-deducted CIS Tax. Evancast sought relief from HMRC under Regulation 9 (3), arguing that it had taken reasonable care and had a genuine belief that CIS tax didn’t apply to payment made to the third-party company. HMRC refused, and the matter was taken before the FTT.

The Tribunal’s decision

The Tribunal determined that Evancast did not qualify for relief under 9 (3). It agreed with HMRC’s position that, despite the company’s otherwise good compliance in respect of other taxes, the company had not acted reasonably, as it had not proactively sought to determine its responsibilities, and merely assumed the third party’s business was administrative and not construction. As such, Evancast was held liable.

Ruling in favour: Harbron Recruit Limited v HMRC

The situation

The contractor, Harbron, was an agency that contracted with end-clients to provide CIS workers, using subcontractors and other agencies to fulfil its clients’ needs.

Following introduction of the false self-employment legislation in 2014 (the amended section 44 ITEPA (2003)), Harbron considered itself unable to adequately determine that the CIS individuals it supplied to clients were not subject to a right of supervision, direction and control as to the manner in which the services are provided. It took the following course of action:

• Sought professional advice on the matter
• Determined that all individuals supplied to its clients must pay tax and National Insurance under PAYE by the companies that paid them

As a consequence of PAYE being operated, and with the additional new requirement to submit intermediary returns to HMRC quarterly, Harbron considered that CIS did not operate between it and the agencies/subcontractors it contracted with. It had operated on this basis since 2014.

HMRC’s decision

Following an enquiry, HMRC determined that Harbron was liable to more than £450,000 in unpaid CIS tax, ruling that CIS was still operational between Harbron and any company it subcontracted to. It said that whether or not the individuals were subject to PAYE further down the chain was irrelevant, as s44 ITEPA did not displace CIS obligations. HMRC therefore refused relief under 9 (3), and Harbron subsequently appealed to the First Tier Tax Tribunal.

The Tribunal’s decision

Before the Tribunal’s final decision, HMRC accepted that Harbron was entitled to partial relief, but it refused to grant full relief under 9 (3) as it did not believe Harbron had acted reasonably in concluding that CIS was not applicable.

However, the Tribunal held that Harbron should be granted full relief, and that determinations should be reduced to nil, because:

• Harbron had taken extensive measures in trying to comply with its obligations
• It took independent specialist advice on the issues
• The interactions between the CIS legislation and s44 were not entirely clear

What can we learn about CIS from these cases?

At first glance, it may seem odd that two somewhat similar scenarios have produced different decisions. The reason for this is due to the “reasonable care” requirement of 9 (3). When considering this, the Tribunal will look at:

• The behaviours of the contractor
• What steps they took
• What information they sought in order to determine their position

In Evancast, based on the evidence before it, the Tribunal found that Evancast didn’t seek out any advice, or take what it considered to be reasonable steps to look into whether CIS should operate. It also considered that they had made assumptions without seeking any clarification.

However, in Harbron, the Tribunal found that the company had sought extensive advice on its compliance, taking independent specialist advice and seeking to understand its position itself from available resources (including HMRC) in coming to its operating decision.

These Tribunal decisions confirm what we are seeing: that HMRC appears to have re-doubled its focus on the construction industry and compliance with CIS. These two cases highlight the importance of contractors seeking advice from their accountants and advisers about CIS compliance.

Need CIS advice?

If you have construction clients and would like our help with advising them on the complexities of CIS, or you’d simply like a second opinion on previous advice you’ve provided, please contact us at CIS@markel.com and one of our CIS specialists will be happy to assist.