Lee Sharpe looks at a rare win for the taxpayer in the construction industry scheme, and a potential lifeline for people caught out by it.
The case of Beech Developments (et al.) v HMRC [2024] EWCA Civ 486 is most welcome for those businesses that catch a nasty case of ‘accidental CIS’. Having been heard at the Court of Appeal, it effectively overturns numerous earlier cases heard only at the tribunals, and HMRC must abide by it. (In fact, HMRC’s guidance, such as in its Construction Industry Scheme Reform Manual at CISR83600, was only recently updated, in January 2025).
Some property-adjacent businesses may believe they do not fall within the scope of the Construction Industry Scheme (CIS), but a note of caution: HMRC is more than happy to lean on quite sweeping definitions in the legislation to style a humble property investment business foolhardy enough to pick up a trowel as falling within the scope of ‘construction operations’ as a mainstream contractor, thereby bypassing the more rarified ‘deemed contractor’ provisions that require a minimum £3m spend on construction activity in (up to) the last year, thence to be ‘caught’ by the CIS regime (readers may appreciate the irony that, outside the world of CIS, HMRC would rather sell their proverbial grandmother than suggest a landlord was actually a property developer!).
A brief introduction to CIS
Broadly, CIS is ‘PAYE-lite’, inasmuch as the contractor is obliged to withhold some of the labour element of any payment to a subcontractor and then to pay over that retention to HMRC on account of the subcontractor’s ultimate income tax liability. The contractor must check with HMRC whether the retention is 20% or 30% (or 0% where the sub-contractor has ‘gross payment status’).
The problem typically arises when an established business suddenly finds it is within the scope of CIS on some or all of its payments, so it should have been retaining or paying across x% of its subcontractor payments for several months or even years.
The regime holds the contractor responsible and liable for those retentions; if they are not made, any shortfall has to be met out of the contractor’s own funds and profits.
However, if we suppose that our contractor wrongly failed to withhold CIS retentions for several years, what if the subcontractor has likewise been accounting for and paying income tax (or corporation tax) on those gross receipts, oblivious to CIS?
Protecting contractors from the risk of HMRC ‘double-dipping’
Just as with ‘real’ PAYE, there is a problem with making the contractor or employer responsible (and liable to account) for what is really an individual subcontractor or employee’s personal tax liability. HMRC could accidentally end up with tax from both the subcontractor and from enforcing collection rights against the contractor, on essentially the same subcontractor income.
The CIS regulations (SI 2005/2045) offer some respite: regulation 9 permits HMRC to make a direction, reducing the contractor’s liability where or to the extent of either of two ‘conditions’, in summary:
-
The contractor took reasonable care in relation to its CIS obligations but had made a mistake in good faith or genuinely believed that CIS tax did not need to be withheld on given payments.
-
The subcontractor has made a tax return incorporating that income from the contractor AND paid the tax due thereon (or does not owe any tax thereon in the first place).
Ignoring any hope that HMRC might entertain the notion that a contractor had been taking reasonable care in observing its CIS obligations yet somehow still disagreed with HMRC on whether CIS deductions should have been made, this leaves the contractor relying on HMRC to:
-
find a given subcontractor’s tax record;
-
satisfy themselves that the contractor’s payments have been included as income in that subcontractor’s tax returns – potentially for several years; and
-
satisfy themselves that the subcontractor has, in fact, paid the tax due on the corresponding profits.
This could cover several years and for numerous subcontractors. The more recent the default, the less chance that subcontractors would have both submitted their returns and paid their payments.
Regulation 13 covers HMRC’s power to make a determination of any CIS withholding tax still due from the contractor, net of any adjustments (directions) made under regulation 9. Crucially, it had long been HMRC’s view that once a regulation 13 determination was made, no further regulation 9 directions (adjustments) could be incorporated.
Given the interval between paying a subcontractor and the subcontractor then including that payment on their own tax return and then paying the corresponding tax due, this would almost invariably mean a serious risk of tax being paid twice on the same incomes – particularly those amounts paid most recently. Ironically, the more compliant the sub-contractors and the faster HMRC worked, the greater the risk of HMRC enjoying a ‘windfall’ at the contractor’s expense.
A contractor might well worry that HMRC might not try too hard to trace every subcontractor, reconcile incomes, and check payments, etc. HMRC rightly refuses to divulge the particulars of a subcontractor’s affairs, on confidentiality grounds, so much of the process has to be taken on trust.
Legal challenge
HMRC’s position that a regulation 13 determination drew a line that could not be crossed had enjoyed support in numerous tribunal cases, such as Ormandi v HMRC [2019] UKFTT 0667 (TC), and North Point (Pall Mall) Ltd v HMRC [2021] UKFTT 0259 (TC).
Notably, the CIS regulations permit appeals to the tribunal only under Condition A above (reasonable care), not Condition B. To an extent, this is understandable, given that any findings under B – at least in terms of amounts – should be relatively uncontroversial, assuming we are dealing with a diligent officer acting reasonably and fairly. This meant that the Beech companies in this latest case were obliged to seek leave for judicial review (which is typically more expensive than a tribunal hearing). The companies lost that review but won at appeal, with key arguments being that tax liabilities should not be discretionary or fall to HMRC’s ‘munificence’, or allow HMRC to retain a ‘windfall’.
The Court of Appeal acknowledged the neat logic of HMRC’s arguments that basically inferred from the legislation that no adjustment to the CIS tax could be directed after a determination had been made, but worried over potential unfairness to the contractor and decided that “contextual considerations point clearly” towards the companies’ approach to the legislation. Of the several aspects discussed, note:
-
If a regulation 13 determination were intended to prevent any further regulation 9 direction adjustments, then regulation 9 should have clearly said so – there was no reference in regulation 9 to limitations being set by the later Regulation.
-
Based on HMRC’s long-standing interpretation, an HMRC officer could simply decide to cut off any appeal rights under regulation 9 (e.g., against condition A above) just by issuing a regulation 13 determination – even if an appeal had already been made: “That is an extraordinary result which would require clear words, [in the legislation], because it contravenes general principles of access to justice.”
-
The judges were unmoved by HMRC’s assurance that any kinks in the logic of its preferred interpretation could be smoothed over by HMRC’s using “collection and management powers”, quoting: “One should be taxed by law, and not untaxed by concession”.
Conclusion
This is the second article I have written this month about the UK courts’ discomfort over ‘windfalls’ to HMRC (the other article, for Property Tax Insider, was on a case concerning VAT claims on DIY housebuilding). In fairness to HMRC, I should say that in my experience, HMRC has not tended to rush to head off any regulation 9 reductions by quickly issuing a regulation 13 determination: quite the opposite. But it is also true that HMRC was entirely sanguine about the risk of a determination eventually resulting in some tax effectively being charged twice on the same CIS payment.
In that light, HMRC’s historic approach has always seemed unfair, justified only if one accepted HMRC’s quiet assumption that construction businesses generally deserve this, and more. One might say it is an issue that begged for a case with a taxpayer with deep pockets but usually garnered only desperation. Fortunately for contractors generally, the tax at stake here was circa £2.5m, so perhaps there was enough of both.
While tailored advice is essential, it seems most contractors exposed to ‘accidental CIS’ like this will want to appeal a regulation 13 determination promptly when issued by HMRC and apply themselves assiduously to encouraging HMRC to match as much tax borne by the corresponding subcontractors as possible, under regulation 9 – bearing in mind that appeals can and do hold cases open for months and years.
