CIS: Failure of reasonable care costs contractors £1.7m

In North Point (Pall Mall) Limited & China Town Development Company Limited v HMRC [2021] TC8205, the First Tier Tribunal (FTT) dismissed appeals against determinations for tax not deducted under the Construction Industry Scheme (CIS). The contractors had failed to take reasonable care by making gross payments to their sub-contractor without checking their status.

North Point (Pall Mall) Limited (NP) and China Town Development Company Limited (CT) were special purpose vehicles set up to purchase and redevelop two sites in Liverpool.

• NP and CT engaged the same sub-contractor to carry out the construction works under separate design and build contracts dated March and September 2016. The contracts identified NP and CT as ‘Employer’ and the sub-contractor company as ‘Contractor’.
  • They failed to take tax advice about the contracts or check them over before signing, relying on previous experience, legal advice taken in 2013 and the advice of their property agent.
• They did not immediately register for the Construction Industry Scheme (CIS) believing that they were not a Contractor. They registered in June 2016.
• Payments to the sub-contractor were made without any deduction of tax on the basis that gross payment status applied.
• Following a PAYE review, HMRC concluded that the conditions for gross payment status were not met by the contractor at the point at which payments were first made to them. HMRC issued determinations under regulation 13 of the CIS Regulations 2005 for:
  • North Point of £663,776 for 2015-2016 and £667,046 for 2016-2017.
  • China Town of £98,638 for 2015-2016 and £293,565 for 2016-2017.
• NP and CT appealed; they had taken reasonable care and the failure to deduct was due to an error made in good faith. They held a genuine belief that the legislation (s.61 FA 2004) requiring deductions to be made did not apply; they had been overcharged and should either be absolved of liability under regulation 9(3), as they had taken Reasonable care, or the assessment should be discharged under s.50(6) TMA 1970. Regulation 9(3) relief claims had already been made and HMRC had refused them.

The FTT dismissed the appeal ruling the appellants had failed to take reasonable care so had not been overcharged.

• The error made was made in good faith but this did not amount to taking reasonable care.
• Given the amounts and complexities involved and potential consequences of getting it wrong, the appellants should not have just signed the contracts without checking them.
• A reasonable director would have:
  • Challenged the advice of their property agent rather than taking it at face value.
  • Tested the advice against their own experience.
  • Taken independent tax advice from an expert.

Comment

The case delves into the technical complexities of the CIS regulations, including how determinations are made and challenged and the jurisdiction of HMRC and the FTT to deal with this.

The FTT said that once a determination has been made under regulation 13, it is too late for either HMRC or the tribunal to be able to grant relief under regulation 9(3) and direct that the contractor is not liable to pay the amounts they have failed to deduct. HMRC’s guidance directs that relief under regulation 9(3) must have already been considered by HMRC before a regulation 13 determination is made. If, however, the FTT were wrong about this, the judge said that the failure to take reasonable care meant that the appeal would still be dismissed.

Whilst in the end it made no difference to the outcome, the case highlights the need to understand the relevant legislation in full before deciding upon and committing to Grounds for appeal.

Useful guides on this topic

CIS: Contractors and Subcontractors
What is the Construction Industry Scheme? Who does it apply to? How does it work?

Penalties: CIS (Construction Industry Scheme)
When are Construction Industry Scheme (CIS) penalties charged and how much are they?

CIS: Construction Industry reverse charge
What is the CIS reverse charge? How do you account for VAT? Can you still cash account for VAT? What administrative changes do I need in order to operate the reverse charge? 

CIS repayments: Top 10 tips
In 2013 HMRC published a list of 'Top 10 tips' for companies who make repayment claims under the Construction Industry Scheme (CIS). The list is no longer available on the HMRC website but still provides a useful checklist.

Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Appeals: Grounds for Appeal Toolkit
What grounds are there to appeal a tax penalty? How can you word a tax appeal? Can you appeal HMRC errors? What is a reasonable excuse? 

External link

North Point (Pall Mall) Limited & China Town Development Company Limited v HMRC [2021] TC8205 TC8205