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CIS: Contractor left with £1.7m tax bill

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North Point failed to deduct tax under the CIS from sub-contractors, as it was not described as a ‘contractor’ in those contracts. The director did not take reasonable care when signing those contracts.   

10th Aug 2021
CIS specialist EmphaCIS Tax Consultancy Ltd
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HMRC issued determinations totalling £1,723,025 to North Point (Pall Mall) Ltd and China Town Development Company ltd (China Town) in respect of tax which should have been deducted by the two companies under the Construction Industry Scheme (CIS) in 2015/16 and 2016/17. Those companies – jointly referred to as North Point – appealed (TC8205) 

The first-tier tribunal dismissed the appeals of North Point on the grounds that:

  • The director, Mr Griffiths, had not taken reasonable care, albeit that the tribunal accepted that the error had been made in good faith, and
  • Neither HMRC nor the tribunal were able to grant relief under Regulation 9 Income Tax (Construction Industry Scheme) Regulations 2005 once determinations under Regulation 13 had been raised.

Griffiths had relied on advice from Mr Choules, the director of Inca Management Ltd (engaged by North Point to provide employers agent services to it), who had a number of years’ experience working within the construction sector and large-scale project management.

Standard contracts

North Point had engaged four different sub-contractor companies using standard joint contract tribunal (JCT) contracts, which were subject to some agreed amendments. The contracts, included a clause relating to the CIS and under that clause, the engager could be identified as being a contractor for the purposes of the CIS or not.

These contracts were pre-populated by Choules.

Choules, believing that as North Point was a developer and/or employer it was not a contractor for the purposes of the CIS and as such the contracts did not identify North Point as being a contractor. Griffiths signed the contracts without giving the matter much further thought, relying on the advice of Choules. It is on this basis that Griffiths believed he had taken reasonable care.

However, both Griffiths (who is also a qualified accountant and who had a considerable amount of experience dealing with the CIS on his clients’ behalf) and Choules gave evidence that they were not tax experts.

Tribunal was not impressed

The tribunal commented that “the reasonable director, with Mr Griffiths’ experience of the CIS, and thus cognisant of the dangers of getting it wrong, would have, at a minimum, read the pre-populated contracts, spotted the reference to the CIS… and have tested the interpretation…, with Mr Choules.”

The tribunal further stated: “It would have been equally clear to Mr Griffiths with his experience of the CIS that both appellants were carrying out construction operations within the ambit of section 74 FA 2003.”

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Replies (17)

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By AK Employment Tax Services
11th Aug 2021 08:46

This case demonstrates the importance of understanding the CIS rules. Whilst Regulation 9 give a way out if things go wrong HMRC are not generally willing to accept claims and there is a increasing number of appeals therefore finding their way to the FTT.

The real area of concern is avoiding getting into a situation in which HMRC issue Regulation 13 determinations because they then preclude the right for any relief by virtue of Regulation 9. This is what appears to have occurred in this particular case

It all boils down to whether the contractor exercised reasonable care

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By Paul Crowley
11th Aug 2021 08:58

"HMRC will strongly challenge a taxpayer’s assertion that they had taken reasonable care to the extent that if they had not taken advice from HMRC, the taxpayer cannot be regarded to have taken reasonable care."

Outrageous opinion from HMRC
I actively discourage clients from so doing.

I suspect nobody from HMRC have ever tried to put new windows into a building, or get a floor laid.

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By johnjenkins
12th Aug 2021 11:15

If you take this to conclusion. the CIS tax that should have been deducted will be offset against the tax that has been paid over with no CIS tax offset.

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By Justin Bryant
12th Aug 2021 11:40

This is a typically bad self-interested salesy case commentary, that does not even provide a link to this interesting case.

The carelessness point was in fact obiter and of less interest (unless you are a salesy CIS consultant of course). Of far more interest was the jurisdiction point and its draconian implications (yes, a JR is possible, but in practice that's just a theoretical justification for the draconian finding that the taxpayer had no ability to appeal the eye-watering CIS determination to the FTT in the 1st place).

https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12158/TC...

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Replying to Justin Bryant:
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By Justin Bryant
12th Aug 2021 12:56

It's a shame the taxpayer's QC did not include common law grounds re the jurisdiction point in its FTT appeal (and basically left it to the judge to essentially say "try the High Court re JR"). See para 24 et seq here as a successful example (albeit re VAT):
https://www.bailii.org/uk/cases/UKUT/TCC/2021/182.html

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Replying to Justin Bryant:
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By Anil Patel
13th Aug 2021 13:00

Thanks Justin, I had included a link to the tax case but this was clearly edited out by Accountingweb.

I won't comment on your other comments...............!

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By optimist
12th Aug 2021 11:46

What this case does is underline the importance of ensuring that by the time HMRC determine your companies are due money, that the companies have no assets and in fact have millions in net liabilities. Therefore HMRC are getting zero but at least they've spent a lot of time and money confirming what they could have had.

It would be good if these articles did more digging into the position of the companies. How many companies has this guy built up Crown debt in then put down?

Forget it Jake. It's Chinatown

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By anthonystorey
12th Aug 2021 11:52

Were the subcontractor companies not on gross payment for CIS and why wasn't Reg 9 relief looked at before the determinations were made. Why can't Reg 9 relief be given anyway. The upshot of this is that HMRC have had their tax twice. Once because the subcontractor companies will have paid the full amount of tax due on the gross CIS payments received and twice because North Point are having to pay the CIS tax that they should have (possibly) deducted. Perhaps it's a new form of MTD - Making Tax Double.

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By AK Employment Tax Services
12th Aug 2021 11:59

Just to add to some comments made:
Sorry to be clear the Tribunal does not have the right to waive the responsibility of the contractor to pay this liability with the drafting of Regulation 9(4) leaving that right with HMRC. The Tribunal can decide to waive the right under Regulation 9(3)however, but to do so would need to be satisfied the contractor exercised reasonable care

It is also the case that the tax recovered from the contractor will not mitigate the liability of the subcontractors concerned who will be assessed on the basis that they had been paid gross. The tax paid is in fact a form of penalty on the contractor.. The position changed after the rules update in 2008

Also if the contractor does not have the funds to meet this claim this does not prevent HMRC seeking recovery from their directors/shareholders if this was a deliberate failure in the eyes of HMRC

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Replying to AK Employment Tax Services:
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By johnjenkins
12th Aug 2021 12:32

So what if (I'm just exploring an avenue here) the company does CIS returns for the business concerned then that business should be able to offset the cis tax deducted and refund it back to the contractor. HMRC chase but tax has already been paid. As this money is CIS tax, and CIS tax is used to offset a tax liability, not a penalty, it would be an interesting scenario.

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By AK Employment Tax Services
12th Aug 2021 12:17

Hello Anthony. Generally if the subcontractor had gross status when they undertook the work then HMRC would give relief by virtue of Regulation 9(4). I have explained if you read the Regulations that decision sits with HMRC and the rules make clear is not something which can be reviewed or overturned by the FTT.

I can only assume in this particular case that the subcontractors did not have gross status when engaged so HMRC have not given relief under Regulation 9(4). This leaves the only route under Regulation 9(3)

Sadly this is how the CIS rules work and there are an increasing number of disputes arising in this particular area. IT is not something which arises in this one instance I have taken a number of cases to Tribunal on the same point and have a number waiting to proceed

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By AK Employment Tax Services
12th Aug 2021 12:25

Hello Anthony. Generally if the subcontractor had gross status when they undertook the work then HMRC would give relief by virtue of Regulation 9(4). I have explained if you read the Regulations that decision sits with HMRC and the rules make clear is not something which can be reviewed or overturned by the FTT.

I can only assume in this particular case that the subcontractors did not have gross status when engaged so HMRC have not given relief under Regulation 9(4). Or that the contractor did not make an application under Regulation 9(5) for a ruling to be made by HMRC in respect of Regulation 9(4).. This leaves the only route under Regulation 9(3) to avoid the liability.

HMRC instructions are clear that inspectors should not issue Regulation 13 determinations without warning to the contractor given the fact that by so doing they preclude the opportunity for a claim under Regulation 9

Sadly this is how the CIS rules work and there are an increasing number of disputes arising in this particular area. It is not something which arises in just this one instance I have taken a number of cases to Tribunal on the same point and have a number waiting to proceed

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By rememberscarborough
12th Aug 2021 19:39

We don't have the full facts but if you have gross status CIS is easy to run. Suspect the defendant didn't have gross status and that there is far more to this story before accusing HMRC of draconian actions.

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By AK Employment Tax Services
13th Aug 2021 07:21

In response to remember Scarborough my comments are based on the dicta of the case which was released by the FTT and is in the public domain

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By mdoodney
15th Aug 2021 14:15

On asking HMRC for their view generally there is no obligation to seek this because, with certain exceptions, and as with their published guidance, it isn't binding and doesn't have the force of law. The following from Gedir ([2016] TC04974) is helpful (though for qualification of this view for 'non-complex' points, McCann ([2020] UKFTT347) is also worth a read) :

[110] Nor is a taxpayer obliged to seek advice from HMRC. There may be occasions when it is helpful to ascertain HMRCʼs view on a particular provision, but the taxpayer does not necessarily have to agree with it! In a case where a range of views are possible, HMRC would be expected, and entitled, to take the view which is most advantageous to it in the same way as the taxpayer would be expected, and entitled, to take the view which is most in his favour.

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By AndrewV12
16th Aug 2021 11:44

However, both Griffiths (who is also a qualified accountant and who had a considerable amount of experience dealing with the CIS on his clients’ behalf) and Choules gave evidence that they were not tax experts.

Wow an Accountant not claiming to be an expert on something (in this case tax ???) , that's a first.

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By AK Employment Tax Services
18th Aug 2021 16:47

I would recommend reading also the recently released decision of Gelder Ltd -2019 06358. This was in respect of a ruling under Regulation 9(3) and the Judge at the Tribunal decided in favour of the taxpayer

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