A construction firm’s appeal against HMRC has been dismissed, after a tribunal ruled it failed to exercise reasonable care in meeting its Construction Industry Scheme (CIS) obligations.
Evancast (Kent) Ltd (EL), operating in the construction sector, employed a workforce of predominantly self-employed subcontractors, for whom it deducted CIS payments. However, complications arose following a verbal agreement with another company, Langdale & Goodfellow (LG), in 2018.
What Happened?
The Agreement
Under the agreement, EL passed worker details and gross payment amounts to LG, which then paid the wages. Over the 2018/19 tax year, LG handled more than £3 million in payments. EL classified LG’s role as “admin services providing payroll” and assumed LG was making the necessary CIS deductions and payments to HMRC. This assumption, however, was never confirmed, and LG ultimately failed to make the CIS payments.
HMRC Investigation
In 2020, HMRC initiated a review to check EL’s tax compliance, including its CIS deductions. After discussions, HMRC issued a warning letter under Regulation 13(2), indicating that EL could face a determination for under-deducted CIS payments.
EL responded by requesting HMRC consider Regulations 9(3) and 9(4) and issue a direction under Regulation 9(5), arguing it had taken “reasonable care” to comply with CIS rules. HMRC disagreed, concluding EL had failed to correctly deduct CIS for payments made to LG and refused to apply Regulation 9(3).
As Regulation 9(4) decisions cannot be appealed, EL brought the Regulation 9(3) issue before the First-tier Tribunal (FTT). The disputed amount totalled £927,586.59.
The Appeal
EL presented two main arguments:
- Payments to LG fell outside the scope of CIS as LG only provided payroll and admin services.
- EL took reasonable care in complying with CIS rules, relying on its accountants and prior compliance with other CIS obligations.
HMRC countered that LG’s role constituted a subcontractor relationship, meaning CIS deductions were required. It also argued that EL, as an experienced CIS operator, had failed to confirm LG’s compliance and thus did not meet the standard of reasonable care.
Tribunal Findings
CIS Applicability
The tribunal found that LG acted as a subcontractor under CIS rules, as outlined in HMRC’s CIS340 guidance. It provided labour or staff to carry out construction work, which placed the payments firmly within CIS requirements.
Reasonable Care
The tribunal concluded that EL had not taken reasonable care. While EL claimed to rely on its accountants and HMRC, it neither sought specific advice nor conducted basic checks to confirm LG was fulfilling its obligations.
EL also failed to secure written agreements with LG or document its compliance efforts. The tribunal noted that a prudent taxpayer with EL’s CIS experience would have made further enquiries to confirm the arrangement was compliant.
Citing previous cases, EL argued that relying on others can sometimes constitute reasonable care. However, the tribunal rejected this defence, stating that merely passing information to accountants without raising specific concerns is insufficient.
Additionally, the tribunal clarified that HMRC’s general guidance obligations do not extend to educating individual taxpayers on their specific responsibilities.
Outcome
The tribunal found that EL’s reliance on assumptions and its failure to verify LG’s compliance showed a lack of reasonable care. As a result, the appeal was dismissed in full, leaving EL liable for the under-deducted CIS payments of £927,586.59.
EEBS Comment – Check your Due Diligence!
If you are using or thinking about using a payroll intermediary or a labour supplier then HMRC’s guidance on the due diligence is important reading. After all, there’s compliance and then there’s compliance!!
The guidance makes sobering reading, threatening all sorts of penalties from tax and NI charges to paying the VAT for suppliers that go bust, and here’s the kicker the guidance tells you:
“We can’t tell you exactly what checks you should make because these will vary depending on how your business operates”!!
So let EEBS help you out here…. Below is a summary of the sort of things you should be asking your construction intermediary:
For the company:
- Please confirm that your companies tax affairs are up to date. As part of continuing to work with your supplier this request should be sent every three months
- Please confirm that your company has all appropriate licenses in place to supply labour
- Ask your supplier for a copy of their VAT registration certificate so that you have HMRC document confirming that you are registered for VAT.
With regard to checking the supply chain:
- Consider very carefully any contractual arrangements that allow your supplier to outsource their services to another company without your knowledge.
- Ensure that any travel and subsistence arrangements between the workers and your supplier comply with HMRC guidelines.
- Especially off-shore arrangements!
- Seek evidence that your supplier continuously reviews the working practices and contractual arrangements for workers supplied to you, to ensure they are genuinely acting in self-employed arrangements.
- And ask for evidence to see if any agency rules apply.
- Ask for confirmation that your supplier complies with employment intermediary reporting requirements and confirm where relevant reports are submitted to HMRC.
Of course, if all of this is a hassle then just talk to EEBS, who have 22 years experience and a business model that’s never been challenged! We’ll confirm all of the above before you even start.
