In 2014, the Agency Rules were introduced to ensure that workers under ‘Supervision, Direction, and Control’ (SDC) of an agency were classified as employees. Harbron Recruit Ltd (HRL), after obtaining professional advice, understood that there was no longer a requirement to deduct Construction Industry Scheme (CIS) payments made to agencies. Acting on this advice, HRL proceeded to submit nil CIS returns.
Background of the Case
Harbron Recruit Ltd specialises in recruiting workers for end clients, predominantly within the construction sector. Rather than engaging workers directly, HRL worked through an agency. Under CIS Payroll regulations, where an agency lacked ‘gross’ status, deductions should have been made from payments.
Having sought expert guidance on implementing the agency rules, HRL’s director, James Harbron, believed that CIS deductions were no longer necessary, as payments were processed net of tax under PAYE. However, HMRC later opened an enquiry and raised an assessment of £483,675 against HRL for excess tax related to CIS Payroll deductions.
HRL’s Defence and Regulation 9 Conditions
HRL contended that they were not liable for the excess tax as they believed they met both conditions A and B of Regulation 9 under CIS regulations:
- Condition A – The failure to make deductions was due to an error made in ‘good faith’ based on a genuine belief that no deduction was necessary.
- Condition B – No additional Income Tax or Corporation Tax liability would have arisen for the recipient of the payment, or if a liability did exist, it had been properly declared to HMRC.
While HMRC accepted that condition B applied to £129,513 of the excess tax, they disputed the remaining amount. Additionally, HMRC did not accept that condition A had been met, arguing that HRL had not exercised ‘Reasonable Care.’
Findings of the First-tier Tribunal (FTT)
The FTT reviewed the case and established the following:
- There was no underlying technical dispute regarding whether the payments fell under CIS Payroll regulations.
- While HMRC refused to apply condition B to part of the excess tax, the legislation does not allow an appeal against this refusal. As a result, the FTT had no jurisdiction to overturn HMRC’s decision on this point.
- It was clear that Mr Harbron acted in good faith, genuinely believing he was complying with CIS Payroll regulations. There was no evidence of negligence or intentional wrongdoing.
- HMRC rejected condition A, arguing that HRL had not exercised reasonable care. However, the FTT disagreed based on the following key points:
- Mr Harbron recognised the complexity of the new rules and took steps to ensure compliance.
- He sought specialist advice and invested considerable time in understanding the position of the workers.
- The interaction between CIS Payroll and agency rules was highly complex, and even HMRC’s own officers struggled to provide clear guidance.
- Although an error occurred, seeking professional advice demonstrated a reasonable approach to compliance.
Furthermore, HMRC argued that ‘ignorance of the law’ is not a valid defence. However, the FTT ruled that Mr Harbron was not ignorant but rather misunderstood the intricate details of CIS Payroll regulations—a distinction that worked in his favour.
Conclusion: The Importance of Professional Advice in CIS Payroll
Nick Pilgrim, MD of EEBS commented “that tax and employment law are some of the most complex rules that companies have to deal with, and it doesn’t matter if you are a multi-national or a one person company, the rules are pretty much the same for everyone! At EEBS as well as our own in-house expertise we also work with some of the countries leading experts in tax and employment law to ensure our clients remain both compliant and competitive”.
Ultimately, the appeal was allowed, highlighting the importance of obtaining expert guidance when navigating CIS Payroll and agency rules. This case serves as a crucial reminder that while mistakes can happen, taking reasonable care—such as seeking professional advice—can provide a valid defence against HMRC penalties.
For businesses managing CIS Payroll, ensuring compliance with evolving regulations is essential. If you need support in handling CIS deductions and payroll obligations, seeking expert advice can help safeguard against costly disputes with HMRC.
Get in touch with Nick or the EEBS team if you require advise on your arrangements.
