A determination under regulation 13 of the Construction Industry Scheme must not include sums in respect of which a direction under regulation 9 had been made.
The Court of Appeal has considered the operation of the CIS, allowing an appeal in Beech Developments (Manchester) Ltd and others v The Commissioners for His Majesty’s Revenue and Customs [2024] EWCA Civ 486.
The CIS, introduced by the Finance Act 2004, aims to reduce the risk of tax evasion by workers in the construction industry. It requires contractors to make deductions from labour payments to their sub-contractors and account to HMRC for the sums deducted. Sub-contractors can offset the sums deducted against their own liabilities.
The contractor must still account to HMRC for the sum that should have been deducted even where no or insufficient deduction is made. Failure to do so can lead to a determination by HMRC of the sum due under regulation 13 which is treated as an assessment to income tax.
Where, however, the sub-contractor does meet its own tax liabilities HMRC may receive more than its entitlement. Regulation 9 empowers HMRC to issue a direction that the contractor is not required to pay where the contractor can establish that the failure to deduct was due to an honest error or belief or either that the sub-contractor was not chargeable to tax or had made a personal tax return taking the payments into account and the contractor requests a direction that it is not liable to pay the excess.
Beech comprised six companies in the same group established to undertake a specific construction project. They made payments to another group entity which acted as the main contractor and operated the CIS regime with its sub-contractors. Beech should also have operated the regime for its payments to the main contractor but did not. HMRC issued determinations for the tax years 2016-2019 and sought around £2.5m. Beech invoked regulation 9 but only after the determinations were issued.
Beech’s claim for judicial review was dismissed by the First-tier Tribunal which accepted HMRC’s position that it had no jurisdiction because a determination had already been made. Beech successfully argued before the Court of Appeal that HMRC has power to issue a direction under regulation 9 in respect of an amount that has been the subject of a determination. Provided that the determination remains capable of adjustment, regulation 13 allows such a direction to be reflected in the determination.
The Court of Appeal quashed HMRC’s decision not to consider Beech’s claim under regulation 9 and required it to reconsider the claim.
Louise Clark is a property law consultant and mediator
