The Construction Industry Scheme and the interplay with the Agency Legislation – are you getting it right?

This is a guest blog by REC business partner, Markel Tax

The First Tier Tax Tribunal (“FTT”) has allowed an appeal in favour of an agency that provided labour within the construction industry. The appeal related to outstanding CIS deductions amounting to around £483,675.

Harbron Recruit Ltd (“HRL”), an agency in the construction industry, provided workers’ services to end clients. HRL did not engage any workers directly but had contracted with other intermediaries who, in turn, engaged the subcontractors.

Following the introduction of the “false self-employment” legislation in 2014 (the amended S44 ITEPA (2003), HRL had some concerns about its obligations and potential liabilities under the new legislation.

The amended legislation requires any business that contracts for the supply of labour/people to ensure the correct deductions of PAYE and NI are operated on all payments made to a worker, unless it can be shown that the worker ‘is not subject to, (or to the right of) supervision direction or control by any person’  (“SDC”). If this cannot be demonstrated, the worker will be deemed to be employed for tax purposes.

In this case a number of workers who were supplied by HRL, were subject to ‘supervision, direction or control’ and the workers were paid net of tax under PAYE. There was no dispute over the compliance with S44.  The dispute came due to the operation of the construction industry scheme (“CIS”).

HRL did not operate CIS on payments to the intermediaries it contracted with who were engaging the subcontractors, and instead submitted Nil returns during 2017-2022 in respect of payments made to those intermediaries. HRL believed that as the workers were employed earners, then they did not need to operate CIS on the companies who engaged those workers. Following a HMRC compliance review, determinations were issued to HRL totalling £483,675 in relation to outstanding CIS payments.

There was no dispute HMRC were technically correct as payments between HRL and the intermediaries should have been within CIS but HRL claimed they were not liable for the tax as both Conditions A and B of Regulation 9, of the Income Tax (CIS) Regulations 2005 were met. 

HMRC accepted that Condition B applied to £129,513 off the excess tax but Condition A was refused on the basis ‘reasonable care’ had not been taken by HRL.

HRL contended that reasonable care had been taken because it had gone to a lot of effort in ensuring the correct tax was applied to the workers. It had spent a lot of time and money in seeking whether or not the workers were subject to SDC in order to ensure it was compliant following the amendments to S.44, as the interaction between CIS and the agency legislation was not easy to follow. It had sought specialist CIS advice and also taken on experienced professionals internally to assist with compliance. In addition, the fact it had been submitting Nil returns had never been raised as an error by its specialist accountant or the internal professionals.

HMRC argued reasonable care had not been taken due to the fact it is clear in the guidance that ‘subcontractors include agencies’ and HMRC submitted that as HRL had actively changed its processes following the changes to the legislation, it was therefore ‘a clear indication that the company did not take reasonable care to comply with its obligations’. HMRC further submitted ‘it is well established that ignorance of the law is not a defence.’

The FTT agreed with HRL that the issue was ‘technically complex’ and HRL had 'acted with the level of care which the reasonable person in his position would have showed’and it was not that HRL was ignorant of the law but it had misunderstood the complexity of the law. The appeal was allowed, and the excess tax was reduced to nil.

This case highlights the complexities of the interplay between the CIS legislation and S.44, particularly where there are a number of intermediaries within the contractual chain and subcontractors who are subject to a right of SDC are engaged. While HRL were successful in their appeal, the CIS legislation does apply to all payments made to companies who provide construction operations (it does not matter how those companies engage the individuals, CIS always applies to that company). If you require any help ensuring compliance with CIS, S.44, along with intermediaries reporting requirements or any assistance in ensuring that any third party processing payments to self-employed subcontractors is in fact meeting its tax obligations, please contact us!
 

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