The Construction Industry Scheme and agency legislation: are you getting it right?

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

Background to the case

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 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.

Where the issue arose

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 compliance with S44. The dispute arose 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, it did not need to operate CIS on the companies engaging those workers. Following an HMRC compliance review, determinations were issued to HRL totalling £483,675 in relation to outstanding CIS payments.

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

HMRC’s position

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

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

HRL’s defence

HRL contended that reasonable care had been taken because it had gone to significant effort to ensure the correct tax was applied to the workers. It had spent considerable time and money determining whether the workers were subject to SDC in order to remain compliant following the amendments to S44, as the interaction between CIS and the agency legislation is complex.

It had sought specialist CIS advice and also engaged 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 internal professionals.

The tribunal’s decision

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

What this means for recruiters

This case highlights the complexities of the interaction between CIS legislation and S44, particularly where there are multiple intermediaries within the contractual chain and subcontractors who are subject to a right of SDC.

While HRL was successful in its appeal, CIS legislation does apply to all payments made to companies providing construction operations (it does not matter how those companies engage individuals – CIS still applies to that company).

If you require any support in ensuring compliance with CIS, S44, or intermediaries reporting requirements, or need assistance in confirming that any third party processing payments to self-employed subcontractors is meeting its tax obligations, please contact us.

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