T11: Construction industry scheme

Background

“The Construction Industry Scheme (‘CIS’) is a statutory scheme which is now contained in the Finance Act 2004. Its aim is to encourage tax recovery for businesses operating in the construction industry. As the Tribunal noted at [6] of the Decision, the construction industry historically attracted a large itinerant workforce who were not employees and so not subject to the PAYE scheme, who were paid cash in hand and who did not fully account for their income for tax and National Insurance purposes. To reduce non-compliance there has since 1972 been a dedicated compliance scheme in place which, very broadly, places an obligation on those who pay self-employed workers for construction work to make a deduction from that pay and to account to HMRC for that deduction. The money is then treated as tax paid by the construction worker.” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §2, Rose J).

Background

Construction contract

"(2) In this Chapter “construction contract” means a contract relating to construction operations (see section 74) which is not a contract of employment but where—

(a) one party to the contract is a sub-contractor (see section 58); and

(b) another party to the contract (“the contractor”) either—

(i) is a sub-contractor under another such contract relating to all or any of the construction operations, or

(ii) is a person to whom section 59 applies." (FA 2004, s.57(2))

“A ‘construction contract’ is defined in section 57(2) as a contract relating to construction operations which is not a contract of employment but where one party to the contract is a sub-contractor and another party to the contract is either a sub- contractor under another such contract relating to all or any of the construction operations, or a contractor for the purposes of section 59.” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §9, Rose J).

Sub-contractor

“(1) For the purposes of this Chapter a party to a contract relating to construction operations is a sub-contractor if, under the contract—

(a) he is under a duty to the contractor to carry out the operations, or to furnish his own labour (in the case of a company, the labour of employees or officers of the company) or the labour of others in the carrying out of the operations or to arrange for the labour of others to be furnished in the carrying out of the operations; or

(b) he is answerable to the contractor for the carrying out of the operations by others, whether under a contract or under other arrangements made or to be made by him.” (FA 2004, s.58)

Contractor is a person to whom s.59 applies

"(1) This section applies to the following bodies or persons—

(a) any person carrying on a business which includes construction operations;

(b) any public office or department of the Crown (including any Northern Ireland department and any part of the Scottish Administration);

(c) the Corporate Officer of the House of Lords, the Corporate Officer of the House of Commons, the Scottish Parliamentary Corporate Body and the National Assembly for Wales Commission;

(d) any local authority;

(e) any development corporation or new town commission;

(f) the Homes and Communities Agency;

(fa) the Greater London Authority in the exercise of its functions relating to housing or regeneration or its new towns and urban development functions;

(g) the Secretary of State if the contract is made by him under section 89 of the Housing Associations Act 1985 (c 69);

(h) the Regulator of Social Housing, a housing association, a housing trust, Scottish Homes, and the Northern Ireland Housing Executive;

(i) any NHS trust;

(j) any HSS trust;

(k) any such body or person, being a body or person (in addition to those falling within paragraphs (b) to (j)) which has been established for the purpose of carrying out functions conferred on it by or under any enactment, as may be designated as a body or person to which this section applies in regulations made by the Board of Inland Revenue;

(l) a person carrying on a business at any time if, in the period of one year ending with that time, the person's expenditure on construction operations exceeds £3,000,000." (FA 2004, s.59(1))

Certain public authorities must have expenditure of £3m on construction operations

"(2) But this section only applies to a body or person falling within any of paragraphs (b) to (fa) or (h) to (k) of subsection (1) at any time if, in the period of one year ending with that time, the body or person's expenditure on construction operations exceeds £3,000,000." (FA 2004, s.59(2))

£3m test met be no further expenditure on construction expected: option to treat condition as no longer met

"(3) Where the condition in subsection (1)(l) or (2) is met in relation to a body or person at any time, the body or person may elect for the condition to be treated as no longer being met if, at that time, the body or person is not expected to make any further expenditure on construction operations.

...

(3B) Subsections (3) and (3A) do not prevent the condition in subsection (1)(l) or (2) from being met again in relation to the body or person." (FA 2004, s.59(3), (3B))

£3m test ceases to be met: option to treat it as continuing to be met

"(3A) Where the condition in subsection (1)(l) or (2) ceases to be met in relation to a body or person at any time, the body or person may elect for the condition to be treated as continuing to be met until the body or person is not expected to make any further expenditure on construction operations.

(3B) Subsections (3) and (3A) do not prevent the condition in subsection (1)(l) or (2) from being met again in relation to the body or person." (FA 2004, s.59(3A), (3B))

Transfer of trade: deemed expenditure incurred by transferee

"(4) Where the whole or part of a trade is transferred by a company (“the transferor”) to another company (“the transferee”) and Chapter 1 of Part 22 of the Corporation Tax Act 2010 has effect in relation to the transfer, then in determining for the purposes of this section the amount of expenditure incurred by the transferee—

(a) the whole or, as the case may be, a proportionate part of any expenditure incurred by the transferor at a time before the transfer is to be treated as if it had been incurred at that time by the transferee; and

(b) where only a part of the trade is transferred, the expenditure is to be apportioned in such manner as appears to the Board of Inland Revenue, or on appeal to the tribunal, to be just and reasonable." (FA 2004, s.59(4))

Reference to body or person includes office or department

"(6) In this section references to a body or person include references to an office or department." (FA 2004, s.59(6))

Definitions

“development corporation” has the same meaning as in—

(a) the New Towns Act 1981 (c 64), or

(b) the New Towns (Scotland) Act 1968 (c 16);

“enactment” includes an enactment comprised in an Act of the Scottish Parliament and a provision comprised in Northern Ireland legislation;

“housing association” has the same meaning as in—

(a) the Housing Associations Act 1985 (c 69), or

(b) Part 2 of the Housing (Northern Ireland) Order 1992 (SI 1992/1725 (NI 15));

“housing trust” has the same meaning as in the Housing Associations Act 1985;

“HSS trust” means a Health and Social Services trust established under the Health and Personal Social Services (Northern Ireland) Order 1991 (SI 1991/194 (NI 1));

“new town commission” has the same meaning as in the New Towns Act (Northern Ireland) 1965 (c 13 (NI));

“NHS trust” means a National Health Service trust—

(a) established under [section 25 of the National Health Service Act 2006 or section 18 of the National Health Service (Wales) Act 2006]2, or

(b) constituted under section 12A of the National Health Service (Scotland) Act 1978 (c 29)." (FA 2004, s.59(5))

Construction operations

"(1) In this Chapter “construction operations” means operations of a description specified in subsection (2), not being operations of a description specified in subsection (3); and references to construction operations—

(a) except where the context otherwise requires, include references to the work of individuals participating in the carrying out of such operations; and

(b) do not include references to operations carried out or to be carried out otherwise than in the United Kingdom (or the territorial sea of the United Kingdom).

(2) The following operations are, subject to subsection (3), construction operations for the purposes of this Chapter—

(a) construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;

(b) construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;

(c) installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;

(d) internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;

(e) painting or decorating the internal or external surfaces of any building or structure;

(f) operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

(3) The following operations are not construction operations for the purposes of this Chapter—

(a) drilling for, or extraction of, oil or natural gas;

(b) extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;

(c) manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;

(d) manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;

(e) the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape;

(f) the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature;

(g) signwriting and erecting, installing and repairing signboards and advertisements;

(h) the installation of seating, blinds and shutters;

(i) the installation of security systems, including burglar alarms, closed circuit television and public address systems." (FA 2004, s.74(1) - (3))

Construction contract

Requirement of contractor to deduct

“(1) On making a contract payment the contractor (see section 57(3)) must deduct from it a sum equal to the relevant percentage of so much of the payment as is not shown to represent the direct cost to the sub-contractor of materials used or to be used in carrying out the construction operations to which the contract under which the payment is to be made relates.” (FA 2004, s.61(1))

Contract payment

"(1) In this Chapter “contract payment” means any payment which is made under a construction contract and is so made by the contractor (see section 57(3)) to—

(a) the sub-contractor,

(b) a person nominated by the sub-contractor or the contractor, or

(c) a person nominated by a person who is a sub-contractor under another such contract relating to all or any of the construction operations." (FA 2004, s.60(1))

“A ‘contract payment’ is defined in section 60(1) as being any payment which is made under a construction contract and is so made by the contractor to the subcontractor or to a person nominated by the sub-contractor or the contractor. A payment is not a contract payment if it is treated as earnings from an employment. A ‘contractor’ according to section 59(1) includes any person carrying on a business which includes construction operations. ‘Construction operations’ are defined in section 74 as including the construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations. However construction operations are not covered by the CIS if they are operations ‘carried out or to be carried out otherwise than in the United Kingdom’: see section 74(1)(b).” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §7, Rose J).

Includes travel, subsistence and accommodation expenses

"Where a construction contract places an obligation upon a contractor to pay a subcontractor’s expenses (such as travel, subsistence and accommodation expenses) such payments form part of the overall value of the contract, by virtue of FA04/s60. As such they will result in a deduction under the Scheme, by virtue of FA04/s61.

An obligation upon a contractor, under a construction contract, to pay a subcontractor’s expenses will fall within FA04/s60 regardless of whether the obligation is written, verbal, express or implied.

A payment made in respect of a subcontractor’s expenses will fall within FA04/s60 regardless of whether the contractor pays or reimburses the subcontractor, pays their expenses directly or pays a nominated third party.

The total amount deducted by the contractor should reflect the gross amount of the payments due under the contract, including the payment of expenses on the subcontractor’s behalf. (See examples 1 & 2 below)." (CISR15080)

But not use of contractor's own facilities

"A deduction will not be due where a contractor allows the subcontractor to use the contractor’s own facilities - such as vehicles or accommodation. A deduction will not be due, even if the contractor is paying a third-party for the facilities, provided these payments are not passed on to the subcontractor thereafter. However, such arrangements will not be common and may imply the existence of an employer/employee relationship (subject to PAYE) rather than a contractor/subcontractor relationship (subject to CIS). Where a contractor makes a payment to a supplier in respect of a subcontractor’s travel, subsistence or accommodation it is very likely that this is a contract payment and that a CIS deduction is due on that payment.

Where the contractor arranges for a third party to provide accommodation to a subcontractor, such as a local hotelier, if the contractor pays for that accommodation and at no point passes on all (or some) of those costs of providing that accommodation to the subcontractor, then subcontractors Payment Deductions Statement (PDS) should not include any entry relating to accommodation costs. The contractor will account for this expenditure in their own records but the subcontractor must not claim any accommodation expenses as well, as they have not had to pay for or contribute towards its provision.

Alternatively, if the contractor passes on all, or some, of the costs of providing the accommodation to the subcontractor, then that amount will be included in the PDS." (CISR15080)

Exceptions

"(2) But a payment made under a construction contract is not a contract payment if any of the following exceptions applies in relation to it." (FA 2004, s.60(2))

Employment income exception

"(3) This exception applies if the payment is treated as earnings from an employment by virtue of Chapter 7 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (c 1) (agency workers)." (FA 2004, s.60(3))

Payment for services supplied through intermediaries exception

"(3A) This exception applies in so far as—

(a) the payment can reasonably be taken to be for the services of an individual, and

(b) the provision of those services gives rise to an engagement to which Chapter 10 of Part 2 of ITEPA 2003 applies (workers' services provided through intermediaries to public authorities or medium or large clients).

(3B) But the exception in subsection (3A) does not apply if, in the case of the engagement mentioned in paragraph (b) of that subsection, the client for the purposes of section 61M(1) of ITEPA 2003—

(a) is not a public authority, and

(b) either—

(i) does not qualify as medium or large for the tax year in which the payment concerned is made, or

(ii) does not have a UK connection for the tax year in which the payment concerned is made.

(3C) Sections 60I (when a person has a UK connection for a tax year), 61K(3) (when a person qualifies as medium or large for a tax year) and 61L (meaning of public authority) of ITEPA 2003 apply for the purposes of subsection (3B)." (FA 2004, s.60(3A) - (3C))

Gross payment status exception

See below.

Small payments exception

"(1) A payment under a construction contract is not a contract payment if—

(a) the conditions prescribed in paragraph (2) in relation to the person making the payment are satisfied, and

(b) the condition prescribed in paragraph (3) in relation to the payment is satisfied.

(2) The conditions prescribed in relation to the person making the payment are that—

(a) the person is one to whom any of paragraphs (b) to (l) of section 59(1) of the Act (contractors) applies, and

(b) the person has been approved by the Commissioners for Her Majesty's Revenue and Customs for the purposes of this regulation.

(3) The condition prescribed in relation to the payment is that the payment is not one made under a construction contract in respect of which the total payments so made (excluding the direct cost of materials to the sub-contractor) exceed or are likely to exceed £1000." (SI 2005/2045, r.18)

Small payments for doing work on own land exception

"(1) A payment under a construction contract is not a contract payment if—

(a) the conditions prescribed in paragraph (2) in relation to the person making the payment are satisfied, and

(b) the conditions prescribed in paragraph (3) in relation to the payment are satisfied.

(2) The conditions prescribed in relation to the person making the payment are that—

(a) the person is one to whom section 59(1)(a) of the Act applies, and

(b) the person has been approved by the Commissioners for Her Majesty's Revenue and Customs for the purposes of this regulation.

(3) The conditions prescribed in relation to the payment are that the payment—

(a) is made to a body or person in respect of construction operations carried out by that body or person in relation to—

(i) property owned by that body or person, or

(ii) agricultural property of which that body or person is a tenant, and

(b) is not one made under a construction contract in respect of which the total payments so made (excluding the direct cost of materials to the sub-contractor) exceed or are likely to exceed £1000.

(4) For the purposes of paragraph (3)(a)(ii) “agricultural property” means—

(a) agricultural land or pasture,

(b) woodland or any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture,

(c) cottages, farm buildings and farm houses, together with the land occupied with them, as are of a character appropriate to the property, and

(d) land and buildings used for breeding and rearing horses on a stud farm and grazing of horses in connection with those activities." (SI 2005/2045, r.19)

Reverse premiums

"(1) Subject to paragraph (2), a payment under a construction contract is not a contract payment if the payment is a reverse premium within the meaning of Schedule 6 to the Finance Act 1999 (tax treatment of receipts by way of reverse premium) (see paragraph 1 of that Schedule) [or section 99 of the Income Tax (Trading and Other Income) Act 2005 (reverse premiums)].

(2) Paragraph 5 of Schedule 6 to the Finance Act 1999 (exclusion of receipts taken into account for capital allowances) [and section 100(1) of the Income Tax (Trading and Other Income) Act 2005 (excluded cases) do] not apply for the purposes of paragraph (1)." (SI 2005/2045, r.20)

Payments as agent of local authority

"A payment under a construction contract is not a contract payment if the payment is made by the governing body or head teacher of a maintained school as the agent of a local authority under section 49(5)(b) of the School Standards and Framework Act 1998 (delegated budget)." (SI 2005/2045, r.21)

Payments in respect of property used for business

"(1) A payment under a construction contract is not a contract payment if the payment is made by a person to whom section 59(1)(l) of the Act applies in respect of construction operations relating to property used for the purposes of the business of—

(a) that person, or

(b) another company in the same group or of another company of which that company owns 50% or more of the shares.

(2) For the purpose of paragraph (1)—

(a) property is not used for the purposes of the business of a person if it is for sale or to let (except where the sale or letting of that property is purely incidental to the business of that person) or is held as an investment by that person;

(b) in determining whether property is used for the purposes of the business of a person incidental use of that property by any other person is disregarded;

Arrangements involving public bodies

"(1) A payment under a construction contract is not a contract payment if—

(a) the person making the payment (“the public body”) is within any of paragraphs (b) to (k) of section 59(1) of the Act, and

(b) the payment is made under a private finance transaction.

(2) For the purposes of this regulation, a transaction is a private finance transaction if—

(a) the resources are provided partly by one or more public bodies and partly by one or more private persons;

(b) it is designed wholly or mainly for the purpose of assisting a public body to discharge a function or is ancillary to the function of a public body; and

(c) the public body makes payments by instalments at annual or more frequent intervals of fees determined in accordance with factors which include—

(i) the standard attained in the performance of services by the private person or persons in relation to the discharge of the function referred to in paragraph (b), or

(ii) the extent, rate or intensity of use of the resources or the asset which is constructed, enhanced, replaced or installed under the transaction.

(3) For the purposes of paragraph (2), “resources” includes—

(a) funds (including payment for the provision of services or facilities),

(b) assets,

(d) the grant of a concession or franchise, and

(e) any other commercial resource." (SI 2005/2045, r.23)

Payments by charities

"A payment under a construction contract is not a contract payment if the payment is made by any body of persons or trust established for charitable purposes only." (SI 2005/2045, r.24)

Payments (including loans) that have the effect of discharging obligations under construction contract taken as made under the contract

"(8) For the purposes of this Chapter a payment (including a payment by way of loan) that has the effect of discharging an obligation under a contract relating to construction operations is to be taken to be made under the contract; and if—

(a) the obligation is to make a payment to a person (“A”) within paragraph (a) to (c) of subsection (1), but

(b) the payment discharging that obligation is made to a person (“B”) not within those paragraphs,

the payment is for those purposes to be taken to be made to A." (FA 2004, s.60(8))

Requirement of contractor to deduct

- Direct cost of material exclusion

HMRC allow cost of plant hire to be treated as materials

"[11] By virtue of sub-section 61(1) FA 2004, any payment to a subcontractor which represents a reimbursement of the cost of materials is excluded from the amount subject to CIS deduction. By concession, HMRC allow the cost of plant hire incurred by a subcontractor to be treated as materials for CIS deduction purposes. In relation to the ascertainment of materials cost, and the treatment of plant hire as materials, the following paragraphs from HMRC Guidance CIS 340 Construction Industry Scheme: a guide for both contractors and sub-contractors have been referred to by parties in their submissions.

'3.13 Materials

The contractor can ask a subcontractor for evidence of the direct cost of materials.

If the subcontractor fails to give this information, the contractor must make a fair estimate of the actual cost of materials. The contractor must always check, that the part of the payment for materials supplied is not overstated. If the materials element looks to be excessive we may seek to recover any under deduction from the contractor. 3.14 Plant hire claimed as materials

“Plant” includes, for example, scaffolding, cranes, cement mixers, concrete pumps, earth moving equipment and compressors.

Where the subcontractor hires plant in order to carry out construction work, the cost of the plant hire and any consumable items such as fuel needed for its operation may be treated as materials for the purposes of calculating any deduction.

This treatment only extends to plant and equipment actually hired by the subcontractor from a third party. If the subcontractor owns the plant used in executing the work no notional deduction for plant hire may be made, although consumable items such as fuel used by the plant may still be treated as materials.

The contractor should check this with the subcontractor before making payment as failure to do so may leave the contractor responsible for any under deduction.' (italics added)" (Gelder v. HMRC [2021] UKFTT 294 (TC), Judge Poon)

- Direct cost of material exclusion

Power to exempt non-construction businesses from requirement to deduct

"(4) Subsection (5) applies where the contractor is a person falling within section 59(1)(l).

(5) An officer of Revenue and Customs may, if the officer considers it appropriate to do so, by notice in writing—

(a) exempt the contractor from the requirement to deduct sums from contract payments under subsection (1) for a specified period;

(b) treat the contractor as if such an exemption had applied in relation to—

(i) specified contract payments made before the date of the notice, or

(ii) contract payments made during a specified period before the date of the notice.

(6) The period referred to in subsection (5)(a)—

(a) must not exceed 90 days, but

(b) may be extended by one or more further notices under subsection (5).

(7) In subsection (5) “specified” means specified in the notice." (FA 2004, s.61(4) - (7))

Power to exempt non-construction businesses from requirement to deduct

Required to deduct even if payment is to overseas company (who then pays workers)

“[80]...I ask myself whether it can have been the intention of Parliament that when construction workers carry out work in the United Kingdom and contract payments are made by the Client in respect of that work to a sub-contractor which is incorporated here and registered for gross payment under the CIS, the sub-contractor does not need to make deductions from the onward payments if the recipient is an Isle of Man company. The answer in my judgment is clearly no, it cannot have so intended. There is no difficulty in enforcement here – ICM (UK) is subject to the CIS and can be required to make the payment. There are no “non-cooperative foreigners” to use Lord Scarman’s phrase to cause a problem for enforcement of the deductions. Further, if the answer to the question were yes, then the door would be open for wide scale tax avoidance of precisely the kind that the CIS was set up to prevent: every construction worker would sign up to be paid via an Isle of Man company and receive his pay without deduction even if he were not himself registered for gross payment.” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §80, Rose J).

Required to deduct even if payment is to overseas company (who then pays workers)

Amount of deduction: relevant percentage (20% or 30%)

"(2) In subsection (1) “the relevant percentage” means such percentage as the Treasury may by order determine.

(3) That percentage must not exceed—

(a) if the person for whose labour (or for whose employees' or officers' labour) the payment in question is made is registered for payment under deduction, the percentage which is the basic rate for the year of assessment in which the payment is made, or

(b) if that person is not so registered, the percentage which is the higher rate for that year of assessment." (FA 2004, s.61(2), (3))

“The obligation imposed by section 61 therefore requires the contractor, when making a contract payment to the sub-contractor, to make a deduction of the relevant percentage – that is a percentage set in an order made by HM Treasury.” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §10, Rose J).

"Payment Under Deduction

The contractor must make a standard deduction (20%) from payments to the subcontractor. To successfully register for payment under deduction a subcontractor must have registered for CIS.

A subcontractor who is registered for payment under deduction may be able to satisfy the conditions of registration for gross payment but prefer to be paid under deduction.

Unmatched

The contractor must make a deduction at the higher rate (30%) from payments to the subcontractor. A subcontractor who is subject to deduction at the higher rate has not been successfully verified. This may be because the:

- subcontractor is not registered for CIS or

- contractor has not provided the correct information to verify the subcontractor..." (COG910080)

Amount of deduction: relevant percentage (20% or 30%)

Registering under the Act (either deduction or gross payment)

"(1) If the Board of Inland Revenue are satisfied, on the application of an individual or a company, that the applicant has provided—

(a) such documents, records and information as may be required by or in accordance with regulations made by the Board, and

(b) such additional documents, records and information as may be required by the Inland Revenue in connection with the application,

the Board must register the individual or company under this section.

(2) If the Board are satisfied that the requirements of subsection (2), (3) or (4) of section 64 are met, the Board must register—

(a) the individual or company, or

(b) in a case falling within subsection (3) of that section, the individual or company as a partner in the firm in question,

for gross payment.

(3) In any other case, the Board must register the individual or company for payment under deduction." (FA 2004, s.63)

Registering under the Act (either deduction or gross payment)

- Gross payment status

"(4) This exception applies if the person to whom the payment is made or, in the case of a payment made to a nominee, each of the following persons—

(a) the nominee,

(b) the person who nominated him, and

(c) the person for whose labour (or, where that person is a company, for whose employees' or officers' labour) the payment is made,

is registered for gross payment when the payment is made. But this is subject to subsections (5) and (6)." (FA 2004, s.60(4))

“If a person is registered for gross payment, this means that the contractor making contract payments to him does not need to make and account for deductions from those payments in accordance with the Scheme. The provisions relating to gross payment are set out in section 63. That provides that HMRC must register a person for gross payment if the person satisfies various criteria. Where the application for registration for gross payment is made by a company, the company must satisfy the conditions in Part 3 of Schedule 11 to the Act: see section 64(4).” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §12, Rose J).

Registration as partner in firm: firm must be sub-contractor

"(5) Where a person is registered for gross payment as a partner in a firm (see section 64), subsection (4) applies only in relation to payments made under contracts under which—

(a) the firm is a sub-contractor, or

(b) where a person has nominated the firm to receive payments, the person who has nominated the firm is a sub-contractor." (FA 2004, s.60(5))

Registration otherwise that as a partner in a firm: firm must not be sub-contractor

"(6) Where a person is registered for gross payment otherwise than as a partner in a firm but he is or becomes a partner in a firm, subsection (4) does not apply in relation to payments made under contracts under which—

(a) the firm is a sub-contractor, or

(b) where a person has nominated the firm to receive payments, the person who has nominated the firm is a sub-contractor." (FA 2004, s.60(6))

Contractor must verify gross payment status with HMRC

r.6 of the 2005 regulations

- Gross payment status

- Registering for gross payment status

General

"[31] As is clear from what was said in Whitter, the objective of the CIS is that only those taxpayers carrying on business in the construction industry who can demonstrate that they are in compliance with their tax and reporting obligations can obtain the privilege of Gross Payment Status. If a taxpayer is unable to demonstrate that to be the case, then unless they can demonstrate a reasonable excuse for the non-compliance they cannot be registered. Likewise, if they fail to continue to comply in full with the relevant obligations after registration, then they are liable to lose that registration, unless again they are able to demonstrate a reasonable excuse for their failure or if HMRC exercise their discretion not to cancel the registration, which typically may happen if the failure is minor or insignificant." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

Individual

"(1) This section sets out the requirements (in addition to that in subsection (1) of section 63) for an applicant to be registered for gross payment.

(2) Where the application is for the registration for gross payment of an individual (otherwise than as a partner in a firm), he must satisfy the conditions in Part 1 of Schedule 11 to this Act." (FA 2004, s.64(1), (2))

Partner

"(3) Where the application is for the registration for gross payment of an individual or a company as a partner in a firm—

(a) the applicant must satisfy the conditions in Part 1 of Schedule 11 to this Act (if an individual) or Part 3 of that Schedule (if a company), and

(b) in either case, the firm itself must satisfy the conditions in Part 2 of that Schedule." (FA 2004, s.64(3))

Company

"(4) Where the application is for the registration for gross payment of a company (otherwise than as a partner in a firm)—

(a) the company must satisfy the conditions in Part 3 of Schedule 11 to this Act, and

(b) if the Board of Inland Revenue have given a direction under subsection (5), each of the persons to whom any of the conditions in Part 1 of that Schedule applies in accordance with the direction must satisfy the conditions which so apply to him.

(5) Where the applicant is a company, the Board may direct that the conditions in Part 1 of Schedule 11 to this Act or such of them as are specified in the direction shall apply to—

(a) the directors of the company,

(b) if the company is a close company, the persons who are the beneficial owners of shares in the company, or

as if each of them were an applicant for registration for gross payment." (FA 2004, s.64(4), (5))

Director

"(7) In subsection (5) “director” has the meaning given by section 67 of the Income Tax (Earnings and Pensions) Act 2003 (c 1)." (FA 2004, s.64(7))

Change of control of registered company

"(1) Where it appears to the Board of Inland Revenue that there has been a change in the control of a company—

(a) registered for gross payment, or

(b) applying to be so registered,

the Board may make a direction under section 64(5).

(2) The Board may make regulations requiring the furnishing of information with respect to changes in the control of a company—

(a) registered for gross payment, or

(b) applying to be so registered.

(3) In this section references to a change in the control of a company are references to such a change determined in accordance with section 995 of the Income Tax Act 2007." (FA 2004, s.65)

Business test

“10. The company must satisfy the Inland Revenue, by such evidence as may be prescribed in regulations made by the Board of Inland Revenue, that—
(a) it is carrying on (whether or not in partnership) a business in the United Kingdom, and
(b) that business satisfies the conditions mentioned in paragraph 2(a) and (b).” (FA 2004, Sch 11, para 10)

"(1) The evidence required to satisfy an officer of Revenue and Customs for the purposes of section 64 of the Act (requirements for registration for gross payment) that the applicant or company is carrying on a business in the United Kingdom which satisfies the conditions mentioned in paragraph 2(a) and (b) of Schedule 11 to the Act is prescribed in paragraph (2).

(2) The evidence is—

(a) the business address;

(b) invoices, contracts or purchase orders for construction work carried out by the applicant;

(d) the books and accounts of the business;

(e) details of the business bank account, including bank statements." (SI 2005/2045, r.27)

Turnover test

"(1) The minimum turnover for the purposes of paragraph 3(1) of Schedule 11 to the Act is £30,000.

(2) The amount specified for the purposes of paragraph 7 of Schedule 11 to the Act is £100,000.

(3) The amount specified for the purposes of paragraph 11 of Schedule 11 to the Act is £100,000." (SI 2005/2045, r.27)

Deemed satisfaction

"A person, firm or company which does not satisfy the condition in paragraphs 3(1), 7(1) or 11(1) of Schedule 11 to the Act, as appropriate, is treated as satisfying that condition if an officer of Revenue and Customs is satisfied that—

(a) the business of the person, firm or company does not mainly consist of construction operations,

(b) in the year prior to making the application the total turnover of the business exceeded the relevant turnover threshold, and

(c) in the year following making the application the person, firm or company is likely to receive relevant payments in relation to construction operations which are incidental to the main business of the person, firm or company." (SI 2005/2045, r.27)

Compliance test

Part 6 of the 2005 regulations.

- Registering for gross payment status

- Appealing registration for payment under deduction decision

"The Board of Inland Revenue may make regulations providing for—

(a) the cancellation, in such circumstances as may be prescribed by the regulations, of a person's registration for payment under deduction;

(b) appeals against a refusal to register a person for payment under deduction or the cancellation of such registration." (FA 2004, s.68)

- Appealing registration for payment under deduction decision

Cancellation of gross payment status

"(1) The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if it appears to them that—

(a) if an application to register the person for gross payment were to be made at that time, the Board would refuse so to register him,

(b) he has made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or

(2) Where the Board make a determination under subsection (1), the person's registration for gross payment is cancelled with effect from the end of a prescribed period after the making of the determination (but see section 67(5)).

(3) The Board of Inland Revenue may at any time make a determination cancelling a person's registration for gross payment if they have reasonable grounds to suspect that the person—

(a) became registered for gross payment on the basis of information which was false,

(b) has fraudulently made an incorrect return or provided incorrect information (whether as a contractor or as a sub-contractor) under any provision of this Chapter or of regulations made under it, or

(4) Where the Board make a determination under subsection (3), the person's registration for gross payment is cancelled with immediate effect.

(5) On making a determination under this section cancelling a person's registration for gross payment, the Board must without delay give the person notice stating the reasons for the cancellation.

(6) Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (1), the person must be registered for payment under deduction.

(7) Where a person's registration for gross payment is cancelled by virtue of a determination under subsection (3), the person may, if the Board thinks fit, be registered for payment under deduction.

(8) A person whose registration for gross payment is cancelled under this section may not, within the period of one year after the cancellation takes effect (see subsections (2) and (4) and section 67(5)), apply for registration for gross payment.

(9) In this section “a prescribed period” means a period prescribed by regulations made by the Board." (FA 2004, s.66)

Cancellation for non-compliance is the norm, not exceptional

"[33] As Henderson LJ said at [80] of Whitter, cancellation of registration where there is a compliance failure is not exceptional and is the norm; taxpayers must be taken to be well aware of the risks to their business that cancellation will bring. The harshness of the regime is justified because of the need to stem the prevalence of tax evasion in the construction industry." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

No requirement to consider effect on business of taxpayer

"[23] Turning to A1/P1 I see force in Mr Eadie’s submission that, even accepting that rights conferred by registration amount to “possessions”, they cannot extend beyond the limits set by the legislation by which they are created. However, I find it unnecessary to rest my decision on that point, since I have no doubt that the Court of Appeal were right to hold that any interference was proportionate. Once it is accepted that the statute does not in itself require the consideration of the impact on the individual taxpayer, there is nothing in A1/P1 which would justify the court in reading in such a requirement. Registration is a privilege conferred by the legislation, which has significant economic advantages, but it is subject to stringent conditions and the risk of cancellation. The impact on the company is no different in kind from that which is inherent in the legislation. I agree entirely with Henderson LJ that the exercise of the power within the scope of the statutory framework comes well within the wide margin of appreciation allowed to the state for the enforcement of tax." (JP Whitter (Water Well Engineers) Ltd v. HMRC [2018] UKSC 31)

Proportionality of cancellation to be measured by reference to compliance requirements

"[21] It is therefore clear from these judgments that the proportionality of any decision of HMRC to cancel the taxpayer’s registration under the CIS must be measured by reference to the compliance requirements of the scheme itself rather than any extraneous factors which impact upon the individual taxpayer." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

Cancellation of gross payment status

- No re-registering for 1 year after cancellation

"(8) A person whose registration for gross payment is cancelled under this section may not, within the period of one year after the cancellation takes effect (see subsections (2) and (4) and section 67(5)), apply for registration for gross payment." (FA 2004, s.66(8))

Purpose is deterrence

"[34] However, there is a further objective, namely deterrence, which was also mentioned by Henderson LJ at [80] of Whitter. This is achieved through the provisions of s 66 (8) FA 2004 which prevent a taxpayer whose registration has been cancelled from applying again for registration for a period of one year after the registration has been cancelled. If a taxpayer is at risk of being required to carry on business without the benefit of Gross Payment Status for a year, it is likely to have a serious deterrent effect. That period also gives sufficient time for a taxpayer to deal with any outstanding compliance failures and be able to satisfy HMRC that its compliance with the relevant obligations has continued for a significant period." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

- No re-registering for 1 year after cancellation

Appealing gross payment decision

(1) A person aggrieved by—

(a) the refusal of an application for registration for gross payment, or

(b) the cancellation of his registration for gross payment,

may by notice appeal.

(2) The notice must be given to the Board of Inland Revenue within 30 days after the refusal or cancellation.

(3) The notice must state the person's reasons for believing that—

(a) the application should not have been refused, or

(b) his registration for gross payment should not have been cancelled.

(4) The jurisdiction of the tribunal on such an appeal that is notified to the tribunal shall include jurisdiction to review any relevant decision taken by the Board of Inland Revenue in the exercise of their functions under section 63, 64, 65 or 66." (FA 2004, s.67(1) - (4))

Appealing cancellation

Assess decision at the time of cancellation, not the time of appeal

"[44] The FTT answered the wrong question in determining the appeal. It said that the relevant question was whether or not the withdrawal of Gross Payment Status 8 years after the initial decision was disproportionate. However, the relevant question was whether HMRC’s decision was justified as at the time that it was made. The fact that there was a long delay before the appeal was heard, unfortunate though that now appears to be for RMF, is irrelevant to the question that the FTT had to determine." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

Tribunal not entitled to consider subsequent behaviour

"[46] ... It is unfortunate in this case that the one year period will, if HMRC’s appeal is allowed, commence many years after the event, during which period the taxpayer appears to have been fully compliant, but that appears to us to be the inevitable effect of the strict wording of the legislation. It is also consistent with the purpose of the CIS to deter noncompliance, as we have set out above. If the FTT were correct, a non-complaint person who exhausted all their appeal rights and began a pattern of compliance while the case was under appeal would not lose their Gross Payment Status regardless of whether or not HMRC’s decision at the time it was taken was correct or proportionate. As submitted by [HMRC], that was clearly not the intended effect of the legislative regime." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

Appealing gross payment decision

- Decision suspended pending appeal

(5) Where a person appeals against the cancellation of his registration for gross payment by virtue of a determination under section 66(1), the cancellation of his registration does not take effect until whichever is the latest of the following—

(a) the abandonment of the appeal,

(b) the determination of the appeal by the tribunal, or

Minimum 1 year de-registration following outcome of appeal, even if suitable to be re-registered by the time of appeal

"[45] We also accept Mr Randle’s submission that the legislation was intended to operate in such a way that in those cases where Gross Payment Status has rightly been withdrawn by HMRC all persons are treated in effectively the same way, whether or not they choose to appeal. As we have noted, s 66 (8) provides that when Gross Payment Status is cancelled a person cannot re-apply for a year after cancellation takes effect. So, although those that have unsuccessfully appealed a s.66 (1) cancellation will retain their Gross Payment Status until they have exhausted any appeals, they will nonetheless lose that status for a minimum of one year before they can re-apply. The same is true of those whose who choose not to appeal." (HMRC v. RMF Construction Services Limited [2022] UKUT 67 (TCC), Fancourt J and Judge Herrington)

- Decision suspended pending appeal

Obligation to deduct and credit to sub-contractor

“Section 62 provides that the contractor must pay the sums deducted to HMRC and that the contract payment is, broadly speaking, treated in the hands of the sub-contractor as being the gross amount as if paid without deduction. Also very broadly, the deduction is then treated as if it were tax or national insurance paid by the sub-contractor on the payment it receives.” (Island Contract Management (UK) Ltd v. HMRC [2015] UKUT 472 (TCC), §10, Rose J).

Obligation to deduct

(1) A sum deducted under section 61 from a payment made by a contractor—

(a) must be paid to the Board of Inland Revenue, and

(b) is to be treated for the purposes of income tax or, as the case may be, corporation tax as not diminishing the amount of the payment." (FA 2004, s.62(1))

Obligation to deduct and credit to sub-contractor

- Treatment as income tax paid (non-company)

"(2) If the sub-contractor is not a company a sum deducted under section 61 and paid to the Board is to be treated as being income tax paid in respect of the sub-contractor's relevant profits.

If the sum is more than sufficient to discharge his liability to income tax in respect of those profits, so much of the excess as is required to discharge any liability of his for Class 4 contributions is to be treated as being Class 4 contributions paid in respect of those profits." (FA 2004, s.62(2))

Sub-contractor

"In this section—

(a) “the sub-contractor” means the person for whose labour (or for whose employees' or officers' labour) the payment is made;" (FA 2004, s.62(5)(a))

Relevant profits

"(b) references to the sub-contractor's “relevant profits” are to the profits from the trade, profession or vocation carried on by him in the course of which the payment was received;" (FA 2004, s.62(5)(b))

Class 4 contributions

"(c) “Class 4 contributions” means Class 4 contributions within the meaning of the Social Security Contributions and Benefits Act 1992 (c 4) or the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c 7)." (FA 2004, s.62(5)(c))

- Treatment as income tax paid (non-company)

- Treatment as discharging relevant liabilities (company)

"(3) If the sub-contractor is a company—

(a) a sum deducted under section 61 and paid to the Board is to be treated, in accordance with regulations, as paid on account of any relevant liabilities of the sub-contractor;

(b) regulations must provide for the sum to be applied in discharging relevant liabilities of the year of assessment in which the deduction is made;

(c) if the amount is more than sufficient to discharge the sub-contractor's relevant liabilities, the excess may be treated, in accordance with the regulations, as being corporation tax paid in respect of the sub-contractor's relevant profits; and

(d) regulations must provide for the repayment to the sub-contractor of any amount not required for the purposes mentioned in paragraphs (b) and (c)." (FA 2004, s.62(3))

Relevant liabilities

"(4) For the purposes of this section the “relevant liabilities” of a sub-contractor are any liabilities of the sub-contractor, whether arising before or after the deduction is made, to make a payment to the Inland Revenue in pursuance of an obligation as an employer or contractor." (FA 2004, s.62(4))

- Treatment as discharging relevant liabilities (company)

- Amount deducted treated as paid for the purposes of sub-contractor's liability

"(10) If a contractor has deducted an amount under section 61 of the Act, but has not paid it to the Commissioners for Her Majesty's Revenue and Customs as required by regulation 7 (payment, due date etc and receipts), that amount is treated, for the purposes of determining the liability of any sub-contractor in respect of whose liability the sum was deducted, as having been paid to the Commissioners for Her Majesty's Revenue and Customs at the time required by regulation 8 (quarterly tax periods)." (SI 2005/2045, r.9(10))

- Amount deducted treated as paid for the purposes of sub-contractor's liability

Obligation to pay amount that should have been deducted

"(1) A contractor must pay to the Commissioners for Her Majesty's Revenue and Customs all amounts he was liable under section 61 of the Act to deduct on account of tax from contract payments made by him during that tax period—

(a) within 17 days after the end of the tax period, where payment is made by an approved method of electronic communications, or

(b) within 14 days after the end of the tax period , in any other case.

(2) The Commissioners for Her Majesty's Revenue and Customs must give a receipt to the contractor for the total amount paid under paragraph (1) if asked." (SI 2005/2045, r.7)

Obligation to pay amount that should have been deducted

- Set off of amounts deducted against other liabilities of contractor

"(1) This regulation applies to sums deducted from contract payments made to a sub-contractor which is a company (“the qualifying sub-contractor”).

(2) So much of any sum deducted under section 61 of the Act by a contractor in a tax year and paid to the Commissioners for Her Majesty's Revenue and Customs as is required shall be applied—

(a) first, in discharge of any liability of the qualifying sub-contractor to account for primary Class 1 contributions in respect of earnings paid to its employees in that year;

(b) second, in discharge of any liability of the qualifying sub-contractor for secondary Class 1 contributions in respect of earnings paid to its employees in that year;

(c) third, in discharge of any liability of the qualifying sub-contractor to account for tax deducted from the emoluments of its employees in accordance with Regulations made under section 684 of ITEPA (pay as you earn) in respect of that year;

(d) fourth, in discharge of any liability of the qualifying sub-contractor to account for deductions made by it in that year from the emoluments of its employees in accordance with regulations made under section 22(5) of the Teaching and Higher Education Act 1998, section 73B of the Education (Scotland) Act 1980, or Article 3(5) of the Education (Student Support) (Northern Ireland) Order 1998;

(e) fifth, in discharge of any liability of the qualifying sub-contractor to refund to the Commissioners for Her Majesty's Revenue and Customs any funding payment made by them in respect of statutory sick pay, statutory maternity pay, statutory paternity pay, statutory shared parental pay, statutory adoption pay or statutory parental bereavement pay] under the relevant recovery provision; and

(f) last, in discharge of any liability of the qualifying sub-contractor to account for sums deducted by it (in its capacity as a contractor) under section 61 of the Act from payments made to other sub-contractors.

(2A) For any tax period where as a consequence of paragraph (2) the qualifying sub-contractor pays an amount to the Commissioners for Her Majesty's Revenue and Customs in respect of any liability referred to in that paragraph that is less than the amount the qualifying sub-contractor would have paid but for that paragraph, paragraph (2B) applies if the qualifying sub-contractor is a Real Time Information employer for the purposes of the PAYE Regulations.

(2B) The qualifying sub-contractor must deliver to the Commissioners for Her Majesty's Revenue and Customs a return under this paragraph stating the value of the sums deducted from contract payments made to the qualifying sub-contractor under section 61 of the Act in the tax year to date.

(2C) The return required by paragraph (2B) must be delivered within 14 days after the end of the tax period.

(2D) If an employer makes an error in a return under paragraph (2B), the employer must provide the correct information in the first return made under that paragraph after the discovery of the error.

(2E) But if the information given has not been corrected before 20th April following the end of the year in question, the employer must provide the correct information for the year in question in a return under this paragraph.

(3) So much of any sum deducted under section 61 of the Act as is not required to discharge the sub-contractor's liabilities specified in paragraph (2) shall be repaid to the qualifying sub-contractor.

This is subject to the qualifications in paragraphs (5) and (6).

(4) . . .

(5) The Commissioners for Her Majesty's Revenue and Customs shall not repay any sum deducted under section 61 of the Act to the qualifying sub-contractor unless—

(a) the tax year in which the deduction was made, has ended; and

(b) the qualifying sub-contractor has paid to the Commissioners for Her Majesty's Revenue and Customs—

(i) any amounts the qualifying sub-contractor deducted from contract payments in their capacity as a contractor during that tax year, and

(ii) any amounts due under the PAYE Regulations in respect of that tax year],

but this paragraph does not apply to a qualifying sub-contractor within paragraph (5A).

(5A) A qualifying sub-contractor is within this paragraph if—

(a) that sub-contractor is subject to a winding-up under Part 4 of the Insolvency Act 1986, and

(b) that sub-contractor has—

(i) ceased trading,

(ii) permanently ceased making payments to which section 61 of the Act applies in its capacity as a contractor, or

(iii) ceased trading and permanently ceased to make any payments within sub-paragraph (b)(ii).

(5B) Where a qualifying sub-contractor is within paragraph (5A), the Commissioners for Her Majesty's Revenue and Customs may repay any sum deducted under section 61 of the Act to that sub-contractor during the tax year in which the deduction was made.

(6) If it appears to an officer of Revenue and Customs that there is an outstanding liability of the qualifying sub-contractor in respect of corporation tax due for an accounting period ending before the relevant payment is made under section 61 of the Act, the amount required to discharge that liability shall be retained by the Commissioners for Her Majesty's Revenue and Customs and applied in discharge of that liability.

(7) In paragraph (2)(e), “the relevant recovery provision” means—

(a) in respect of statutory paternity pay and statutory adoption pay, regulations 4, 5, 6 and 8 of either the Statutory Paternity Pay and Statutory Adoption Pay (Administration) Regulations 2002 or the Statutory Paternity Pay and Statutory Adoption Pay (Administration) Regulations (Northern Ireland) 2002;

(aa) . . .

(b) in respect of statutory maternity pay, regulations 5, 6, 6A and 7A of the Statutory Maternity (Compensation of Employers) and Miscellaneous Amendment Regulations 1994 or the Statutory Maternity (Compensation of Employers) and Miscellaneous Amendment Regulations (Northern Ireland) 1994;

[(c) in respect of statutory shared parental pay, regulations 4, 5, 6 and 8 of either the Statutory Shared Parental Pay (Administration) Regulations 2014 or corresponding regulations made under articles 8, 9, 11 and 16(1) of the Employment (Northern Ireland) Order 2002;

(d) in respect of statutory parental bereavement pay, regulations 4, 5, 6 and 8 of the Statutory Parental Bereavement Pay (Administration) Regulations 2020.

(8) A return under this regulation must—

(a) state—

(i) the employer's HMRC office number,

(ii) the employer's PAYE reference for the purposes of the PAYE Regulations,

(iii) the employer's accounts office reference, . . .

(iv) the tax year to which the return relates, . . .

[(v) the employer's Company Registration Number (CRN), and

(vi) the employer's Unique Taxpayer Reference (UTR), and]

(b) be delivered using an approved method of electronic communications unless the qualifying sub-contractor is one to whom regulation 67D of the PAYE Regulations applies, in which case the return must be made in a document or format provided or approved by the Commissioners for Her Majesty's Revenue and Customs." (SI 2005/2045, r.56)

- Set off of amounts deducted against other liabilities of contractor

- Collection of amount required to be deducted

(a) within 17 days after the end of the tax period, where payment is made by an approved method of electronic communications, or

(b) within 14 days after the end of the tax period , in any other case.

(2) The Commissioners for Her Majesty's Revenue and Customs must give a receipt to the contractor for the total amount paid under paragraph (1) if asked.

(3) But no separate receipt for the total amount paid under paragraph (1) need be given if a receipt is given for the total of—

(a) the amount paid under paragraph (1),

(b) any tax deducted under the PAYE Regulations, and

(c) any earnings-related contributions (as defined by regulation 1(2) of the Social Security (Contributions) Regulations 2001,

paid at the same time." (SI 2005/2045, r.7)

De minimis underpayment disregarded

"(1) Payment of an amount that is less than the amount which the contractor was liable to pay to the Commissioners for Her Majesty's Revenue and Customs under regulation 7(1), will, for the purposes of paragraph 6(2) of Schedule 56 to the Finance Act 2009 (amounts of penalty: PAYE and CIS), be treated as a payment of the full amount if the difference between the full amount and the amount paid is no more than £100 (“the tolerance”), but this is subject to paragraph (2).

(2) If a contractor makes a payment under regulation 7(1) and the total sum paid to Her Majesty's Revenue and Customs for the tax period includes not only that payment but also one or more of—

(a) any tax deducted under the PAYE Regulations,

(b) any earnings-related contributions (as defined by regulation 1(2) of the SSC Regulations, or

the tolerance is applied to the total sum paid to the Commissioners for Her Majesty's Revenue and Customs for the tax period to which the payments relate." (SI 2005/2045, r.7A)

- Collection of amount required to be deducted

Direction that contractor not liable where it failed to deduct

- Contractor took reasonable care and error made in good faith (Condition A)

"(1) This regulation applies if—

(a) it appears to an officer of Revenue and Customs that the deductible amount exceeds the amount actually deducted, and

(b) condition A or B is met.

(2) In this regulation—

“the deductible amount” is the amount which a contractor was liable to deduct on account of tax from a contract payment under section 61 of the Act in a tax period;

“the amount actually deducted” is the amount actually deducted by the contractor on account of tax from a contract payment under section 61 of the Act during that tax period;

“the excess” means the amount by which the deductible amount exceeds the amount actually deducted.

(3) Condition A is that the contractor satisfies an officer of Revenue and Customs—

(a) that he took reasonable care to comply with section 61 of the Act and these Regulations, and

(b) that—

(i) the failure to deduct the excess was due to an error made in good faith, or

(ii) he held a genuine belief that section 61 of the Act did not apply to the payment." (SI 2005/2045, r.9(1) - (3))

Power to make a direction

"(5) An officer of Revenue and Customs may direct that the contractor is not liable to pay the excess to the Commissioners for Her Majesty's Revenue and Customs." (SI 2005/2045, r.9(5))

Reasonable care

"[18]The standard required by Regulation 9 is that the business must take reasonable care in its compliance with the CIS. It does not require that mistakes must never be made. We consider that the standard of "reasonable care" is one that must be appropriate and proportionate to the particular contractor's business. The compliance systems to be expected of a substantial multi-national contractor with a large and sophisticated accounting department are very different from the systems to be adopted by a small business. In the case of PDF, we are satisfied that it took reasonable care to meet its obligations under the CIS. The fact that this is the only error that PDF has ever made under the CIS in ten years is the practical evidence of this.” (PDF Electrical Limited v. HMRC [2012] UKFTT 708 (TC), Judge Aleksander)

Reasonable step of employing professional adviser

"[34] Mr Mabe himself was clearly unaware of his filing obligations when he first employed sub-contractors, but he employed a professional accountant and provided him with all the necessary paperwork from which he had been able to prepare Mr Barrett’s accounts, including reference to expenses incurred in relation to sub-contractors. In our view, a reasonable taxpayer in Mr Mabe’s position, having employed an accountant to deal with both accounting and tax, including PAYE, and having provided the accountant with all relevant information with respect to his business, would have been entitled to rely on that accountant to draw attention to any relevant filing obligation. It would also have been reasonable for such a taxpayer to have concluded, from his accountant’s silence, that there were no such obligations outstanding." (Mabe v. HMRC [2016] UKFTT 340 (TC), Judge Gillett)

Sufficiently robust systems amounts to reasonable care

"[64] We consider the evidence in the round, and reach the conclusion that the system in place was sufficiently robust, with checks and balances to pick up anomalies. Mr Gray is one of seven quantity surveyors responsible for the management of larger projects. The surveyors are organised in a team under a senior quantity surveyor, who would provide supervision and guidance on any technical issues and queries. There are industry standards that a QS can refer to in ascertaining the reasonableness of the materials cost in a subcontractor's invoice. The CVR system serves as a check on the overall costs of any one project that a QS needs to monitor at all times; there are the QS appointed by Gelder's clients, who would function as a countercheck on the judgment of an internal surveyor. As Mr Fullwood has emphasised, on these construction projects, there is always QS against QS to test the fairness of cost valuation." (Gelder v. HMRC [2021] UKFTT 294 (TC), Judge Poon)

Reasonable director would test statements by sub-contractor

"[29] In the case of these appellants, the numbers were big. And Mr Griffiths had personal knowledge of what the consequences might be if the CIS did apply. In those circumstances the reasonable director would, in our view, have firstly tested the statement that the appellants were not contractors for the CIS against his own experience; he would not have accepted it at face value given that experience; he would have tested Mr Choules as to the basis of that statement and not simply signed the contract without so doing; he would have asked whether, even though this appeared to be standard practice in the industry, that standard practice was based on appropriate tax advice; given that the CIS is such an important aspect of cash flow in the construction industry, he should have independently checked the position with a tax expert (as subsequently happened when he went to GT). Mr Griffiths should have instructed GT or a firm of similar standing before he entered into the first contract, rather than relying on the word of Mr Choules and Inca. This is far from a counsel of perfection. It is what a reasonable director who finds himself leaving his tax “comfort zone” would do. We make no criticism of Mr Choules or Inca who absolutely believed that the appellants were not contractors for the purposes of the CIS and we have no doubt that conviction was instrumental in influencing Mr Griffiths with the result that the latter did not take independent advice. But Mr Griffiths should have taken independent tax advice. And that would have been the action of a reasonable director, imbued with Mr Griffiths’ attributes and experience and placed in his position at the time. The reasonable director with those attributes and experience would not have accepted the contracts and signed them without checking them, and when checking, checking further whether the changes to recital 4, namely that the appellants were not contractors for the purposes of the CIS had been based on tax advice rather than just industry practice. Given the consequences, which were known to him, of failing to comply with the CIS and the fact that he was taking a step up in terms of complexity and financial value, it is our view that the reasonable director would also have taken independent tax advice from a suitably qualified organisation." (North Point (Pall Mall) Limited v. HMRC [2021] UKFTT 259 (TC), Judge Nigel Popplewell)

- Contractor took reasonable care and error made in good faith (Condition A)

- Appeal refusal to issue Condition A direction

HMRC to issue refusal notice

"(6) If condition A is not met an officer of Revenue and Customs may refuse to make a direction under paragraph (5) by giving notice to the contractor (“the refusal notice”) stating—

(a) the grounds for the refusal, and

(b) the date on which the refusal notice was issued." (SI 2005/2045, r.9(6))

Right to appeal within 30 days

"(7) A contractor may appeal against the refusal notice—

(a) by notice to an officer of Revenue and Customs,

(b) within 30 days of the refusal notice,

Permitted grounds of appeal

"(8) For the purpose of paragraph (7) the grounds of appeal are that—

(a) that the contractor took reasonable care to comply with section 61 of the Act and these Regulations, and

(b) that—

(i) the failure to deduct the excess was due to an error made in good faith, or

(ii) the contractor held a genuine belief that section 61 of the Act did not apply to the payment." (SI 2005/2045, r.9(8))

Tribunal power

"(9) If on an appeal under paragraph (7) that is notified to the tribunal it appears that the refusal notice should not have been issued the tribunal may direct that an officer of Revenue and Customs make a direction under paragraph (5) in an amount the tribunal determines is the excess for one or more tax periods falling within the relevant year." (SI 2005/2045, r.9(9))

- Appeal refusal to issue Condition A direction

- No deduction but recipient not liable to tax or has paid tax (Condition B)

"(1) This regulation applies if—

(a) it appears to an officer of Revenue and Customs that the deductible amount exceeds the amount actually deducted, and

(b) condition A or B is met.

(2) In this regulation—

“the deductible amount” is the amount which a contractor was liable to deduct on account of tax from a contract payment under section 61 of the Act in a tax period;

“the amount actually deducted” is the amount actually deducted by the contractor on account of tax from a contract payment under section 61 of the Act during that tax period;

“the excess” means the amount by which the deductible amount exceeds the amount actually deducted.

...

(4) Condition B is that—

(a) an officer of Revenue and Customs is satisfied that the person to whom the contractor made the contract payments to which section 61 of the Act applies either—

(i) was not chargeable to income tax or corporation tax in respect of those payments, or

(ii) has made a return of his income or profits in accordance with section 8 of TMA (personal return) or paragraph 3 of Schedule 18 to the Finance Act 1998 (company tax return), in which those payments were taken into account, and paid the income tax and Class 4 contributions due or corporation tax due in respect of such income or profits;

and

(b) the contractor requests that the Commissioners for Her Majesty's Revenue and Customs make a direction under paragraph (5)." (SI 2005/2045, r.9(1), (2), (4))

Power to make a direction

"(5) An officer of Revenue and Customs may direct that the contractor is not liable to pay the excess to the Commissioners for Her Majesty's Revenue and Customs." (SI 2005/2045, r.9(5))

Tax return must be filed within the statutory period

"[130] On my view of the scope of this tribunal’s jurisdiction, this is not a question for consideration. However, for completeness, I should say that the answer to the question is plainly no.

[131] Apart from Mr Barrett’s own recollection of what he had been told by Mr Luke, the only evidence in this respect relied upon by Mr Barrett was the letter from HMRC to Mr Luke dated 5 March 2014, which I have summarised at [25]. Far from supporting Mr Barrett’s case, however, that letter serves to confirm that Mr Luke had not filed his relevant tax returns within the statutory time period, and consequently, according to my earlier finding, had not “made a return of his income or profits in accordance with section 8 of TMA”, and so had failed the test in regulation 9(4)(a)(ii) of the 2005 Regulations.

[132] Furthermore, the letter does not confirm that the relevant tax and national insurance contributions had been paid. There is no indication as to what income or profits had been included in the returns, nor the basis upon which HMRC had made determinations.

[133] I find, therefore, that Condition B has not been shown to have been satisfied." (Nigel Barrett v HMRC [2015] UKFTT 329 (TC) (Judge Berner))

Example

"[54] Before issuing the Determinations, HMRC exercised its powers under Regulation 9 to reduce the amount of the deductions due from the Appellant under section 61 FA 2004 in relation to contract payments made by him during the period by the amount of tax it (HMRC) was satisfied had been paid by the subcontractors in respect of those contract payments. Using the terms of Regulation 9, the deductible amount of £100,066.68 was in this way reduced to £2,779.51." (Kinsella v. HMRC [2020] UKFTT 217 (TC))

- No deduction but recipient not liable to tax or has paid tax (Condition B)

- Further requests for Condition B direction

"If, having refused a request for a direction under regulation 9(5) ‘Condition B’, the contractor immediately supplies you with evidence suggesting that the refusal is not soundly based; you should ask the subcontractor’s Processing Office whether the position has changed. However, you cannot keep re-visiting the claim to see whether the subcontractor(s) involved have now satisfied regulation 9(5) ‘Condition B’, and you should look to making a regulation 13(2) determination to collect the deduction due that the contractor should have made , or including the amount in a Class 6 settlement." (CISR83060)

- Further requests for Condition B direction

- Judicial review refusal to make Condition B direction

"[57] In this case HMRC are not satisfied and there is no provision in the legislation allowing the Tribunal to substitute its own view if it did come to a different conclusion." (Kinsella v. HMRC [2020] UKFTT 217 (TC))

"[116]That there is no right of appeal against a refusal to make a direction under regulation 9(5) on the basis of HMRC not being satisfied that Condition B had been met was the view taken by the First-tier Tribunal (Judge Raghavan and Mr Gillett) in Hoskins v Revenue and Customs Commissioners [2012] UKFTT 284 (TC), with which I respectfully agree. Such a challenge can only be made by judicial review. The tribunal in that case went on to consider whether any avenue of appeal could be afforded through the determination made under regulation 13(2) and the appeal right under regulation 13(5). It held that it could not, essentially having regard to the effect of regulation 13(3).

[117] In my judgment, the absence of appeal rights in relation to a refusal by reference to Condition B points clearly against there being any legislative intention that such a refusal should be capable of being challenged by way of a statutory appeal, whether directly or indirectly by way of appeal against the determination under regulation 13(2). For the reasons I have given, which in my view accord with the reasoning of the Upper Tribunal in Dhanak, applying a purposive construction of the relevant provisions, s 50(6) TMA does not provide this tribunal with the jurisdiction to reduce the charge to tax on Mr Barrett otherwise than in accordance with the statutory provisions themselves. In this case, the regulation 13(2) determination having been made at a time when no direction had been given under regulation 9(5), the effect of regulation 13(3) is to preclude any adjustment to the determination by reference to regulation 9(5)." (Nigel Barrett v HMRC [2015] UKFTT 329 (TC) (Judge Berner))

- Judicial review refusal to make Condition B direction

No r.9(5) direction if tax determined under r.13

"(1) This regulation applies if—

(a) there is a dispute between a contractor and a sub-contractor as to—

(i) whether a payment is made under a construction contract, or

(ii) the amount, if any, deductible by the contractor under section 61 of the Act from a contract payment to a sub-contractor or his nominee, or

(b) an officer of Revenue and Customs has reason to believe, as a result of an inspection under regulation 51 or otherwise, that there may be an amount payable for a tax year under these Regulations by a contractor that has not been paid to them, or

(2) An officer of Revenue and Customs may determine the amount which to the best of his judgment a contractor is liable to pay under these Regulations, and serve notice of his determination on the contractor.

(3) A determination under this regulation must not include amounts in respect of which a direction under regulation 9(5) has been made and directions under that regulation do not apply to amounts determined under this regulation." (SI 2005/2045, r.13(1) - (3))

"[53]...In my judgment: the FTT was correct in Hoskins (at §§21-22) to describe Non-Liability Directions and Liability Determinations as "mutually exclusive"; the FTT was correct in Barrett (at §§101, 105) that no Non-Liability Direction can be effective to reduce or eliminate the effect of a prior extant Liability Determination; the FTT was correct in Ormandi (at §§48(4)(6), 49) that a Liability Determination, unless withdrawn, precludes a subsequent Non-Liability Direction; and the FTT was correct in North Point (at §18) that public law principles enforced by judicial review are available to address questions of "abuse". I record that I have wondered whether the North Point situation – where a Carefulness appeal (reg.9(7)) against a refusal (reg.9(6)) is 'extinguished' by a later Liability Determination – is answered by the FTT being able to give a 'directed direction' (reg.9(9)) taking effect from the date of the refusal. But nobody supported this analysis (see §13 above), it is not what is in issue in this case, and public law protection remains." (R (oao Beech Developments (Manchester) Limited) v. HMRC [2023] EWHC 977 (Admin), Fordham J)

If contractor disputes obligation to deduct, HMRC may issue r.13 determination without considering r.9(5)

"Where the contractor does not dispute the obligation to make a deduction and the failure to do so, any representations for a direction under Regulation 9(5) must be considered before a Regulation 13(2) determination is raised. This is because once a Regulation 13(2) determination has been issued it will not be possible to consider a direction under Regulation 9(5) as this is precluded by Regulation 13(3).

Where, however, the contractor disputes the obligation to make a deduction, a Regulation 13(2) determination must be issued, but doing so will rule out any later consideration of a Regulation 9(5) direction.

Example

A contractor may initially contend that no deduction was due because the payment was for an operation outside the scope of the Scheme.

In this case the first step is to determine whether there was a legal duty to apply the Scheme to the payment in question. This may be achieved either by direct agreement between the contractor and HMRC without recourse to issuing a determination under Regulation 13(2), in which case a direction under Regulation 9(5) may then be considered as to whether the failure can be viewed as an ‘error made in good faith’.

If however, it is necessary to issue a determination under Regulation 13(2) to settle the ‘scope’ issue as the matter may go forward either for an internal review, or be heard before the Tribunal, then the fact that a determination under Regulation 13(2) has been made will prevent you from making any later consideration of a Regulation 9(5) direction." (CISR83040)

FTT has no jurisdiction to review

"[18] Mr Kazakos submitted (although not in as many words) that such construction would result in injustice in that Regulation 13 could be applied to deprive a taxpayer of its appeal rights under Regulation 9(5) which cannot have been intended by Parliament. Indeed HMRC might fall out with a taxpayer and deliberately issue a Regulation 9 determination in order to prevent a taxpayer exercising such appeal rights. We do not think that this of itself means that our interpretation leads to an injustice. Firstly, as HMRC’s Compliance Manual makes clear, unless (basically stated) there is a risk to the revenue, a claim for relief under Regulation 9(3) should be considered and resolved before the issue of a Regulation 13 determination. Secondly if a Regulation 13 determination is issued so as to prejudice a taxpayer exercising its rights of appeal under Regulation 9(7), an application for relief from such abusive behaviour may be made to the High Court.

[19] This reminds us, albeit in a different context, of the arguments concerning the proportionality of the default surcharge regime for VAT. The regime itself has been held to be proportionate, but it can operate in a disproportionate way as regards a particular taxpayer. Our interpretation of the foregoing Regulation does not of itself generate an injustice, but it may be that in its application to a particular taxpayer, that taxpayer suffers an injustice. As we say, in those circumstances, the taxpayer may bring an action before the High Court.

[20] So it is our view that once an amount of the excess has been included in a determination, it is no longer open to either HMRC or the Tribunal to make a direction under Regulation 9(5)." (North Point (Pall Mall) Limited v. HMRC [2021] UKFTT 259 (TC), Judge Nigel Popplewell)

No r.9(5) direction if tax determined under r.13

- Effect of r.9(5) direction that contractor not liable

"(1) This regulation applies if—

(a) there is a dispute between a contractor and a sub-contractor as to—

(i) whether a payment is made under a construction contract, or

(ii) the amount, if any, deductible by the contractor under section 61 of the Act from a contract payment to a sub-contractor or his nominee, or

- Effect of r.9(5) direction that contractor not liable

Liability of sub-contractor

Nigel Barrett v HMRC [2015] UKFTT 329 (TC) (Judge Berner)

Liability of sub-contractor

T11: Construction industry scheme

Background

Construction contract​

Sub-contractor

Contractor is a person to whom s.59 applies

Certain public authorities must have expenditure of £3m on construction operations

£3m test met be no further expenditure on construction expected: option to treat condition as no longer met

£3m test ceases to be met: option to treat it as continuing to be met

Transfer of trade: deemed expenditure incurred by transferee

Reference to body or person includes office or department

Definitions

Construction operations

Requirement of contractor to deduct

Contract payment

Includes travel, subsistence and accommodation expenses

​

An obligation upon a contractor, under a construction contract, to pay a subcontractor’s expenses will fall within FA04/s60 regardless of whether the obligation is written, verbal, express or implied.

A payment made in respect of a subcontractor’s expenses will fall within FA04/s60 regardless of whether the contractor pays or reimburses the subcontractor, pays their expenses directly or pays a nominated third party.

The total amount deducted by the contractor should reflect the gross amount of the payments due under the contract, including the payment of expenses on the subcontractor’s behalf. (See examples 1 & 2 below)." (CISR15080)

​

But not use of contractor's own facilities

​

Alternatively, if the contractor passes on all, or some, of the costs of providing the accommodation to the subcontractor, then that amount will be included in the PDS." (CISR15080)

​

Exceptions

​

​

Employment income exception

Payment for services supplied through intermediaries exception

Gross payment status exception

See below.

Small payments exception

Small payments for doing work on own land exception

Reverse premiums

Payments as agent of local authority

Payments in respect of property used for business

Arrangements involving public bodies

Payments by charities

Payments (including loans) that have the effect of discharging obligations under construction contract taken as made under the contract

- Direct cost of material exclusion

HMRC allow cost of plant hire to be treated as materials

Power to exempt non-construction businesses from requirement to deduct

Required to deduct even if payment is to overseas company (who then pays workers)

Amount of deduction: relevant percentage (20% or 30%) ​

"Payment Under Deduction

The contractor must make a standard deduction (20%) from payments to the subcontractor. To successfully register for payment under deduction a subcontractor must have registered for CIS.

A subcontractor who is registered for payment under deduction may be able to satisfy the conditions of registration for gross payment but prefer to be paid under deduction.

Unmatched

The contractor must make a deduction at the higher rate (30%) from payments to the subcontractor. A subcontractor who is subject to deduction at the higher rate has not been successfully verified. This may be because the:

- subcontractor is not registered for CIS or

- contractor has not provided the correct information to verify the subcontractor..." (COG910080)

Registering under the Act (either deduction or gross payment)

- Gross payment status

Registration as partner in firm: firm must be sub-contractor

​

​

Registration otherwise that as a partner in a firm: firm must not be sub-contractor

​

​

Contractor must verify gross payment status with HMRC

- Registering for gross payment status​

General

​

Individual

​

Partner

​

​

Company

​

​

Director

​

​

Change of control of registered company

​

​

Business test

Turnover test

Deemed satisfaction

Construction contract

Amount of deduction: relevant percentage (20% or 30%)

- Registering for gross payment status

Cancellation of gross payment status

- Collection of amount required to be deducted

- Contractor took reasonable care and error made in good faith (Condition A)

- Appeal refusal to issue Condition A direction

- No deduction but recipient not liable to tax or has paid tax (Condition B)

- Judicial review refusal to make Condition B direction

No r.9(5) direction if tax determined under r.13