A landmark CIS case: Successfully challenging a £450,000 HMRC enquiry

HMRC opened an enquiry into an employment agency business concerned that it had failed to operate the Construction Industry Scheme (CIS) correctly on payments it had made to various umbrella companies.

The challenge

The business had engaged the services of a reputable firm of advisers when faced with the introduction of the Intermediaries legislation, which required agencies to submit quarterly reports to HMRC detailing payments made to non-PAYE workers. The issue was that the business had misunderstood the advice given and decided that the new intermediaries reporting actually replaced the requirement to submit CIS returns.

HMRC assessed the outstanding CIS liability at over £450,000 and the business contacted us to try and defend the assessment.

The CIS legislation, under regulation 9(3) allows for a business to request HMRC to consider relief from the CIS liability where the business can demonstrate that it took reasonable care in complying with its CIS obligations and either that the error was made in good faith, or the business had a genuine belief the law did not require a deduction for CIS to be made from the payment. (Condition A).

A request was made to HMRC for relief under the regulation on the grounds that the director of the business had demonstrated that the business had taken reasonable care to comply with its CIS obligations by engaging with an independent adviser, clearly demonstrating that the director acknowledged the business lacked the experience needed to make decisions on CIS compliance.

Needless to say, HMRC refused the application stating that the business had failed to demonstrate it had taken reasonable care by failing to submit the CIS returns and that misunderstanding the advice given was not an error made in good faith.

How did we help?

We began by requesting Alternative Dispute Resolution (ADR) with HMRC to discuss the case and try to persuade HMRC that the actions of the business did demonstrate very reasonable actions in seeking advice.

Again, HMRC would not accept what was felt to be a very obvious case of reasonableness, so ADR failed, leaving the only option of a hearing at First Tier Tax Tribunal.

The outcome

Thankfully, the FTT were able to understand our evidence and, more importantly our approach to the concept of what might be considered reasonable using the accepted everyday concept of what constitutes a reasonable approach to tax compliance.

The FTT found in our clients favour and dismissed HMRC’s case addressing the lack of commonsense demonstrated by HMRC in its handling of the case. The Judge made it clear the legislation does not require there to never be an error, but that an error can be made that is not deliberate, and that the director in this case, had clearly shown he had taken reasonable care.

Would you like to know more?

This case is one of only a few that FTT has found in favour of the taxpayer so sets a very important precedent when looking at the concept of reasonable care. If you are looking for guidance for a current tax investigation, we’re here to support you. Contact us today for an initial consultation with one of our experts.