Another CIS Judgment: Time for Businesses to Act

HMRC’s Continued Focus on the Construction Sector

Our regular readers will recall our many articles over the years highlighting HMRC’s focus on the construction sector.

HMRC continues to view the sector as one where dubious practices and non-compliance can be common.

The latest evidence of this targeted approach can be seen in the fraud measures introduced in April. In simple terms, these measures mean that where it can be shown that a business knew, or should have known, that it entered into a transaction connected with the fraudulent evasion of tax, there can be serious consequences.

These consequences can include:

• The immediate cancellation of Gross Payment Status (GPS)
• An increase in the time limit from 1 to 5 years to reapply for GPS
• The business becoming liable for the lost tax
• A penalty of 30% of the lost tax being charged to the business, as well as to its directors and other persons connected to the business

A Recent CIS Judgment at the First-tier Tax Tribunal

As these measures bed in, we await the inevitable increase in compliance activity. The ever-stricter regime, and HMRC’s willingness to take businesses to task, is shown in a recent case heard at the First-tier Tax Tribunal. The case was George Star Builders Limited v HMRC [2026] UKFTT 800 (TC).

Background to George Star Builders Limited

George Star Builders Limited (GSL) was formed in 2015 by George Jarda, who was the sole director and shareholder. Mr Jarda came to the UK in 2007 and worked as a sole trader subcontractor. He had registered under the Construction Industry Scheme (CIS). He had been engaged by another business. When that business ceased trading, he decided to set up GSL. He took on most of the staff, as well as the contracts of that business.

CIS Registration and Gross Payment Status

Mr Jarda appointed a bookkeeper and an accountant. GSL registered under the CIS as a subcontractor in February 2017, with a start date of 1 February 2015. The company also obtained Gross Payment Status.

Blank Cheques and Subcontractor Payments

In 2017, Mr Jarda started asking customers to give him cheques with the payee section left blank. He would then cash the cheques at a bureau and use the money to pay subcontractors. He assumed there was nothing wrong with doing so. He also assumed that the subcontractors were responsible for their own affairs, including declaring those payments.

Nil CIS Returns Were Submitted

On 30 September 2020, Mr Jarda registered the business as a contractor. GSL then made nil monthly returns, stating that no payments had been made to subcontractors. In fact, substantial payments had been made throughout this period.

HMRC Opened a COP 9 Investigation

HMRC suspected tax fraud due to deliberate behaviour. As a result, HMRC opened an investigation in 2021 using the Code of Practice 9 (COP 9) civil investigation of fraud procedure. Under this procedure, the recipient of the COP 9 is given the opportunity to make a complete, accurate, open and honest disclosure.

This disclosure must cover deliberate behaviour that brought about the loss of tax, duty or payment administered by HMRC. It must also cover all other irregularities in their tax affairs. Deliberate behaviour, in this context, is considered to have taken place where a person submitted documents containing information they knew was incorrect.

The Key Issue in the CIS Judgment

The case centred on whether HMRC should have made a Direction under Regulation 9 of the CIS Regulations. More specifically, it concerned Regulation 9(3)(a). This requires reasonable care to have been taken in operating the CIS and making deductions on account of tax. If the reasonable care test was met, the business would not have had to pay over any under-declared deductions.

HMRC Refused to Make a Direction

HMRC refused to make a Direction. Instead, HMRC issued formal determinations under Regulation 13 of the CIS Regulations for the deductions that had not been remitted to HMRC. After an Independent Review came down in favour of HMRC, GSL appealed to the First-tier Tax Tribunal.

GSL’s Argument at the Tribunal

In a nutshell, GSL’s representative argued that Mr Jarda did not know he had to tell the accountant or bookkeeper about payments to subcontractors. This was said to be due to his limited knowledge of how the CIS operates.

The accountant and bookkeeper, who would have had a good knowledge of CIS, also did not know they had to ask Mr Jarda about subcontractor payments.

In short, the argument was that Mr Jarda relied on his advisers. It was also argued that he acted in “reasonable ignorance” because he was not aware of his obligations. On that basis, it was argued that he was reasonable in not complying with them.

The Tribunal’s Conclusion

The First-tier Tax Tribunal steadfastly disagreed. It concluded that Mr Jarda had not taken reasonable care in operating the CIS.

The Tribunal also concluded that he would have been aware that there could be tax implications. This was especially the case given that he had worked in the construction industry for almost 20 years. The appeal was dismissed.

What This CIS Judgment Means for Businesses

In light of the facts, the outcome in this case was predictable. That said, the action taken by HMRC, including the use of the COP 9 procedure, demonstrates the stricter stance we expect to become commonplace. This is particularly likely as the fraud measures take hold.

Why Businesses Should Review Their CIS Processes Now

Taking time now to review the processes and procedures you have in place for operating the CIS would be a good start. This can help protect your business from HMRC intervention in the first instance. It can also provide a level of comfort if your business is selected for review.

Wider Compliance Issues to Consider

Alongside a CIS process review, it would be prudent to carry out a detailed and diligent assessment of other related areas. This includes the employment status of subcontractors. It also includes the supply chains and associated transactions that your business is involved in. These issues should be considered with the fraud measures in mind.

Speak to Chartergates About CIS Compliance

Please get in touch with your usual contact if you would like advice or to discuss how we may be able to help.

Disclaimer

Chartergate Legal Services Ltd has drafted this update to provide you with a general overview of the relevant law and developments at the date of sending only. This update is provided as a general overview and should be taken as such. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.