Important Tribunal judgment on offshore CIS

The First-tier Tax Tribunal has just released its judgment in the case of Island Contract Management (UK) Ltd v HMRC, a case concerning deductions under the construction industry scheme in relation to payments via its Isle of Man parent company, Island Contract Management Ltd.  For ease of reference we will refer to the parties as ICM(UK) and ICM.

This is a lengthy judgment with some complexities, but in short boils down to the following.  ICM set up a business in the Isle of Man to engage construction workers.  After some time ICM(UK) was set up in the UK to contract with agencies, and obtained a CIS6 card so it could be paid gross.  So the model was that the agencies contracted with ICM(UK), which in turn contracted with ICM, which in turn engaged the subcontractor.

As ICM was outside of the UK tax jurisdiction, it did not operate CIS when it paid the workers.  But what about ICM(UK)?  The company believed that it did not have to deduct CIS from the payments it made to the Isle of Man parent company, and did not do so.  HMRC started an enquiry and after a meeting and initial correspondence, decided to raise assessments on the basis that ICM(UK) ought to have deducted CIS.  HMRC also cancelled ICM(UK)’s gross payment status.

At this point, Accountax were called in to try to defend the company against HMRC’s attack.  Unfortunately there were some deficiencies in the set-up and the contractual relationships that had been put in place were not robust and could not protect the model.

The main issues will be a familiar concern to most umbrella companies – much of the marketing material and the contracts did not place ICM properly in the contractual chain, and the Tribunal found that ICM was ‘clearly acting as a paying agent or payroll bureau’.  This basically put ICM(UK) directly in contract with the workers, and obliged them to deduct CIS.  Interestingly, the Tribunal similarly found that ICM(UK) was also a “mere conduit” for payment, but in that case decided that ICM(UK) was a genuine subcontractor under CIS (see below).  There is clearly some tension between these two aspects of the judgment.

So what then was the defence?  There were some procedural issues with HMRC’s determinations.  For example ICM(UK) felt that there was no tax due, it had not been unreasonable in not making deductions, and it wanted to claim relief under the CIS Regulations.  The Tribunal agreed that HMRC had not given ICM(UK) enough time to do this, but decided that this error was corrected by HMRC’s follow-up actions and it didn’t make any difference overall.

Ultimately, the Tribunal rejected all of the procedural challenges and upheld the assessments (totalling £42,751,508.78).

In terms of whether ICM(UK) was obliged to deduct tax on payments to ICM in the Isle of Man (we have always maintained that you should deduct CIS if the work is carried out in the UK, regardless of where the recipient of the payment resides), this became a moot point as ICM(UK) Ltd was found to be in direct contract with the workers anyway.  In an interesting twist HMRC’s claimed CIS expert produced a witness statement before the hearing stating that it was not necessary to deduct CIS from overseas companies.  However, at the outset of the hearing he changed his evidence, claiming that it had been ‘a mistake’.  Given that the company’s own error on this point was the whole thrust of the case, one might have had some sympathy for ICM(UK) in this regard – however the Tribunal did not, and viewed the model as a means to circumvent CIS with implications for major potential tax losses to the exchequer, and found against the company accordingly.

A further point taken concerned HMRC’s argument that the Ramsay case applied here – i.e. that ICM could be ignored because it served no legitimate purpose and had been inserted simply to circumvent CIS.  Although the Tribunal found that ICM was a pre-existing genuine business and ICM(UK) was the “mere conduit”, it decided that ICM had been inserted for a non-commercial purpose and that Ramsay would have applied, although it was not strictly necessary to determine this point.  Although this is a non-binding First-tier judgment and this part of the judgment is obiter dicta, it underlines the need for commerciality in arrangements.


This judgment reinforces our long-standing advice on some very common compliance areas for umbrella companies and similar models:

  • If a company is merely a payroll bureau or a ‘mere conduit’ for payment, the worker remains in contract with the client.  This could be the agency or the construction client.  This is a major compliance issue for umbrella companies and has CIS, PAYE, NIC, employment law and commercial implications.  In essence, if you don’t get this right, your business model will fail.
  • There must be commerciality to the arrangements – merely processing payments is not enough.  Umbrella companies must be genuine employers.  Self-employed models must be genuine subcontractors.
  • CIS deductions are due wherever payments are made – even if the payments are going offshore – if the worker is carrying out construction operations in the UK.

If you are concerned about any aspects of the above – speak to us urgently.

Are there any positive outcomes from this judgment? Clearly this is a major case with a significant liability attached, but there are some positive elements, particularly for clients of umbrella companies.  It is notable that despite the constant sabre rattling HMRC did not challenge the self-employed status of the workers in this case.  They accepted that the operatives were self-employed under CIS.  Neither did HMRC try to argue that ICM(UK)’s clients were liable here – in fact the Tribunal found that so far as clients were concerned ICM(UK) was a genuine subcontractor for the purposes of CIS, so it would be impossible for HMRC to argue that ICM(UK)’s clients have any liability (as long as the clients inspected the CIS6 card or verified ICM(UK) properly).

This judgment is not yet final, and as with all judgments ICM(UK) have 56 days to appeal.

Published: 04.19.13 - Posted In: Latest News