Operation of the Construction Industry Scheme

The Facts:

A building contractor received a notice from HMRC that they wanted to carry out a routine inspection. The contractor was using a number of different subcontractors on their sites to provide them with labour, plant and materials.

The subcontractors did not all have gross payment and they itemised on their invoices to the contractor the elements of the invoice that were for labour and separated out the materials element, which included plant costs. Sometimes the subcontractor worked out the 20% deduction. The contractor followed the invoices and deducted 20% from the labour element, but did not deduct anything from the plant and materials costs.

The Dispute:

HMRC queried the deductions made by the building contractor. HMRC alleged that the subcontractors were claiming high amounts of materials and the contractor should have queried the amounts. Also HMRC claimed that the contractor had to prove that the plant was hired by the subcontractors as they could not deduct any “owned” plant. They said it was not good enough that the subcontractors itemised the invoices – the contractor should have worked the deductions out themselves.

HMRC claimed that the contractor was responsible for the deductions, and worked out a bill for tens of thousands of pounds from the contractor. To add insult to injury, they added on interest and penalties, and just to ram home the point HMRC said that as the contractor had failed to operate the Construction Industry Scheme they were going to cancel the contractor’s gross payment status.

The Defence:

HMRC had approached this in a typically heavy-handed fashion, but unfortunately they had made some errors themselves in handling the enquiry. HMRC had also failed to take into account the safeguards within the Construction Industry Scheme that prevent contractors being penalised even where mistakes were made, as long as reasonable care had been taken by the contractor. It was the common understanding in the industry (rightly or wrongly) that subcontractors could claim a CIS materials deduction for plant, and it was not unreasonable for the contractor to follow the invoices, so long as they were not plainly wrong.

Even where there was a liability, a contractor could bring a claim for the liability to be transferred back to the subcontractor where either reasonable care had been taken, or where there was no actual tax loss to the exchequer. These are statutory claims and HMRC are obliged to consider them – and there is a right of appeal to the independent tribunal.

Furthermore, the ‘reasonable care’ argument applied equally to the penalties and the cancellation of gross payment status.

The Result:

By a combination of the above technical arguments, and by bringing pressure to bear on HMRC in relation to their own mistakes, HMRC backed down and accepted that there was no liability and that the company could retain its own gross payment status.