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Chartered Accountants will have at least some nodding acquaintance with the Construction Industry Scheme. You will probably know that it is run by HMRC and applies to contractors that engage subcontractors for defined construction operations.

What follows are summaries of three cases taken from the museum of tax cases won by HMRC, where the contractor paid a significant price for a lack of knowledge or care.

After reading these, you may care to consider whether your clients, or your own company, maintains a sufficiently high level of compliance.

The usual process for an invoice raised by a subcontractor is that someone at the contractor’s office will review the work specified and the value given. Payment for a sum (not necessarily that invoiced) will be authorised; the accounts department will issue the payment, net of tax if applicable.

The authoriser may not be familiar with the workings of CIS; the person issuing the payment will not necessarily question the sum authorised. That can lead to problems for the contractor, if the subcontractor claims a high proportion of the invoice’s value as being for materials and therefore not subject to tax deduction.

Tax deducted can be redeemed by the subcontractor – but its deduction is delayed cash flow. As the subcontractor is probably not able to use VAT as temporary borrowings anymore (thanks to the domestic reverse charge), there is a greater temptation to look for lower tax deductions.

Does this matter to the contractor? HMRC think it should. They certainly did with Flemming. A review of the company’s records showed little evidence of the verification of the sums charged by subcontractors for materials. Whatever the subcontractor specified was accepted. HMRC sought payment from the company for under-deducted tax, which was upheld at the Tax Tribunal.

The cost to the company? Nearly £33,000.

Some readers may be familiar with the Income Tax (Construction Industry Scheme) Regulations 2005. In particular, Regulations 9 and 13. The latter empowers HMRC to recover tax that has not been deducted from subcontractors; the former allows discretion in whether the contractor is asked to pay. The exercise of that discretion will depend on the circumstances of the case.

The Tayfield directors considered their company’s trade to be that of a property developer. They engaged another company, Britannia, as the contractor with a separate company as the QS; in turn, subcontractors would be engaged and so on down the supply chain. Tayfield had registered for CIS but had submitted nil returns.

A change in circumstances involved Tayfield paying Britannia’s subcontractors directly. HMRC reviewed Tayfield’s procedures and found a very low level of CIS diligence. The discretion not to pursue tax was not granted and the company was assessed for under-deducted tax. The Tax Tribunal agreed with HMRC that the company had not exercised reasonable care with CIS.

This cost the company in excess of £79,000.

The circumstances are similar to those in Tayfield. More than one company was involved but it is the essence of the findings that is more important than the detail.

One of the two directors believed the company to be property developers; the other director, an accountant who was aware of CIS but not an expert, chose to believe his colleague. Without taking advice, at least to begin with. Only when HMRC took an interest in the company, working upwards through the supply chain, was advice sought.

Again, HMRC refused discretion as to CIS failures and under-deductions.

The sum payable to HMRC was in excess of £1.7 million. Subsequently, the project stalled and the company went into administration. Eight years later, the site remains abandoned.

There are many more facets of CIS that can cause problems for businesses in construction, and their accountants. If you have responsibility for CIS, can you say that you are confident in your compliance?

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