Confusion over Construction Industry Scheme (CIS) rules has left a contractor with a tax bill for £1.7m.

Under the Construction Industry Scheme (CIS), contractors deduct 20% from a subcontractor’s payments and pass it to HMRC (there are some exceptions which did not apply to this case.)

Determinations were issued by HMRC for £1.7m to the contractor, North Point (Pall Mall) Ltd and China Town Development Company Ltd (China Town) (a subsidiary of North Point) as they should have made deductions under the CIS scheme for construction and demolition services they had used in 2015/16 and 2016/17.

North Point (Pall Mall) Ltd and China Town Development Company Ltd (China Town) jointly referred to as North Point, raised appeals stating that a former director accepted he had made a mistake however had taken ‘reasonable care’ to abide by the law and he had taken advice of an employment agent who had experience in large-scale project management and had prepared contracts that had been ‘pre populated’ by the director of the employment agency, ready for the director of North Point to sign. These contracts contained a CIS clause which lead to the misunderstanding.

The appeals were dismissed by the first-tier tribunal. The tribunal stated that the former director of Northpoint (a qualified accountant) who had experience of dealing with CIS on his client’s behalf would be aware of the consequences of getting it wrong and should at least have read the pre populated contracts and could have tested the interpretation of  the CIS clause in these contracts, especially as neither the former director of North Point or the director of the employment agent were tax specialists.

This case shows the importance of understanding the obligations of your business, if you are unsure about your CIS obligations, contact us for a free, 1 hour consultation by clicking here.