By: Robert W. Maas FCA, FTII, FIIT, TEP
Tax is also deducted at source from payments to building industry sub-contractors. This has to be deducted (and in most cases accounted for electronically) by contractors and anyone else who spends an average £1million or more on construction operations.
The legislation is mainly contained in Finance Act 2004 (FA 2004), ss 57–77 and Sch 11 and the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005 No 2045). The definition of a contractor is contained in FA 2004, s 59. A person is a sub-contractor in relation to a contract relating to construction operations if either:
- (a) he is under a duty to the contractor to carry out the operations, or to furnish his own labour (in the case of a company, the labour of employees or officers), or the labour of others is to be furnished in carrying out the operations; or
- (b) he is answerable to the contractor for the carrying out of the operations by others (whether under a contract or under any other arrangements).
[FA 2004, s 58].
All construction industry workers who work for contractors are required to register with HMRC. They can register a person for gross payment, in which case the contractor does not need to deduct tax at source, or for payment under deduction [FA 2004, s 63]. A jobbing builder who works only for private individuals or for non-contractors does not need to register. Many contractors will not engage sub-contractors who are not registered for gross payments. Accordingly this statue is of far greater benefit to the worker than the case flow benefit of receiving his earnings gross and accounting for tax under self-assessment, rather than tax being deducted at source.
Where payment under deduction applies, the deduction is not intended to reflect the worker’s final tax liability. It is intended to seek to ensure that he does not disappear without completing a tax return and that HMRC has third party confirmation of his earnings.
The deduction is at a flat rate of 20% (or 30% if the payment is made to someone who is not registered or for whom HMRC cannot trace his registration). If a payment to the sub-contractor includes the cost of materials, a deduction does not need to be made from that amount. It is up to the contractor to ascertain that cost, perhaps by sight of the invoice for the purchase of materials. If no evidence of such cost is produced, the contractor is likely to deduct tax from the entire payment. It should be noted that if the subcontractor seeks a mark-up on materials it is only his cost price that escapes the deduction.
To obtain registration for gross payment, an individual needs to satisfy HMRC that:
- (a) he is carrying on a business in the UK which consists of (or includes) the carrying out of construction operations in the UK (or the furnishing, or arranging for the furnishing of labour in carrying out construction operations [FA 2004, Sch 11, para 2(a)];
- (b) that business is, to a substantial extent, carried on by means of a bank account [FA 2004, Sch 11, para 2(b)];
- (c) he is likely to have a business turnover of at least £30,000 in the next tax year from construction operations [FA 2004, Sch 11, para 3(1) and Reg 28];
- (d) he has complied with all of his tax and NIC obligations (including all requests to supply accounts or information about any business of his to HMRC) in the 12 months preceding the application for registration [FA 2004, Sch 11, para 4(1)], and if he controls any company, such company has also complied with all of its tax obligations (and there is reason to believe that he or any company will continue to do so) [FA 2004, Sch 11, para 4(1)].
A person has complied with such obligations only if he did so at the time at which (or during the period in which) he was required to do so [FA 2004, Sch 11, para 4(8)]. The Regulations set out the document that HMRC want to see to satisfy themselves that the conditions are met.
For the purpose of 8.34(d) (the compliance test) a person who fails the test is treated as having passed it in certain circumstances [FA 2004, Sch 11, para 4(3)]. These are:
- (a) a monthly contractor’s return was submitted within 28 days of the due date and there were no more than two similar failures in the previous 12 months;
- (b) a payment of PAYE or sub-contractor deductions was made within 14 days of the due date and there has been not more than two similar failures in the previous 12 months;
- (c) a payment of income tax (eg under self-assessment) was made within 28 days of the due date and there was no similar failure in the previous 12 months;
- (d) a P35 was submitted late;
- (e) a payment of corporation tax was made within 28 days of the due date and any shortfall in that payment has incurred an interest charge, but not a penalty;
- (f) a self-assessment return was submitted late;
- (g) a late payment (or non-payment) of tax, interest or penalties was less than £100.
A person is also regarded as satisfying their obligations if the reason that they did not do so was that they had a reasonable excuse for failing to do so, and they complied without unreasonable delay after the excuse ceased [FA 2004, Sch 11, para 4(4)]. There is a right of appeal to the FTT against a refusal to register a person for gross payment. Notice of appeal must be given to HMRC within 30 days of the refusal stating the grounds of appeal [FA 2004, s 67].
A partnership has to satisfy the above conditions but as if the turnover test at (c) referred to £200,000. Each partner has to pass the compliance test at (d) [FA 2004, Sch 11, paras 5–8]. A company must also satisfy the above, again by reference to a £200,000 turnover limit. It need not satisfy the turnover test if it is a company limited by shares and all of its shareholders are themselves registered for gross payment. It is treated as doing so if the turnover is at least £30,000 multiplied by the number of directors and shareholders in the company. It must also have complied with specified requirements of the Companies Act 2006 (mainly those relating to accounts and administration) [FA 2004, Sch 11, paras 9–12].
HMRC can at any time cancel a person’s registration for gross payment if it appears to them that either:
- (a) if he applied for registration at that time they would refuse to register him;
- (b) he has made an incorrect return or provided incorrect information under CIS; or
- (c) he has failed to comply with any of the CIS rules.
[FA 2004, s 66(1)]. There is a right of appeal to the FTT against the cancellation of a registration for gross payments. Notice of appeal must be given within 30 days of the cancellation giving reasons for the appeal. If notice of appeal is given, the cancellation does not take effect until the appeal is finally determined or abandoned [Finance Act 2006, s 67]. If there is no appeal, it takes effect 90 days after the cancellation notice [Reg 26].
A person who applies for registration for payment under deduction merely needs to satisfy HMRC of his identity. If they are not satisfied, they can refuse to register him. There is a right of appeal to the FTT against such a refusal [FA 2004, s 68; Reg 25].
If a person provides false or incorrect information in connection with his application, has fraudulently made an incorrect return or provided any incorrect information under CIS or has knowingly failed to comply with any of the CIS rules, HMRC can cancel his registration with immediate effect, both if the registration is for gross payment [FA 2004, s 66(3),(4)] and if it is for payment under deduction [FA 2004, s 68 and Reg 25]. There is a right of appeal against such a cancellation.
In A & P Noden (TC 1079) HMRC cancelled a partnership registration for gross payment on the basis that the partners had been late in paying their 2008/09 self-assessment liabilities on more than three occasions in a 12-month period. The partnership was subsequently notified of a substantial claim against it which resulted in a substantial loss as a result of which HMRC repaid the partners’ balancing payments for 2007/08. The FTT held that this meant that the 2008/09 interim payments should have been nil, so the fact that they were paid late did not constitute a default. The tribunal in that case held that it had full appellate jurisdiction, not merely a supervisory one (see also 8.44).
In Bellwell Plant Ltd (TC 605), where registration for gross payment was refused because the company had failed to pay its corporation tax by the due date, the tribunal said that the fact that the business would suffer if the gross payment status was not granted cannot be a ground for allowing an appeal against refusal where the gross payment status depends on the satisfaction of conditions. In Industrial Contracting Services Ltd (TC 1152) HMRC withdrew gross payment status because NIC of £312 due on 19 July 2009 was not paid until 8 August 2009. The tribunal held that once HMRC is satisfied that the compliance test is not met, they have no discretion to allow registration to continue unless there is a reasonable excuse. The fact that the payment was delayed due to an oversight brought about by the appellant’s busy work schedule and which was rectified as soon as the appellant became aware of his mistake was held not to be a reasonable excuse, even taking into account the small amount of tax owing or number of days before payment was made.
The taxpayer was held to have had a reasonable excuse in S Mutch (TC 232) where the failure to pay by the due date was due to a sudden and unexpected downturn in the house-building industry in the Corby area. Mr Mutch employed 20 carpenters. His main customer stopped new building and left much of its stock in a part-built state. By the time that the relevant tax payments had become due, Mr Mutch was able to obtain little work and had had to reduce his staff to two carpenters. Similarly in Connaught Contracts (TC 798) the tribunal held that the fact that the cash-flow problems that the business had suffered coincided almost exactly with one of the worst financial crises in the country’s history constituted a reasonable excuse.
In JP Whitter (Waterwell Engineers) Ltd 2017 STC 149) the FTT held that HMRC have a discretion in deciding whether to cancel a registration, albeit that they have no discretion in deciding whether to grant it. It felt that this was because cancellation of registration can clearly have serious implications for an existing business. Interestingly the FTT (in contrast to that in Noden – see 8.41) decided that it had only a supervisory jurisdiction and cannot substitute its own decision for that of HMRC. It felt that was to be expected in a case where HMRC are exercising a discretion (ie not to cancel a registration). It pointed out that a similar conclusion had been reached by the tribunals in Piers Consulting Ltd (TC 1456) and Cardiff Lift Company (TC 1470). This meant that the consequence of HMRC not taking a relevant matter into account was that the tribunal has to allow the appeal unless it could be said that HMRC would inevitably have reached the same decision had it taken proportionality into account. The Upper tribunal agreed, albeit that it had reached a different decision in holding that HMRC had correctly exercised its power. However, the Upper Tribunal pointed out that the policy behind CIS is to ensure the effective collection of tax and that ‘a person should retain his registration only if he continues to display an adequate track record. The power to cancel registration is there principally to ensure compliance with the substance of the CIS’. It went on to say there might however be cases where HMRC feel that a failure would not be repeated and that withdrawal of registration would not be appropriate, but emphasised that ‘the financial consequences of a decision to cancel registration for gross status are irrelevant to any issue of future compliance’. Accordingly, it has no right to have regard to such consequences. The Court of Appeal agreed but without fully accepting the Upper Tribunal’s reasoning. It thought that the Human Rights Act requires HMRC to exercise their discretion proportionately but in doing so they do not need (except in the most exceptional cases) to go beyond the proportionality of the CIS regime as a whole. Henderson LJ added, ‘The adverse effect on the company’s business is in my view an entirely predictable consequence of the company’s non-compliance, for which it has only itself to blame’. Another interesting point that arose from the Whitter case is that registered taxpayers are subject to ongoing review by HMRC, carried out by computer on an annual basis, to ensure continuing compliance with the conditions at
In Island Contract Management (UK) Ltd v HMRC  UKUT 0472, (2016 STC 715), the Upper Tribunal again upheld HMRC’s decision to revoke.
When a contractor first engages a sub-contractor, he is required to verify with HMRC whether that person is registered for gross payment, for payment under deduction of tax, or is not registered. He is also required to re-verify at least every two years if he continues to use the sub-contractor [Reg 6].
Where a contractor pays a sub-contractor under deduction of tax, he must give the sub-contractor a payment and deduction statement (PDS) within 14 days of the end of the tax month [Reg 4(8)]. A contractor must make (electronically) a monthly return of both gross and net payments (and tax deducted within 14 days of the end of the month (17 if it pays the tax electronically). If there are no payments in a month, it must submit a nil return [Reg 4]. The payment must be made within the same period unless a contractor’s total PAYE and CIS liabilities average under £1,500 a month, in which case it can be paid quarterly [Regs 7, 8].
If a sub-contractor is a company and is registered under deduction of tax, it can set off the tax it suffers during a month against its PAYE, NIC and CIS liabilities for that or any subsequent month in the same tax year. The balance will be set against the company’s corporation tax liability with any excess being repaid to it. If the sub-contractor is an individual and is himself a contractor, he can obtain relief only against his end of year tax liability. He will suffer the cash-flow disadvantage of having to pay his own contractors out of his net earnings.
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