Mark McLaughlin warns owners of businesses with properties that becoming too involved in construction or improvement work on their properties could have unexpected and unwelcome results.
Many owners of businesses not engaged in construction work will probably know little or nothing about the construction industry scheme (CIS). This is perhaps understandable, as the definition of ‘contractor’ for CIS purposes means that non-construction businesses are generally excluded, unless average annual expenditure on construction operations (normally measured over a three-year period) exceeds £1 million (FA 2004, s 59(1)).
Don’t make it personal!
However, non-construction business owners who become personally involved in construction work undertaken on properties (e.g. arranging for the work to be done on their business properties, contracting with the builders, etc.) could inadvertently become subject to obligations under the CIS regime, including the requirement to deduct tax from subcontractors who are not registered for gross payment, and to account for that tax to HM Revenue and Customs (HMRC).
In Donnithorne v Revenue and Customs [2016] UKFTT 241 (TC) the appellant, the director of companies owning nursing homes, wanted to ensure that various additions or improvements were made to one of the nursing homes. He therefore decided to take on the role of arranging for the construction work to be done. To his surprise, HMRC assessed the appellant for having failed to make deductions under the CIS in respect of payments made to three subcontractors. HMRC also sought penalties from the appellant for having made no CIS returns.
Before the First-tier Tribunal, the appellant conceded that he had been acting as a contractor, even though he appeared not to be undertaking any of the work himself. He had entered into the contracts with the construction workers; if the workers had not been paid it was the appellant who they would have sued for payment. This made the appellant an ‘intermediary’, and he therefore had a potential liability to deduct and account to HMRC for tax under the CIS.
Escape route
However, there are certain exemptions from a contractor’s liability to deduct and account to HMRC for CIS deductions, where the contractor has failed to do so.
One such exemption applies if the contractor satisfies HMRC that he took reasonable care to comply with the requirement to deduct the correct tax from relevant payments to subcontractors (within FA 2004, s 61), and that either the failure to deduct that tax was due to an error made in good faith, or he held a genuine belief that this requirement did not apply to the payment (SI 2005/2045, reg 9(3)).
If HMRC refuses to direct that the contractor is not liable to pay the tax, the contractor may appeal (reg 9(7)). Fortunately for the appellant in Donnithorne, the tribunal decided that reg 9(3) was satisfied on the ‘unusual’ facts of the case. The appellant’s liability to account now for CIS payments was therefore discharged in relation to payments made to the first subcontractor. In addition, the appellant’s CIS liability was eliminated in respect of payments made to the second subcontractor. The tribunal made no finding or decision in relation to the small payment (i.e. £229) made to the third subcontractor.
Furthermore, the tribunal decided that in view of the special circumstances in the case, the appellant’s liability for penalties should be entirely eliminated under the ‘special reduction’ provisions for late filing penalties (in FA 2009, Sch 55, para 16).
Practical Tip:
Business owners should exercise caution when arranging for construction work to be carried out on their business properties. Interestingly, the tribunal in Donnithorne pointed out: ‘with a minor difference in form, the conclusion could well have been that there was no question of liability under the CIS scheme on anybody’s part. For had the nursing home companies themselves engaged the builders, there would have been no liability on the part of those companies (not being construction companies in any sense) to make deductions on paying for building works in just the manner that there are no such liabilities when an ordinary home owner pays for some building work on his house…’
