HMRC challenges on the construction industry scheme are proving that it is expensive to get it wrong
We have seen a significant increase in the level of HMRC activity in regard to reviewing the construction industry tax scheme. The result of these reviews is that a number of errors are being identified made by contractors and their operation of the construction industry scheme. The typical errors are either that :
- payments are being made without the scheme rules being applied when these apply, or
- that the tax to be withheld in cases in which the subcontractor does not hold ‘gross status’ is being incorrectly calculated
It is a matter of procedure in these cases to seek to recover tax on the payments made when the construction industry scheme was not being fully complied with. In addition to this HMRC can seek to charge penalties.
When it comes to the contractor this can result in a significant claim by HMRC. It is a fact that HMRC will not excuse this liability unless they are satisfied under Regulation 9(4) that the subcontractor concerned has made a return of his income or profits in which those payments were taken into account, and paid the income tax and Class 4 National Insurance contributions due or corporation tax due in respect of such income or profits. It is worth noting that the contractor is reliant on HMRC and if they are not prepared to issue such a direction there is no right of appeal.
Alternatively the contractor can appeal under Regulation 9(3) but in so doing he would need to satisfy HMRC :
- that he took reasonable care to comply with the construction industry scheme, and
- the failure to deduct the excess was due to an error made in good faith, or
- he held a genuine belief that the construction industry scheme did not apply to the payment
If HMRC do not accept an appeal under Regulation 9(3) (and the evidence is that they are generally reluctant to do so) then the contractor can take the appeal before the Tax Tribunal. There are a growing number of appeals which have been taken to the Tribunal and there is no clear line being adopted by the Judges who have heard the cases. I personally been involved in representing 3 clients at Tribunal on this point and found some of the Judges to not excuse the contractor of their responsibilities even if it was an innocent error whilst others have ruled that the liability should be removed.
Getting the construction industry scheme wrong can be expensive and it is therefore sensible to take a step back on occasions and ensure that there are no flaws in your systems or procedures. If there are any points of concern then consult with your usual tax specialist.
Alastair Kendrick, Tax Director
Alastair Kendrick is a former HM Inspector of Taxes with considerable experience of the construction industry scheme. He is an experienced in dealing with disputes with HMRC and of taking appeals before the Tax Tribunal.
If you have any queries regarding the construction industry tax scheme, please contact Alastair directly: firstname.lastname@example.org
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