A construction company which, during an eight-year period, breached its obligations under the Income Tax (Construction Industry Scheme) Regulations 2005 to deduct tax at source from sums paid to sub-contractors has failed in an appeal against an income tax demand for in excess of £42 million.
The First-Tier Tribunal rejected the company’s plea that it was not liable because construction workers had been paid via its Isle of Man-based parent company.
The tribunal noted that the construction industry tax compliance scheme (CIS) had been put in place to tackle difficulties in collecting appropriate tax payments within an industry which attracted large numbers of itinerant workers who were often paid ‘cash in hand’. The scheme required contractors to make direct deductions from sums paid to sub-contractors, save where a sub-contractor was exempted from the scheme and permitted to receive gross payments.
Between 2002 and 2010, a scheme was operated whereby sums due from the company to sub-contractors were paid by its offshore parent company. Her Majesty’s Revenue and Customs (HMRC) took the view that those arrangements did not affect the company’s liabilities under the CIS and raised tax demands totalling £42,751,508. The company’s authorisation to receive gross payments was also withdrawn.
Dismissing the company’s appeal against those decisions, the tribunal observed that the company had an obligation, as a principal, to make payments to its sub-contractors from sums received, gross, from its own clients. It mattered not that the sub-contractors were in fact paid by the off-shore company, subject to a 5% management fee in respect of its role as a ‘paying agency’.
Arguments that HMRC’s demands were excessive were also rejected and the cancellation of the company’s gross payment status was confirmed. There was, the tribunal ruled, no basis on which the company could establish a reasonable excuse for having failed to make the necessary deductions.