Beech Developments v HMRC and how to respond to a CIS determination

A recent case before the Court of Appeal makes it clear that a taxpayer must act quickly if they wish to dispute an HMRC determination that they have not paid their Construction Industry Scheme (CIS) payments.

The issue

Under the CIS rules, if a contractor does not make an appropriate deduction from a payment to a subcontractor then HMRC may make a determination of the amount in question under reg. 13 of the CIS regulations. 

However, there is no provision that permits the sub-contractor to obtain a credit against their own liabilities for amounts that the contractor is required to pay but which have not been deducted. 

This means that where the sub-contractor does in fact meet their own tax liabilities, HMRC receives a windfall. This is because they receive payments from both the contractor and subcontractor on account of the same tax. In addition, where the contractor has simply made an innocent mistake they are left out of pocket.

This issue was particularly acute in the recent case of Beech Developments (Manchester) Ltd and others v HMRC [2024] EWCA Civ 486. The case involved a construction group with a purely internal subcontractor company that co-ordinated external contractors on behalf of other group companies.

The facts

The six appellant companies were in the same group and were each established to carry out a specific construction project. They all made payments to another group entity, Beech Construction Partnership Ltd (“BCPL”). From a commercial perspective BCPL acted as the main contractor in relation to each project, and it operated the CIS regime on the sub-contracts that it entered into. 

However, the appellant entities were also “contractors” for CIS purposes and BCPL was a “sub-contractor”, so the appellants should have operated the regime as well. They did not do so. As a result, HMRC issued determinations for a little under £2.5m – a fairly substantial windfall for HMRC.

The appellants appealed the determinations and also sought a regulation 9 direction. A regulation 9 direction allows a contractor to be relieved of the obligation to make a payment of underdeducted sums to HMRC if (broadly speaking) either: (i) the contractor took reasonable care to comply and made an error in good faith or (ii) the subcontractor has in fact paid the tax that would have arisen from the payments.

HMRC refused to consider the application for a reg 9 direction on the basis of reg 13(3), which states:

“(3) A determination under this regulation must not include amounts in respect of which a direction under regulation 9(5) has been made and directions under that regulation do not apply to amounts determined under this regulation.”

HMRC maintained that this meant that there was no power to make a regulation 9 direction once a regulation 13 determination had been made.

The decision

The taxpayers brough judicial review proceedings and lost at first instance. On appeal to the Court of Appeal, the taxpayers won.

Falk LJ held that the words that a regulation 9 direction “does not apply” to amounts covered by regulation 13 does not prevent a regulation 9 direction from being made. It just means that such a direction would not have effect unless and until the regulation 13 determination has been overturned or withdrawn. HMRC do have power to issue a direction under reg. 9 in respect of an amount that has been the subject of a determination under reg. 13. Provided that the determination remains capable of adjustment, reg. 13(3) provides a means for such a direction to be reflected in the determination.

What does it mean?

So, what does all this mean for a contractor faced with an HMRC determination? In short, it means that a contractor faced with a regulation 13 determination must act quickly. They will need to both appeal the determination and apply for a regulation 9 direction. Time is precious as, once the regulation 13 determination is finalised, a regulation 9 direction will not have any effect.

CIS issues? The Tax Team at Clyde & Co can assist further.