A question of best judgement?
Justine Riccomini discusses the outcome of the most recent CIS case to come to the Tribunal, which concerns itself with the age-old problem of the deductions for cost of materials from the gross payments to a subcontractor.
In the case of Elmpine Developments Ltd  TC 07830/  UKFTT 0351 (TC), the taxpayer (“Elmpine”) appealed against a determination made under Regulation 13(2) of SI 2005/2045 [Income Tax (Construction Industry Scheme) Regulations 2005] which allows an HMRC officer the discretion of using their ‘best judgement’ when computing liabilities and corresponding deductions.
Previous cases include the notable Van Boeckel v C&E Commrs  1 BVC 378 which imposed a protocol whereby the Tribunal must satisfy itself initially that the conclusions of the officer are unreasonable before proceeding to hear the detail.
In this case, Elmpine’s appeal made the representation that the officer had chosen not to take into account a crucial invoice containing a breakdown of labour and materials from a sub-contractor, which was issued when the sub-contractor was in voluntary liquidation. In its examination, the FTT found ‘no reason’ why a company in the process of a voluntary liquidation could not issue a valid invoice, and therefore, why the invoice could not be taken into account by the officer. As such, it was concluded by the FTT that the officer had acted unreasonably by refusing to admit the invoice and disallowing the materials costs in their entirety.
The disagreement came to light following a compliance review by HMRC in 2016 whereby HMRC discovered that Elmpine had not registered under CIS although it had been carrying out relevant works since October 2013. The business registered under the CIS in November 2016 and HMRC proceeded to retrospectively assess the amounts considered to be due to it between October 2013 and October 2016.
Following various adjustments to the computation, which were agreed by Elmpine, there remained a question over an invoice from AKY Contractors Limited which reflected a breakdown of the total payments of £648,500, as to £423,240 related to materials and £225,260 related to labour.
The HMRC officer refused to admit the invoice as the company was in liquidation and had been for over 9 months by the time the invoice was rendered. After some to-ing and fro-ing, HMRC resolved to issue a Reg.13(2) Income Tax (Construction Industry Scheme) Regulations 2005 determination for a total of £295,133 (reduced to £250,146 following a review), and based on total gross payments of £833,820. The disputed sums within that determination amounted to £639,770 of which the CIS withholding was £191,931.
Elmpine appealed to the Tribunal in January 2019 following a request for a Statutory Review, the outcome of which was to uphold the HMRC review and determination, albeit to remove £22,000 from the assessment which had been incorrectly attributed to the wrong tax year.
The FTT decision, which was published on 2 September 2020, was to partially allow the taxpayer’s appeal on the basis that HMRC had acted unreasonably by choosing not to take account of evidence which related to the cost of the materials purchased. This led to the due amounts being adjusted by the Tribunal Judge, who said that he found the HMRC officer’s approach “very hard to understand”. The final AKY Contractors Ltd 30% withholding was calculated to be due at £64,959 based on a gross value of £216,530 – quite some way away from the original determination of three times that, of £639,770.
The legislation governing the deduction of tax under the CIS is set out in s60 Finance Act 2004. It remains to be seen whether HMRC will choose to appeal this decision, which by its very nature is not binding… but does seem eminently sensible. Making use of the ability to query “Best Judgement” therefore proved worth the effort in this case.