Failure to take reasonable care with CIS payments loses Evancast (Kent) Ltd its Tribunal appeal

Justine Riccomini explains how Evancast (Kent) Limited lost its case at the First Tier Tribunal on a Construction Industry Scheme point by failing to take reasonable care.

On 21 November 2024, the First Tier Tribunal (FTT) issued a decision in the case of Evancast (Kent) Limited (EKL) v HMRC.

Background

Evancast (Kent) Ltd (EKL) was a contractor in the construction industry which necessitated the operation of CIS and making CIS withholdings from around 95% of its subcontractors. EKL met another business, Langdale & Goodfellow (L&G), in 2018, and reached a verbal agreement that L&G would supply the workers and EKL would outsource the administration work for payments to the subcontractors to L&G instead of doing this themselves.  

Without entering into a service level agreement obtaining details of the payments and the withholdings, or consulting their professional advisers, EKL made some assumptions – including that L&G were handling the CIS deductions as well as paying the subcontractors. In fact, what should have happened is that EKL should have made CIS withholdings from L&G on the payments it was sending to them, because L&G was technically a subcontractor to EKL under the CIS Regulations.

In a 2020 review, HMRC issued a letter under Regulation 13(2) of the Income Tax (Construction Industry Scheme) Regulations 2005 advising that a determination would follow containing assessments totalling around £925,000.  

EKL asked for HMRC to reconsider the decision, under Regulations 9(3) and 9(4) of the same Act on the basis that they had taken reasonable care to comply with FA04 S.61 and instead issue a direction under 9(5)  effectively absolving EKL from having to pay any additional CIS, on the basis that EKL had taken reasonable care to comply with the regulations.

However, HMRC did not agree and refused the Reg 9(3) and (4) claims, at which point EKL appealed to the First Tier Tribunal (FTT).  

EL therefore appealed the decision to the First Tier Tribunal (FTT), setting out the following grounds for appeal:

1. L&G were not withing the CIS regime because as far as EKL was concerned, L&G provided administrative and payroll services.
2. EKL had taken reasonable care and had complied with FA04 S.61, thus enabling them to comply with Regulation 9(3) of the IT(CIS) Regs 2005.  The relevant cases quoted in defence of their argument were Barking Brickworks Contracts Ltd and Nigel Barrett – which advanced the defence that no taxpayer could be fully aware of all HMRC guidance and legislation. 

The decision

Having examined the fact pattern, the FTT concluded that it was unable to find any consistency in approach by EKL in its approach to the outsourcing of the work, including the failure to obtain a written terms of agreement for L&G’s services, and an overall failure to understand L&G’s status in terms of them being a subcontractor of EKL in the context of the CIS legislation. There was no evidence of professional advice ever having been sought, nor had EKL consulted HMRC in writing or by evidencing their decision-making process by turning to the CIS guidance pages. 

As such, the FTT could not agree that EKL had exercised reasonable care, and dismissed the references to the two cases in EKL’s argument due the company already being well-versed in CIS matters over numerous years – thus making them aware of the existence of relevant legislation and guidance and it was imprudent of them to have been so imprecise with their due diligence upon engaging L&G.

The FTT determined that L&G was a subcontractor of EKL, as set out in the CIS340 guidance.

What can we learn?

This case gives us a valuable insight into the way the judiciary views the concept of reasonable care. In any tax matter it is vital to make sure an audit trail and written documentation is preserved to demonstrate the decision-making process at the time. Any contractual arrangements should be clearly set out and official guidance referred to – with proof of referral. An additional layer of security exists if professional advice has been sought, and that advice is in writing.