Interaction of CIS assessments and applications for relief

The Court of Appeal has upheld a company's appeal against HMRC's refusal to consider a claim under regulation 9 of the CIS Regulations to forego payment of amounts which should have been deducted under the CIS scheme: Beech Developments (Manchester) Ltd and others v HMRC [2024] EWCA Civ 486. The Court had held that the issue of a determination of the amount due under the CIS Regulations by HMRC does not, provided that determination is not final, prevent consideration of a claim by a taxpayer that HMRC should forego amounts due under regulation 9 on the basis either that the sub-contractor has fully accounted for tax on those amounts or that the contractor had made an error in good faith and took reasonable care.

Background

Beech was part of a group of companies involved in a construction project. Beech made payments to another group entity, BCPL, which acted as the main contractor. BCPL operated the CIS regime on the sub-contracts that it entered into, however, as between payments between Beech and BCPL, Beech as a contractor and BCPL a sub-contractor, such that the CIS regime should also have been operated on those payments. Beech failed to do so and as a result HMRC determined amounts under regulation 13 of the CIS Regulations.

Beech appealed those determinations and also applied for HMRC to apply regulation 9. Regulation 9 essentially allows HMRC to forego recovery of amounts which a contractor has failed to deduct where certain conditions are met (broadly where the error is made in good faith and the contractor took reasonable care or where the sub-contractor has paid tax in full on the payments).

HMRC refused to consider the application to apply regulation 9 on the basis that once it had made a determination under regulation 13 it was not allowed to apply regulation 9. In particular, HMRC pointed out that regulation 13(3) states that: “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.”

Beech sought judicial review of HMRC’s decision not to consider the application of regulation 9 on the facts. The High Court rejected that application, accepting HMRC’s interpretation of the interaction of regulations 9 and 13. Beech appealed.

Court of Appeal decision

Beech essentially argued that an article 13 determination did not preclude a regulation 9 direction. Beech argued that a direction could be made under regulation 9 while there was a determination, but it would not have any effect unless and until the determination has been reduced or cancelled.

The Court of Appeal recognised the attraction of the argument put forward by HMRC and accepted by the judge. The wording of regulation 13(3) invited a symmetrical interpretation of the two aspects of it. Firstly, that a determination under regulation 13 cannot include amounts if a direction has been made under regulation 9. Secondly, directions under regulation 9 do not apply to amounts determined under regulation 13.

However, following a detailed analysis of the provisions, the Court of Appeal has rejected HMRC interpretation of its powers under regulation 9 and found in favour of Beech.

Importantly, whilst it was clear from the wording that a regulation 9 direction meant that no assessment could be made under regulation 13, the second part of regulation 13(3) did not state that a regulation 9 could not be made. And the Court listed a number of contextual considerations that pointed to Beech’s interpretation being correct.

In particular, whilst a regulation 9 direction was final, a regulation 13 determination can later be adjusted up or down including to nil. As such, there was generally no symmetry between regulation 9 and regulation 13.

The Court also pointed to the lack of any cross-reference in regulation 9 itself to the provision in regulation 13 and considered that, whilst not determinative, if regulation 13(3) was intended to preclude a regulation 9 direction, then the lack of a cross-reference was surprising.

In addition, the Court pointed out that HMRC’s interpretation meant that the right of appeal against a refusal to accept that the conditions in regulation 9 are met could be nullified or removed by HMRC issuing a regulation 13 determination. That would be an extraordinary result. It was clearly appropriate for an appeal against a regulation 13 determination to raise as a ground of appeal that a regulation 9 direction should be made, but HMRC’s argument in relation to regulation 13(3) precluded such an approach. (Though HMRC did by concession agree that this would be appropriate.)

In addition, the Court rejected the argument that HMRC’s interpretation was necessary to prevent an open-ended approach to regulation 9 applications. The Court noted that Beech’s interpretation was not open-ended as once a regulation 13 determination became final, either by not being appealed or being upheld, then there would be no scope for challenging it on the basis that a direction should be made.

As a result, the Court has held that HMRC do have a power to issue a regulation 9 direction in respect of an amount that has been the subject to a regulation 13 determination. As a result, the Court quashed HMRC’s decision not to consider Beech’s claim under regulation 9 and directed HMRC to reconsider the claim.

Comment

The decision of the Court is clearly the equitable approach to interpretation of these provisions. HMRC had relied on the fact that they gave notice to Beech (and other taxpayers) of the need to make a regulation 9 application before any determinations are made and no such applications had been made. However, the Court noted that there is no statutory obligation on HMRC to do so and no statutory restrictions on the timing of applications under regulation 9. HMRC’s argument that they would not seek to recover unpaid tax by relying on their care and management powers in appropriate case where a direction should have been made was quite rightly rejected by the Court on the basis that “One should be taxed by law, and not untaxed by concession”.