Construction businesses could face significant labour tax risks

In a recent case, Evancast (Kent) Limited (EL), a company active in the construction industry which regularly engaged the services of subcontractors, had not made Construction Industry Scheme (CIS) deductions on payments to a supplier whose services they viewed as payroll related. However, the supplier was acting like a labour agency, providing workers to EL who were carrying out construction operations under contractual terms between the workers and the supplier. The supplier therefore fell within the definition of a “subcontractor” for CIS purposes and, as contractor, EL should have deducted CIS tax from payments made to them. In the 2018/19 tax year the payments made by EL to the supplier exceeded £3m so the CIS tax at stake was significant.

HMRC held EL liable for the CIS tax it should have deducted, which EL claimed it should not have to pay because, under Regulation 9(3) of the CIS regulations, it took reasonable care to comply with the CIS and the failure to deduct the CIS tax was an error made in good faith. HMRC refused EL’s claim arguing that it should have had a significant knowledge of the CIS rules and did not take reasonable care to apply CIS correctly to this supplier. The tribunal agreed with HMRC, and the appeal was dismissed.

What are the three key takeaways?

1. The case reinforces the importance of labour supply chain due diligence. EL did not undertake any checks on this supplier to understand what their risks were and how to mitigate them, and this mistake proved costly. The tax risks here potentially extended beyond the CIS to, for example, the operation of VAT, the agency legislation, and the off payroll working rules. A clear process to consider all the risks should be operated. This is set to become even more important as we approach April 2026 when the rules on who is responsible for PAYE on payments made to the workers supplied via umbrella companies are expected to change.
2. It is a timely reminder that the CIS can apply to payments to agencies providing labour for construction operations. Missing this is a common mistake made by many contractors when operating the CIS. All contractors in receipt of such supplies of labour should ensure they are operating the CIS when required to do so.

Taxpayers are expected to provide a high standard of proof to demonstrate that the required level of reasonable care has been exercised. EL said that it did not believe CIS applied to the invoices from the supplier, but EL was actively involved in the construction industry, and much was expected of it. Although it had engaged a bookkeeper and tax advisers which it relied upon, there was no written evidence that EL had consulted with them or otherwise checked the CIS position in relation to this supplier. The tribunal therefore could not establish, on the balance of probabilities, that EL had exercised reasonable care, confirming the importance of documenting written professional advice.