Harbron Recruit Ltd wins appeal against HMRC

Introduction

The First-tier Tribunal recently ruled in favour of Harbron Recruit Ltd (HRL) in a significant case concerning the Construction Industry Scheme (CIS) and the interaction with agency rules. The tribunal found that HRL had acted with reasonable care in its tax compliance, overturning a substantial HMRC determination.

Background

HRL, a family-run business led by Mr James Harbron, provides labour to the construction industry. The company faced a challenge from HMRC, which claimed HRL owed £483,675 under the CIS for payments made to intermediary agencies between 2017 and 2021. HMRC argued that HRL misunderstood the interaction between the CIS and agency rules, leading to incorrect nil returns.

The Dispute

HRL's operations involved contracting with agencies that engaged workers for construction projects. In 2014, changes to the agency rules deemed workers employed by agencies if subject to supervision, direction, or control. HRL, advised by specialists, believed these changes negated the need for CIS deductions, as workers were paid under PAYE by the agencies.

HMRC's Position

HMRC initiated a compliance check in 2020, asserting that HRL failed to apply CIS correctly. They issued a warning letter and proposed determinations for the alleged under-deducted amounts. HMRC accepted that Condition B of the CIS regulations applied to a portion of the excess but refused to acknowledge that HRL had acted with reasonable care under Condition A.

The Tribunal's Findings

The tribunal, led by Judge Anne Redston, determined that HRL had indeed acted with reasonable care. The decision considered HRL's steps to ensure compliance, including seeking professional advice and implementing systems to identify workers' employment status. The tribunal highlighted the complexity of the CIS and agency rules interaction, which even seasoned professionals found challenging.

Conclusion

The tribunal's decision to allow HRL's appeal was based on the company's diligent efforts to adhere to tax obligations. It emphasised that HRL's misunderstanding of the law did not equate to negligence, and the mistake was made in good faith. Consequently, the tribunal directed HMRC to issue a determination of nil liability for the disputed amounts.

Implications

This ruling underscores the importance of understanding the nuances of tax regulations and the potential for reasonable care to mitigate penalties. It serves as a reminder for businesses to seek expert advice when navigating complex legal frameworks.

Learn More

For more information on contractor law, see BeCivil's guide to Contractor Law.