The Supreme Court’s decision in JP Whitter (Water Well Engineers) Limited highlights the need for those in the construction sector to comply fully with all the requirements of the Construction Industry sub-contractor Scheme. Under the CIS, payments made to a sub-contractor are subject to 20% withholding tax, unless the contractor benefits from gross payment status. Given that margins in the sector are low, a 20% withholding has a big impact – not least because main contractors may be concerned that sub-contractors do not have HMRC approval.
The company had been registered under the CIS for 25 years before a string of compliance failures in 2009-11. HMRC at first allowed the company’s appeal against loss of gross payment status but after PAYE failures for seven months decided to cancel CIS registration. The company’s evidence was accepted by the First Tier Tribunal – that loss of status would cost it 60% of turnover and 80% of its employees. However, the Supreme Court held that HMRC’s discretion in allowing continuing registration had to be exercised in the context of the CIS – and ignore wider factors, such as the impact on the business. The whole point of the CIS is to reduce tax evasion, which is why the rules are strict.