The Beech Developments case: Can HMRC cancel an existing CIS liability determination?
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
3 July 2023
We set out how a case involving Construction Industry Scheme (CIS) determinations has been referred to the Court of Appeal for judicial review.
Should HMRC be permitted to not issue a “non-liability direction” where a “Liability Determination” has been issued previously for the same amount? This question recently arose in the case of Beech Developments and Ors. v HMRC, where the High Court was asked to consider whether an application for a judicial review was appropriate.
This case concerns itself with CIS deductions. The contractor in question, Beech Developments Ltd, paid a subcontractor gross when deductions should have been made according to the scheme rules. Under Part 3 Chapter 3 FA 2004 and the Income tax (CIS Regs) 2005, this creates a liability on the contractor.
In 2019, an officer of HMRC issued a Liability Determination under s.61 FA 2004 based on liabilities of £344,000. This power enables HMRC to assess amounts which a contractor has failed to deduct under the CIS.
Beech Developments made a judicial review application on the grounds of a material error of law when HMRC concluded it was unable to issue a so-called “non-liability direction” (NLD) in respect of a tax bill. A NLD is a power under Reg 9(5) of SI 2005 No. 2045 which enables HMRC to direct that a contractor is not liable to pay the amounts assessed under a Liability Determination, subject to certain conditions. Issuing the NLD would have the effect of nullifying Beech’s liability and passing it on to the subcontractor to settle instead.
The contractor asked that HMRC issue a NLD to effectively cancel out the original Liability Determination as assessed because it had made payment to the subcontractor in circumstances which allowed a NLD to be issued.
In the opinion of Beech Developments, HMRC had unlawfully declined to utilise its powers to issue a NLD. However, HMRC argued that it was prevented by statute from issuing this because the two regulations were mutually exclusive, so it was unable to cancel out the liability using Reg 9(5).
Three cases which don't support the request for a judicial review
HMRC contended that there are three cases which have taken place, namely Ormandi [2019] UKFTT 667 (TC); North Point [2021] UKFTT 259 (TC) and Hoskins [2012] UKFTT 284 (TC) which ostensibly do not support the claim which Beech is making, albeit there is some element of doubt within those decisions.
Decision
On 15 July 2022, Fordham J read out a seven-paragraph long decision in which he granted permission to appeal to the Court of Appeal in respect of a judicial review to be undertaken on this point of law. He concluded that in his opinion, HMRC could potentially utilise Reg 9(5) to exempt the contractor from the liabilities under the determination: “In broad terms, a regulation 9(5) NLD is empowered in this situation: where there is a deficit in terms of sums which a contractor should have deducted and passed on to the Revenue, in respect of the tax liability of a subcontractor; but where statutorily criteria are satisfied relating to the excusability of that default and the subcontractor's direct accountability for the liability.”
However, he stated: “I am not deciding whether there is an arguable defence; but whether there is an arguable claim.” In other words, his role was not to decide on whether the power existed or could be used by HMRC to cancel out the original determination. Instead, he had been tasked with deciding whether, due to the arguments put forward by both sides, there was sufficient doubt concerning the interaction of the two pieces of legislation governing the Liability Determination and the non-liability direction that it would be appropriate to allow an appeal to the Court of Appeal on the point of the judicial review. In summary, as Fordham J stated, “…the threshold of arguability is crossed”.
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