Judgment summary
The Tribunal considered appeals by Brants Bridge Limited and Braccans Limited against HMRC decisions dated 12 April 2023 refusing to make directions under regulation 9(5) of the Income Tax (Construction Industry Scheme) Regulations 2005 relieving them of liability for under-deducted CIS payments to subcontractors (paras 1-2).
HMRC's case was that Brants Bridge failed to deduct and account for £549,949.34 and Braccans failed to deduct and account for £312,926.60 (para 2).
The only issue before the Tribunal was whether the Appellants took reasonable care to comply with section 61 FA 2004 and the CIS Regulations, since HMRC did not dispute that the failures were due to errors made in good faith or a genuine belief that CIS did not apply (paras 17-18).
The Tribunal applied the Perrin test as adapted for CIS reasonable care, and the standard summarised in PDF Electrical v HMRC, namely that the care required must be appropriate and proportionate to the particular contractor's business (paras 18-20).
The appeals were dismissed, the Tribunal finding that the Appellants did not take reasonable care (paras 118-119).
Background
Mr Yisroel Kohn operated a property business, primarily through Property 4 Investments Ltd (P4I), a holding company for a wider group of property-owning companies worth over £106 million, including the Appellants (paras 25-27).
Braccans was set up in May 2016 to purchase an office building in Bracknell for £3.1 million, converted into residential apartments; some apartments were later sold externally due to a co-investor wanting to exit, with the remainder transferred to a subsidiary (paras 31-33).
Brants Bridge was set up in March 2017 to purchase three further office buildings in Bracknell for an aggregate £6,450,000, with further expenditure of over £4.5m, intended for conversion into 79 residential apartments and subsequent transfer to a subsidiary (para 35).
Mr Kohn relied on an internal team ("the Team") at P4I, recruited from within his Orthodox Jewish community in Stamford Hill, none of whom held formal professional qualifications, to advise on CIS and other compliance matters (paras 41-51).
The Team, principally Tulli Gross, advised that CIS did not apply because the Appellants were "investment" companies below the relevant threshold, intending to retain the properties rather than sell them (paras 53-56).
HMRC's accountant correspondence (Mr Silver) had separately told HMRC, in the context of VAT recovery, that there was an intention to sell the developed flats, which Mr Kohn explained referred only to intra-group transfers to a subsidiary for VAT purposes (paras 36-38, 56-58).
Core dispute
The dispute centred on whether the Appellants took reasonable care to comply with section 61 FA 2004 and the CIS Regulations, as required by Condition A in regulation 9(3)(a) of the CIS Regulations, in order for HMRC to be required to make a direction relieving them of liability under regulation 9(5) (paras 9-10, 18).
The Appellants argued that Mr Kohn reasonably relied on an experienced, trusted internal Team recruited from his community, who had told him they had read and understood HMRC's CIS guidance and concluded that the Appellants were not "mainstream" contractors because they were investment companies below the deemed contractor threshold (paras 91-92).
HMRC argued that the Appellants' conclusion that they were not mainstream contractors did not reflect the statutory wording, case law or HMRC's published guidance, and that reasonable care required more than uncritical reliance on an unqualified and untested internal team, particularly given the scale of the business and the obvious tension between the intended VAT treatment (requiring an intention to sell) and the claimed CIS investment status (requiring retention) (paras 78-90, 103-113).
Court findings
The Tribunal found that a conclusion that the Appellants were not "mainstream" contractors did not go with the grain of the legislation, authorities (including Mundial Invest SA v Moore) or HMRC's published guidance (CIS340 and CISR12080), though this alone did not determine whether reasonable care had been taken (paras 78-90).
The Tribunal held it was reasonable for Mr Kohn to recruit Team members from within his community without formal qualifications, given the characteristics of that community and his business model (paras 93-94).
However, the Tribunal found it was not reasonable for Mr Kohn to allow the Team to take responsibility for CIS compliance without testing their knowledge and understanding of the CIS, given the scale and value of the projects and the risk of a conceptual error being repeated across similarly structured projects (paras 95-101).
The Tribunal further found that Mr Kohn acted unreasonably in ignoring the clear tension between the VAT-driven intention to transfer properties to subsidiaries (which implied an intention to sell) and his understanding that CIS exemption required the properties to be retained as investments; he had no reasonable basis for assuming intra-group transfers had no CIS consequences despite knowing they affected VAT (paras 102-113).
The Tribunal also noted the absence of any written record of the Team's CIS analysis or reasoning, which further indicated a lack of reasonable care, although it accepted there was no formal legal requirement to keep such records (paras 114-117).
Outcome
The Tribunal concluded that the Appellants did not take reasonable care to comply with section 61 FA 2004 and the CIS Regulations, and that HMRC were correct to refuse to make a direction under regulation 9(5) on the basis that Condition A was not satisfied (para 118).
Both appeals were dismissed (para 119).
Major issues / areas of contention
- Whether the Appellants took reasonable care to comply with section 61 FA 2004 and the CIS Regulations under Condition A in regulation 9(3)(a).
- Whether the Appellants were 'mainstream' contractors within section 59(1)(a) FA 2004 rather than 'deemed' contractors below the threshold.
- Whether reliance on an internal, unqualified Team recruited from Mr Kohn's community constituted reasonable care without testing their CIS knowledge.
- Whether there was an unresolved tension between the VAT treatment (requiring intention to sell) and the claimed CIS investment status (requiring retention of property).
- The relevance, if any, of the absence of contemporaneous written records of the CIS advice given.