In the recent case of John Scofield v HMRC (2011), the First Tier Tax Tribunal may have important consequences about how HMRC operates the Construction Industry Scheme.

The Construction Industry Scheme or CIS is HMRC’s scheme for the deduction of tax at source for the self employed and other businesses being paid to carry out or arrange construction work. These subcontractors should register with HMRC. Those with a good history of tax compliance where the risk of future default is low can apply for enhanced registration which allows them to be paid gross, rather than subject to the usual deduction of tax. HMRC can cancel a subcontractor’s gross payment status at any time if they decide that a fresh application at that time would be refused. The withdrawal of gross payment status can seriously undermine a business.

HMRC had withdrawn Mr Scofield’s gross payment status after ten failures of tax compliance were identified. The withdrawal was made by the HMRC automated computer system which was programmed to identify such failures. In fact eight of the ten compliance failures were HMRC errors and another should have been disregarded because Mr Scofield had a reasonable excuse. The only outstanding compliance failure was a late payment of income tax.

The Tribunal allowed the appeal and found the withdrawal of Mr Scofield’s gross payment status was invalid. It was invalid because HMRC had not properly exercised its discretion. An automated computer cannot exercise discretion. It was not enough that determinations could be reviewed by an HMRC official after the event if the subcontractor appealed. The Tribunal said that if the subcontractor had a reasonable excuse for the compliance failure, that excuse had to be considered first before any determination to withdraw gross payment status was made.

This case is important because it throws doubt on how HMRC operate the Construction Industry Scheme and the way that they rely on their automated computer system to determine the withdrawal of gross payment status. Yet again the Tribunal has decided in favour of the taxpayer against HMRC seeking to cut costs in how it administrates the tax system.