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June 13, 2016

Construction Industry Scheme CIS - Appealing Penalties

Under the Construction Industry Scheme (CIS), contractors are required to file a monthly return and deduct money from subcontractors’ payments before passing it directly to HM Revenue & Customs.


Where a contractor fails to submit a CIS return or make payments to HMRC, they may be charged fixed and discretionary penalties.

The penalties for failing to comply are punitive as the CIS was introduced to prevent tax evasion by subcontractors. Therefore it is important that contractors and subcontractors are aware of their responsibilities

Where a CIS penalty has been issued, it may not be payable if the contractor can show that either:

1. There has been no loss of tax [Regulation 9(4)], or

2. The contractor took reasonable care to comply with the Act, and

  • The failure to deduct was due to an error made in good faith, or
  • They held a genuine belief that the Act did not apply to the payment [Regulation 9(3)]

The recent case of Donnithorne v HMRC illustrates how individuals can unknowingly and unexpectedly become responsible for CIS returns and payments. It also sets out some of the factors that the Tribunal will consider when deciding whether or not the penalties are due.


Eric Donnithorne was the director of two nursing homes.

He wanted to ensure that various additions and improvements were made to the buildings of one of the homes so he personally arranged for construction work to be done.

Donnithorne failed to file CIS returns and made payments to three subcontractors without making a deduction, resulting in a penalty of £21,000.

The Case

The courts noted that this was an unusual case as Mr Donnithorne inadvertently acted as a contractor by arranging for the construction work to be done.

If the nursing home companies had engaged the builders themselves, there would have been no requirement to comply with the CIS provisions as they were not ‘construction companies’.

However, as Donnithorne would have been sued if the subcontractors were not paid, this made him an intermediary for CIS purposes and he therefore had a liability to deduct and account to HMRC for tax under the CIS scheme.

Donnithorne accepted that he was responsible for complying with the CIS scheme but argued that the penalties were not due under Regulation 9.

Regulation 9(4)

HMRC were not satisfied there had been no loss of tax, therefore the conditions of Reg 9(4) was not met.

Regulation 9(3)

Donnithorne argued that he had been unaware of any potential liability to deduct tax under the CIS regulations.

Evidence was provided which showed that the subcontractors had told him that they were self-employed and ‘registered with the Inland Revenue’. Donnithorne thought that this meant that he was not required to make deductions under PAYE (not knowing that CIS could even apply) and that the subcontractors would pay tax on their net profits via their self-assessment tax returns.

The Decision

In light of the unusual facts of the case and the fact that Donnithorne was not a trader who should have been aware of the CIS regulations, it was held that he took reasonable care and his liability to account for CIS payments was discharged, as were the penalties.

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