HT-2023-000006 - [2024] EWHC 2516 (TCC)

J&BH has raised an issue as to the appropriate payee as to 20% of the sum of £95,466.61 which I have held to be due to A & V in respect of the measured works and the varied works.

It is J&BH’s position that by reason of Section 61(1) of the Finance Act 2004 and Regulation 7(1) of the Income Tax (Construction Industry Scheme) Regulations 2005 it is obliged to deduct 20% of the sum of £95,466.61 (namely £19,089.32), pay that amount to HMRC, and only pay the balance of 80% to A & V.

In paragraphs 34 to 42 of its Note prepared for the purposes of the handing down of the Sixth judgment, J&BH submits:

34.

Historically, A&V had gross payment status so JBH was not required to and did not make any CIS deductions. A&V had recognised in its applications, for example its Application 14, that ““IMPORTANT- This Valuation is exclusive of VAT & CIS Deductions” ….

35.

However, as the Court is aware from the evidence it has received, A&V has not met these tests, including its failure to pay its tax on time.

36.

On 15 March 2024, JBH received a letter from HMRC dated 5 March 2024 notifying it that A&V’s tax treatment for the CIS was changing from 9 April 2024. The letter stated: [Appendix D – HMRC letter]

“From that date any payments that you make to this subcontractor, including any payments for work done before that date, must be made net, with tax deducted at 20%.”

37.

On 2 September 2024, JBH searched for A&V on the CIS portal and the entry confirmed that it was registered for standard rate, i.e. 20% deduction. [Appendix E – HMRC CIS Portal Check]

38.

It follows that while the Court has decided the sum due to A&V for the Contract Sum, any order should reflect, or allow, for the fact that JBH has a legal obligation to deduct 20% of the £95,446.61 and instead pay it directly to HMRC.

39.

There is no basis for A&V to assert that this statutory obligation and mechanism should not apply.

40.

Even A&V’s final account had stated “IMPORTANT- This Final Account is exclusive of VAT & CIS Deductions” ….

41.

The obligation to pay CIS sits with JBH. If the gross Contract Sum is paid in full to A&V, JBH has very real concerns that it will not be paid to HMRC as there is no primary obligation on A&V to pay CIS. Further, JBH would be required to pay CIS on top of the gross sum paid which would produce an unfair result.

42.

In contrast, there is no reason for the Court to doubt that JBH would pay the deducted sums to HMRC. JBH has a statutory obligation to do so and will do so. JBH is content for its confirmation that it will pay the deduction of £19,089.32 to HMRC by a certain date to be included as a recital to the Court’s order.

In A & V’s Submissions dated 4 September 2024, it submits:

4.1

Within JBH letter dated 02.09.2024 first paragraph of section C (CIS Deduction) JBH are saying (miraculously) that they have to comply with the Law now and that any payment made from JBH to A&V has to be subject to a statutory of 20% CIS deduction because they have received a purported Letter from HMRC dated 5 March 2024 saying that A&V’s tax code has changed now and that any payments made to A&V must be made net, with tax deduction at 20%. Also, within paragraph three of section C, JBH insist to remind A&V that they are Legally required to deduct this 20% and pay it directly to HMRC.

4.2

If JBH would have not breached the contract several times but instead have respected the Sub-Contract clauses and their obligations; the Construction and Regeneration Act and the Law back in Feb-March 2021 then JBH would not have to be now so legally required to deduct the 20% CIS but instead should have paid the sums in full as gross payment including the CIS as previously made. The sum that JBH are due to pay now is the Judgment award sum that JBH should have paid this in May 2021 when A&V were registered and entitled to receiving gross payments.

4.3

Furthermore, A&V has not been informed of any changes to its CIS tax code, it is a bit strange that JBH has been notified about these changes but not A&V, I will raise the issue with HMRC. However, even if this is the case, I do not trust that JBH will make any payments to HMRC in respect of any CIS deduction for A&V, putting A&V in even worse situation then it is already with HMRC.

4.4

A&V, therefore, disagree with JBH position regarding CIS deduction. A&V respectfully requests that the Court clarify that it is for A&V to manage its CIS obligation with HMRC and that JBH should not unilaterally deduct CIS from any payments as A&V is [no] longer JBH subcontractor and that the payment that JBH should make is following the Judgment award sum and not following a subcontractor payment application.

On one view, this point is a point which should have been raised by J&BH before the hand down of my Fifth judgment, insofar as it goes to the amount payable by J&BH to A & V. I do not understand that to be how J&BH puts its case, and, for the avoidance of doubt, I record that my Fifth judgment stands as determining the amounts due from one Party to the other subject to the exceptions in respect of adjudicators’ fees and interest, and in respect of the enforcement proceedings between the Parties (Mr Smith’s fees and the Enforcement Costs).

If the point does not go to the state of account between J&BH and A & V, then no issue of res judicata arises.

In my judgment, the time at which this point will become relevant is when I decide whether there should be a stay on any part of the judgment in favour of A & V against J&BH, and, if so, upon what terms.

At that stage, if J&BH wishes there to be a stay of execution, I would expect evidence to be available as to how my judgment would be treated in circumstances where my judgment records sums which should have been paid to A & V some years ago and which would not have been the subject of the CIS deductions if paid by J&BH when I have found they should have been paid.

For the moment, no adjustment is made in respect of the amounts which I have found due and payable.