In Schotten & Hansen (UK) Limited v HMRC [2017] TC05679 a taxpayer escaped a £28k penalty. Ignorance of the CIS rules was a reasonable excuse in relation to the use of foreign sub-contractors.

  • Mr and Mrs Hansen came to the UK from Denmark and took advice at that time from a large firm of accountants before switching to another reputable firm who handled their company (‘S&H’) tax affairs.
  • S&H registered for the Construction Industry Scheme under the old rules in 2005, but no returns were filed and when the new CIS rules applied their case was ignored by HMRC as it was not ‘live’.
  • HMRC commenced a CIS compliance check in 2014 and it was established that S&H had been engaging a German firm, Roland Langenegger GmbH (‘RL’) as its only sub-contractor since 2008.
  • It was discovered that the company had failed to operate CIS. In 2014, following HMRC’s visit, S&H and RL both registered for CIS. RL obtained gross payment status.
  • HMRC calculated that S&H should have deducted some £395,000 in CIS: there is no provision under the CIS rules which allows the back-dating of gross status. under CIS.
  • Late filing penalties were assessed under s98A TMA for 2010-11, as reduced by the transitional rules and sch55 FA 2009 for years 2011 to 2014.

S&H appealed the penalties on the basis that they had a reasonable excuse for late submissions: they had assumed that because their sub-contractor was outside the UK tax system it would therefore outside the CIS scheme. Its accountants were also unaware that the scheme applied to foreign company sub-contractors and had failed to pick up on this as an issue either. This single error was then repeated year on year.

The FTT considered whether the company should have had checked the assumption that CIS did not apply.

  • The taxpayer’s directors had obtained professional advice on the UK tax system throughout.
  • The CIS issue was then not advised upon by the company’s accountants as the company did not realise that it needed advice on this matter and the accountants did not realise that there was an issue.

The taxpayers’ appeal was allowed.


Taxpayers coming to the UK are expected to obtain appropriate advice and these taxpayers did. In the midst of a taxsystem of growing complexity we have another case where reliance on accountants provided a reasonable excuse.  As it is not that common for business to use foreign firms for sub-contracting it is easy to see how accountants could have overlooked CIS.

Additionally, there would not have been any loss of tax if the German company had realised that it should have registered for gross payment status.  One wonders whether it was also aware of the potential VAT or other direct tax implications.

Cross border trading is going to become ever more interesting with the new devolved tax regimes across the UK and post-Brexit.

Our links

Construction Industry Scheme

CIS: tax penalties

Case: Schotten v HMRC

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