In Kalinga Holdings Limited v HMRC [2026] TC09812, the First Tier Tribunal (FTT) found that a company that purchased an old office building to convert into residential flats was liable to make deductions under the Construction Industry Scheme (CIS) and it had not taken reasonable care to comply with that obligation.
In 2017, Kalinga Holdings Limited (Kalinga) bought a large and unused Ministry of Defence office building, Sapphire House, in Telford for around £3m.
- The property was purchased with the intention of developing the office building into flats to sell for a profit.
- This was Kalinga's first and only project.
- Kalinga soon realised that the nature of the building and its location made it highly unlikely the flats would sell, so it decided to retain them and rent them out.
- Planning permission was granted for conversion in two phases.
- 28 April 2017: to convert some of the office space into 51 residential apartments.
- 10 August 2017: to convert the remaining office space into 80 residential apartments.
- Kalinga subsequently developed the property into 131 residential flats.
- Between 2018-19 and 2020-21, Kalinga paid around £1.45m to three construction subcontractors.
- Kalinga made no Construction Industry Scheme (CIS) deductions, assuming the CIS did not apply.
- HMRC later concluded that £383,337 should have been deducted and paid over.
- In January 2020, 51 flats were sold to an associated company for £3.5m.
- In August 2020, the remaining 80 flats were sold to another associated company for £5.5m.
- Kalinga applied for a direction under regulation 9(5), which HMRC refused.
- This would have relieved Kalinga of its liability to account for amounts under-deducted from subcontractors within CIS.
A contractor may be 'mainstream', businesses whose activities include construction operations, or 'deemed', non-construction businesses spending over a threshold on construction.
- Kalinga believed it was a property investment company, not a developer, and therefore outside CIS unless it exceeded the 'deemed contractor' threshold of £1m per year, which it did not.
- Kalinga later accepted that it was a contractor for CIS purposes.
Kalinga claimed it took reasonable care to comply with its obligations under the CIS by reading and following HMRC's guidance.
- Kalinga's director, Mr Neal Patel, sought informal guidance from their accountant.
- Their accountant said he was not a CIS specialist and suggested they read HMRC's CIS340 guidance.
- Based on reading CIS340, it was concluded that:
- A property investment company, i.e. one that retains property long-term, does not have to register for CIS.
- Because Kalinga planned to keep the flats as investments and rent them out, CIS did not apply.
- They did not look at other HMRC guidance, did not check definitions more broadly, and did not seek specialist tax advice.
The flats were later sold to two associated companies.
- VAT planning was carried out to recover VAT of over £0.5m on the purchase of the original office building.
- Kalinga retained the freehold but granted long leases to the subsidiaries at premiums for 99-125 years, meaning that the sales transactions were Zero-rated for VAT purposes.
Kalinga did not seem to have thought or sought advice about the wider tax position and the effect that might have on its ability to retain the property long-term.
- HMRC considered that Kalinga would be a mainstream contractor and therefore CIS should have been operated. It was also not satisfied that Kalinga had taken reasonable care to comply with the provisions of the CIS.
- Kalinga believed it had fully understood the guidance and there was no need to confirm or check the position. This was despite the guidance not making any meaningful reference to the CIS position on the differences between property development and investment.
- Further professional advice should have been sought to clarify the position.
- There was no mention of this matter being discussed with Kalinga's accountant for VAT purposes.
- It was stated that the original intention was to sell the flats, but this then changed, and the flats were to be retained for investment purposes. The statements of intention were inconsistent.
- Kalinga Appealed HMRC's decision.
The First Tier Tribunal (FTT) found that:
- Neither Mr Patel nor Kalinga's accountant investigated whether their understanding matched HMRC's interpretation, nor did they check whether selling the flats aligned with their assumptions.
- CIS340 was not very clear, especially on the distinction between property developers and investors.
- A thoughtful reader of the explanation of 'mainstream' contractor might conclude that a property investment company could, in certain circumstances, be a 'mainstream' contractor.
- The scale of work, i.e. £1.45m in construction costs, should have signalled that this was a serious tax issue requiring careful analysis.
- CIS340's webpage included links to other relevant HMRC materials, including the CIS manual, if they had chosen to explore further.
- Kalinga's belief that CIS did not apply was genuinely held.
- The company did not take Reasonable care in reaching that belief.
- Reasonable care for making a decision as to whether CIS applies involves:
- Seeking competent professional advice when the issues are significant.
- Recognising the limits of one's own expertise.
- Reading around the subject where guidance is ambiguous.
- Kalinga did none of these things.
- HMRC acted correctly in refusing to make a direction under regulation 9(5), meaning Kalinga remained liable for the under-deducted CIS tax.
The appeal was dismissed.
Useful guides on this topic
CIS: Contractors and Subcontractors
What is the Construction Industry Scheme? Who does it apply to? How does it work?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?
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