A formwork specialist has been cleared of breaking the law by making payments to a labour agency whose supply chain had been involved in tax fraud.
First Tier Tax tribunal judge Michael Blackwell and tribunal member Gill Hunter overturned an unspecified financial penalty issued in 2022 by HMRC to Cheema Construction Services (CCS) Ltd – a supplier of concrete formwork to a number of tier one contractors – and its director, Kulminder Cheema.
The tax authority had issued the penalty with after finding that the firm knew, or should have known, that it was using workers from agencies who had fraudulently evaded tax.
In a ruling last month, Blackwell and Hunter accepted that Cheema “had a lax attitude to some parts of due diligence”, but found that the tax regulator had not shown that CCS had known, or should have known that its payments were connected to fraudulent transactions by other firms.
CCS, based in Chatham in Kent, recruits workers as needed from labour suppliers to develop concrete formworks.
HMRC flagged some tax deductions on payments CCS made to Woodside Contracts Limited, a labour agency based in Walsall.
It ruled that HMRC said that these payments were directly linked to five other labour agencies supplying Woodside, which had all evaded tax.
The tax authority was “satisfied that…CCS knew, or should have known, that this was the case”, court documents released on Tuesday (18 February) show.
In 2022, HMRC imposed the financial penalty on CCS and also took away the firm’s right to deduct VAT paid on its purchases of any goods of services from Woodside for the period between January 2020 and July 2021.
However, CCS and Cheema took the dispute to the First Tier Tribunal, arguing that HMRC could not connect its loss of tax revenue to transactions between CCS and Woodside.
CCS did not dispute that the five labour firms evaded tax.
But it argued that HMRC had not carried out enough due diligence to prove that CCS’ payments went directly to the five companies which evaded tax.
In its submissions to the tribunal, HMRC argued that Woodside only used the five labour suppliers. This meant all the labour supplied by Woodside to CCS could be “traced to a fraudulent tax loss”, it added.
HMRC also said that Woodside‘s Construction Industry Scheme (CIS) returns suggested that Woodside only used those five firms.
Under the CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC.
The tribunal said that it would not have been obvious to CCS that the labour provided by Woodside came from sources involved in fraudulent activities.
It said: “We do not find that HMRC have shown that the only reasonable explanation for circumstances surrounding CCS’s transactions with Woodside was that they were connected with fraud,” the tribunal found.
It added that HMRC had not demonstrated that CCSL should have known “on balance of probabilities” that the transactions were connected to fraud.
It overturned the financial penalties issued to CCS.
