Case: FTT decides that property investor was not a contractor engaged in a construction contract

[2018] UKFTT 0685 (TC)

Judge Michael Connell, David Earle

Decision released 20 November 2018

Construction industry scheme - Penalties for late filing of returns – Whether appellant was a ‘contractor’ engaged in a ‘construction contract’ within the meaning of FA 2004, s. 57 and 59 – Required to file CIS returns? - Mundial considered - No - Appeal allowed.

Thornton Heath LLP [2018] TC06831


The appellant had been charged penalties under FA 2009, Sch. 55 of £3,700 for failure to make monthly returns under the construction industry scheme (CIS) for the period March 2015 to April 2016 inclusive.

Two issues arose at the appeal:

whether the appellant was operating as a property development business or a property investment business with particular reference to the conversion of a building; and

whether HMRC had raised the penalties under the correct legislation.

The appellant had acquired a property in London in July 2007. At the time of the purchase, the ground floor was let to a convenience store and the first and second floors were let to a snooker club.

Upon expiry of the lease to the snooker club in 2014, the first and second floor were redeveloped by the appellant into nine residential units. A contractor was engaged to undertake the works in February 2015 and the redevelopment was completed on 27 April 2016.

The appellant retained the freehold and continued to let the ground floor to the convenience store. The residential units were sold under long leases and the appellant received ground rent.

HMRC advised the appellant to register as a contractor under the CIS legislation as it considered that the conversion of the upper floors to residential units was not a minor refurbishment and that the property investment business had taken on the mantle of a mainstream contractor.

The appellant registered for CIS in June 2016 and submitted backdated nil returns for March 2015 to April 2016. HMRC issued late filing penalties in March 2017.

As this was a penalty appeal, the burden of proof was on HMRC to show that the penalties had been correctly raised. To do that, HMRC needed to show that the appellant was a contractor as defined by FA 2004, s. 59 i.e. carrying on a business that includes construction operations. In considering this point, the FTT examined Mundial Invest SA Ltd V Moore (HM Inspector of Taxes) [2006] BTC 301.

The FTT also referred to HMRC’s manuals at CISR12080 which deals with property developers and property investors.

The FTT considered that this issue was whether the appellant’s usual business changed when it undertook the conversion of the property so that it was carrying on a business which included construction operations.

The FTT held the view that the appellant was acting as principal and appointed a main contractor. Therefore the contract was not a construction contract for the purposes of FA 2004, s. 57(2) and the appellant was not obliged to make monthly CIS returns. The FTT found that the penalties had not been correctly charged.

The FTT also noted that the penalties did not take into account the provisions that should have capped the penalties at £3,000 (FA 2009, Sch. 55, para. 11) and that HMRC had not considered that after 6 April 2015, nil returns were not required if no payment was made (see the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2015 (SI 2015/429), reg. 2(2)).

The appeal was allowed and the penalties were discharged.


This decision highlights the difficulty that property investors face when considering whether the construction industry scheme applies to works carried out on their property portfolio. Large scale investors always need to be wary of the deemed contractor rules as cumulative expenditure on maintaining their portfolio could potentially cause the threshold to be breached.

Smaller scale investors are more likely to fall foul of crossing the boundary from being a property investor to a property developer if the works are substantial. As noted by the Tribunal, aside from Mundial, there is a paucity of case law to determine where the boundary lies.

For commentary on the CIS classification of property developers and property investors, see the Direct Tax Reporter at ¶282-725.

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