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Executive summary
In Kalinga Holdings Ltd v HMRC [2026] UKFTT 368 (TC), the First-tier Tribunal refused to relieve a property company from significant Construction Industry Scheme (CIS) liabilities, holding that it had not taken “reasonable care” when deciding that CIS did not apply to a large residential conversion project.
For real estate clients, the decision is a timely reminder that CIS exposure is not limited to traditional developers. Property investment vehicles, single-project SPVs and funds undertaking refurbishment or conversion works can all fall within scope; and reliance on HMRC guidance or non-specialist advice may not be enough to establish reasonable care.
The case in brief
The facts
Kalinga Holdings Ltd acquired a large former office building and undertook a project to convert it into 131 residential flats, making payments of approximately £1.45m to construction subcontractors over several years. No CIS deductions were made on those payments.
HMRC later assessed under-deductions of £383,337, and Kalinga sought a direction under regulation 9(5) of the Construction Industry Scheme Regulations 2005, which can relieve a contractor from liability where statutory conditions are met.
Kalinga originally argued that it was a “deemed contractor” for CIS, and so below the threshold for CIS to apply. However, by the time of the hearing, Kalinga accepted that it was a “contractor” for CIS purposes. The sole live issue was therefore whether it had taken “reasonable care” to comply with its CIS obligations, as required by regulation 9(3)(a).
Regulation 9(5) Direction
The general position is that where a contractor (mainstream or deemed) fails to make a required deduction under the CIS, it is nevertheless obliged to account to HMRC for such amount. Regulation 9 offers an important exception, providing that HMRC “may” direct that a contractor is not liable to pay any shortfall between the amounts it should have deducted under CIS and the amounts deducted if one of two conditions is met.
The two conditions are:
Condition A is that the contractor:
- took reasonable care to comply with the CIS; and
- either made a good faith error or genuinely believed CIS did not apply.
Condition B is that:
- the recipient of the payment from which there should have been a withholding has included the relevant amounts in its tax return and paid the relevant tax; and
- the contractor requests a direction from HMRC (under Regulation 9(5)).
What the tribunal actually decided
1. “Reasonable care” is the central test
The tribunal made clear that, on an appeal under regulation 9(7), its role was confined to determining whether the taxpayer had satisfied Condition A. If reasonable care is not established, the tribunal has no power to grant relief, regardless of whether subcontractors themselves paid the correct tax.
2. Reliance on HMRC guidance was not enough
Kalinga argued that it believed CIS did not apply because it considered itself a property investment company, based largely on:
- its reading of HMRC’s CIS340 guidance; and
- informal discussion with an accountant, who expressly stated that CIS was outside his area of expertise.
The tribunal rejected this as insufficient. It emphasised that:
- the project was large, complex and financially significant;
- the company had not sought specialist CIS advice; and
- there was no evidence of structured analysis of CIS risk before deciding not to operate deductions.
3. Commercial labels do not determine CIS status
A key theme in the judgment is that the taxpayer’s self-characterisation as an “investment company” carried little weight. The tribunal focused instead on what the company actually did:
- it entered into construction contracts;
- it paid subcontractors for construction operations; and
- it undertook a development-scale conversion project.
For CIS purposes, the reality of the activities — not the intended long-term holding strategy — was determinative.
4. “Reasonable care” requires proportional governance
The tribunal’s analysis shows that reasonable care is assessed in context. What might suffice for a small-scale project will not necessarily suffice where:
- expenditure is material;
- the project involves multiple subcontractors; and
- the tax consequences are significant.
In those circumstances, the tribunal expected proportionate governance, including appropriate specialist input.
Why this matters for real estate clients
CIS is a real risk for “investors”, not just developers
Many in the real estate sector assume CIS is a developer-only issue. Kalinga confirms that this is unsafe where an SPV or fund:
- undertakes refurbishment, conversion or fit-out works; or
- engages subcontractors directly or indirectly.
HMRC guidance is not a safe harbour
The judgment reinforces a wider trend: HMRC manuals and guidance are not a defence if the underlying legal position is misunderstood. In this case, it was acknowledged that the guidance was a bit misleading and the taxpayer would have had to piece together different bits of guidance to understand HMRC's view.
This highlights the potential difficulties where:
- guidance is read selectively;
- advice is taken from non-specialists; or
- decisions are made informally without documented analysis.
Governance failures can crystallise years later
CIS liabilities often surface years after the works are completed, when records are harder to reconstruct and subcontractors may no longer exist. If uncovered during a buy-side diligence exercise at the time of an exit (which is often the case), it can become a major issue with the potential to derail an M&A process.
Kalinga demonstrates how:
- early-stage governance failures can translate into large historic liabilities;
- “reasonable care” is assessed with hindsight against the scale of the project; and
- HMRC will not necessarily exercise their discretion in favour of the taxpayer where the reasonable care standard cannot be evidenced (even if there is no loss of tax).
Practical implications for real estate investors and funds
Real estate clients should consider the following steps:
1. Early CIS scoping for development works
Treat CIS as a mandatory workstream at the outset of refurbishment or conversion projects.
2. Specialist advice where projects are material
For sizeable works, reliance on generalist advice or guidance alone is unlikely to meet the reasonable care standard (noting that in this case the total construction spend was c£1.45million, so the threshold where professional advice is required is reasonably low).
3. Documented decision-making
Maintain a clear audit trail explaining:
- why CIS was considered;
- what advice was taken; and
- how conclusions were reached.
4. SPV-level governance
Ensure CIS responsibility is clearly allocated within fund and SPV structures (mostly likely via management agreements), rather than assumed away.
Key takeaways
- CIS exposure extends to property investment and fund structures, not just traditional developers.
- “Reasonable care” requires proportionate, specialist governance on significant projects.
- Reliance on HMRC guidance alone may be insufficient.
- Early decisions on CIS can create long-tail tax risk.
- Real estate clients should embed CIS analysis into project and fund governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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