Misconstrued

My client is a contractor and pays some subcontractors net of tax as they are not registered to receive their payments gross.

Last year he sent some subcontractors to work on a job several hundred miles away. The contractor paid for a few hotel rooms for the subcontractors to stay in for the duration of the job.

He deducted tax from their pay but HMRC say that he should also have paid tax under the construction industry scheme (CIS) in respect of the amount paid for the hotel rooms.

However they also say that this tax could not be reclaimed by the subcontractor. Is this right? It seems to me that HMRC are effectively ending up with tax in respect of a payment that would be tax deductible.

If HMRC are correct where does this end?

For example if the contractor had allowed his subcontractors...