HMRC have now published their findings of a recent consultation which addressed the perceived abuse of certain aspects of the Construction Industry Scheme (CIS).
As a result, there will be four significant changes to the operation of CIS from April 2021, which are explained below.
Full details can be found at Changes-to-tackle-Construction-Industry-Scheme-abuse
CIS set-off deductions claimed
Currently where a limited company subcontractor has suffered CIS deductions they are able to off-set those deductions against their own employer PAYE/CIS liabilities. HMRC have been concerned that some subcontractors are falsely reclaiming CIS deductions to which they are not entitled or claiming credit for higher amounts of CIS deductions than actually suffered.
The changes from April 2021 will enable HMRC to correct the CIS deductions claimed by the subcontractor on the employer payment summary (EPS), where the subcontractor is unable to provide any satisfactory evidence to support the amount claimed. In addition, where corrective action has been taken, the subcontractor may be prevented from off-setting any further CIS deductions against their employer/contractor liabilities.
If there are further deductions to claim, the subcontractor may have to wait until after the end of the tax year to make that claim and this will have to be verified by HMRC.
From April 2021 the deemed contractor rules will be amended to require a business to monitor its construction operation expenditure more regularly than the current requirement of looking back over the preceding 3 accounting periods to check if that expenditure has exceeded the deemed limit (£3m).
The new rules will require the business to look back over the previous 12 months to check if their cumulative construction costs have exceeded the deemed limit of £3m. If they have, they will be required to register as a contractor and operate CIS on the next payment they make to a subcontractor that falls within the scope of CIS.
Under the new rules a deemed contractor can stop operating the scheme once their expenditure falls below the £3m threshold within the previous 12-month period or the contract has ended and they do not expect to make any further payments that fall within the scheme.
From April, HMRC will only allow a deduction for material costs where a subcontractor has directly purchased materials used or to be used in fulfilling that specific contract. HMRC will continue to expect the contractor to ensure that the cost of materials being claimed by the subcontractor is accurate and not overstated.
Expanding the scope of the false registration penalty
Currently HMRC can penalise an individual for providing false information when registering for CIS but this does not extend to cover another person.
The penalty regime will be expanded to be applicable to a ‘relevant person’ and will include an agent, director, company secretary, or anyone HMRC believes was in a position to exercise control and direction over the individual making the CIS registration.
The penalty of up to a maximum of £3,000 can be charged where HMRC consider that a relevant person has made a false statement, provided false documents, encouraged an individual/business to make a false statement or provide false documents.
What is clear is that the Government remains focused on ensuring CIS compliance and will continue to police the system and look for ways to address the perception that there is a high level of tax fraud and abuse within the construction industry.
If you would like The Guild to review your CIS procedures to ensure compliance with the new legislation please contact us.