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Markel Tax

21 Jul 2020

Government consultation: Tackling Construction Industry abuse

HMRC has extended the current consultation on potential abuse of the Construction Industry Scheme. The consultation had been due to close on 28 May but has now been held open until 28 August to allow businesses affected by the current crisis more time to respond.

The document contains:

  • New powers to allow HMRC to correct the Construction Industry Scheme (CIS) deduction amounts claimed by sub-contractors on employer returns.

  • Clarification of the CIS rules to explain their meaning or expand their scope and discusses some early ideas around construction supply chains.

  • Discussions on some early ideas around construction supply chains and asks whether they would prevent tax loss.

Under CIS, on making a payment to a sub-contractor, the contractor must deduct a percentage of the payment on account of tax. Contractors verify the payment status of their sub-contractors with HMRC who in turn advise the contractor to either make gross payments or to apply the appropriate percentage deduction. The sub-contractor operating through limited companies that have had CIS deductions can also have those deductions set off against their employer PAYE and NIC liabilities. However, some employers are fraudulently creating false repayments for themselves and/or their sub-contractors.

The consultation proposes a new power from April 2021 which will allow HMRC to correct the CIS deduction amounts claimed by employer sub-contractors. This means HMRC will have the power to correct the CIS deduction claimed and to suspend any further CIS deductions for the remainder of the tax year. Where HMRC suspects foul play between the employer and the contractor it would have the power to ignore the evidence it believes may be false. This action could cause serious cash flow issues for those subcontractors with incorrect paperwork and could lead to the removal of gross payment status.   

One of the main proposals is a change to the definition of 'deemed contractor' which could reduce the number of non-construction businesses which fall within CIS. The consultation recommends that a threshold be applied on a rolling basis so where a business spends more than £3m on a construction project the scheme applies to payments over the £3m threshold. Deemed contractors will then fall out of the scheme if the contract comes to an end and they do not anticipate any further payments for construction. This could prove to be a positive change as potentially it could reduce the number of deemed contractors and the administrative costs for those that remain and should be a lower risk of tax abuse.

Currently CIS only applies to the labour element of any payment and the cost of materials can be deducted from the contract payment before tax is deducted. The government intends to rewrite the materials rule so that a materials deduction for CIS purposes can be made only from a payment under a construction contract where a subcontractor has directly purchased materials used or to be used in fulfilling that contract. This will stop a deduction being taken for the same materials at all levels of the supply chain.

The government is considering measures to give companies at the top of the supply chain the responsibility in policing CIS further down the chain other than their direct subcontractors. HMRC want the main contractors to inform them of its supply chain, a step which would require a much higher level of due diligence. This could involve verifying the indirect sub-contractor with HMRC to check whether:

  • they are registered for CIS

  • VAT

  • other taxes

  • checking they are registered with Companies House

  • checking how long they have been trading; asking for copies of their insurance cover and last accounts

  • check their workers are eligible to work in the UK

  • checking the directors/partners are “fit and proper” persons

This level of due diligence will inevitably bring an additional cost to the company at the top of the supply chain. However with this information HMRC would then have powers to inform the main contractor of fraudulent activity and notify them to remove the offender from the supply chain or make any future payments under the supply chain subject to deduction of tax. It must also be noted that where the fraud continues, HMRC could stop the main contractor from paying their sub-contractors gross and/or hold them responsible for tax losses due to fraud lower down the supply chain.

A type of site registration system as in Ireland is also being considered which would enable contractors to record which sub-contractors were working on particular sites, making it easier for HMRC to cross check payments and deductions reported by contractors against those reported by sub-contractors.

For more information about this or if you would like to speak to us about our dedicated Construction Industry Retainer service (CIS force) please contact David Harmer or Tyra Ali by email or on 0333 920 5708.

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Tagged Construction Construction
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