Every year, through avoidance, evasion and non-compliance, the Treasury goes short of billions of pounds of tax revenue.
The government is making a concerted effort to reduce these revenue losses, and since 2010, it’s taken action to secure and protect over £200 billion of tax that would have otherwise gone unpaid.
In the 2020 budget, the Chancellor announced further measures calculated to raise an additional £4.7 billion by 2025.
One of the sectors the government has clearly in its sights is the construction industry. A particular focus of attention is the Construction Industry Scheme (CIS).
We’ve looked at CIS before, and you’ll find an overview of the scheme in our blog:
In brief, under CIS, contractors are required to deduct 20% tax from payments made to any subcontractors they work with, passing these on to HMRC as advance payments towards the subcontractor’s income tax liability. Contractors must also provide subcontractors with a statement detailing any deductions made.
While contractors are required to register onto the scheme, subcontractors don’t have to. But if a contractor is unable to verify a subcontractor through CIS online, they must deduct tax at the higher rate of 30%.
Where a subcontractor is also a limited company and an employer, they can offset any CIS deductions they’ve suffered against their PAYE and NIC by submitting an employment payment summary (EPS).
In the 2020 budget, the Chancellor announced that the government wil legislate to prevent non-compliant businesses from using CIS to claim tax refunds to which they are not entitled. He also confirmed that the government will publish a consultation document introducing options on how to promote supply chain due diligence.
So, with some legislation agreed and ready to be introduced shortly, and more under discussion, let’s take stock of where we are right now:
Changes to CIS – confirmed
Introduction of VAT domestic reverse charge (from October 2020)
The VAT domestic reverse charge for building and construction services – a key component of the government’s crackdown on abuse in the construction sector, was due to be introduced in October 2019. The legislation – aimed at preventing losses through so-called ‘missing trader’ fraud, was delayed by Brexit and will now come into effect on 1st March 2021.
New powers for HMRC to adjust CIS returns (from April 2021)
With effect from April 2021, HMRC will be able to adjust the CIS returns of employers it believes are falsely claiming CIS deductions.
If an employer cannot provide evidence to prove that their claim is genuine, HMRC will correct the return, and the employer will be unable to recover any further CIS deductions that may be due until after the end of the tax year. The employer will be able to start the new tax year afresh – but their CIS returns will continue to be closely monitored by HMRC.
Changes to CIS – proposed
As mentioned already, the government is currently in the process of consulting on CIS, looking at ways to ensure the scheme is not vulnerable to abuse and fraud. The consultation – Tackling Construction Industry Scheme abuse was originally due to close at the end of May but has now been extended until 28th August 2020. Although we’ll have to wait until then to find out full details of the proposals to be considered, some have already been revealed:
Change to turnover rule determining when a contractor must register
At the moment, if you’re a contractor that pays subcontractors for construction work and you spend an average of more than £1 million a year on construction in any 3-year period, you must register onto the scheme.
HMRC proposes to change this so that spending will be calculated on a rolling basis. As soon as you exceed £3 million in any 3-year period, you’ll be required to register and operate CIS.
Change to rules regarding deductions for materials
HMRC proposes to redraft the rules on the deduction of allowable materials. They will be updated to clarify that only the subcontractor directly purchasing materials for a contract can make a claim for a deduction of materials.
Change to who can be penalised for false registration
Currently, submitting false information when registering for CIS carries a penalty for the individual involved. HMRC proposes broadening this rule so that anyone found to be coercing or persuading another person to falsely register will also be subject to a penalty.
Crackdown on artificial supply chains
The current scheme is open to abuse by fraudsters who establish complex supply chains to hide tax-evasion. HMRC is looking at how the current rules might be made more robust and exploring processes to help improve due diligence in the supply chain.
The crackdown on CIS means that monthly returns are going to be subject to even closer scrutiny than usual. While there’s no doubt that the government is justified in acting against those using CIS to profit themselves, the possibility that some law-abiding businesses – whether through error or a lack of attention to detail, may inadvertently fall foul of HMRC is going to increase.
At Inca, we work with many clients in the construction industry, and we understand how it can be a struggle to get CIS certification from all the third parties you work with.
But now, more than ever, it’s crucial that the information you report on your CIS returns is correct.
If your business has been affected by COVID-19 and you’d like help or advice on any aspect of your business finances, give us a call. We’re here to support you in any way we can.