Construction Industry Scheme: consultation responses

10 Dec 2020

aerial view builders

December 2020

HM Revenue & Customs (HMRC) has published the responses it received from the recent consultation Tackling Construction Industry Scheme Abuse, which was launched in the March 2020 Budget.

More information on the consultation can be found here.

Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments – passing these direct to HMRC. These deductions are taken as advance payment towards the subcontractor’s tax and National Insurance contributions.

To tackle perceived fraud in the industry, changes to CIS are being proposed as a result of the consultation. These can be summarised in four main areas:

  1. CIS set-off amendment power
    Currently, subcontractor companies can offset in-year CIS deductions against their employer liability. The proposed amendments will give HMRC power to change and reject offset claims where satisfactory evidence is not available, and stop future offsets within in the same tax year.
  2. Cost of materials
    The amendment clarifies the definition of ‘materials’ and proposes that only materials purchased by subcontractors for the specific contracted work are deductible and not within the scope of CIS deduction.
  3. Deemed contractors
    The updated rules would result in a continuous monitoring of non-construction business to determine if CIS should be applied. Under the new regime, CIS should be applied when cumulative expenditure to a contractor in relation to construction operations exceeds £3 million in the previous 12 months. Once construction-related expenditure stops or drops below £3 million for the previous 12 months, CIS deductions can be stopped.
  4. CIS registrations penalty
    Under current legislation, HMRC can impose penalties on an individual or company when false information is provided within a CIS application. Under the proposed changes, this penalty net would be widening to include agents, directors, company secretaries, or anyone HMRC believes is in a position to exercise influence and control over the business and/or the person making the CIS registration.

Consultation responses

Following the consultation, HMRC now has feedback on the potential amendments. A clear undertone from the public responses and subsequent government replies was that the proposed new process is the cleanest way to mitigate abuse, however, there must be protection in place for genuine mistakes and consequences should only apply to consistent non-compliance and not genuine errors.

Errors and the potential consequences

The consultation highlighted that HMRC could make corrections without preventing subcontractors from future CIS off-sets and that a ‘grace period’ for infrequent or minor errors would be welcomed. The result being a more flexible approach, which would only prevent subcontractors with consistent non-compliance from making future CIS offsets.

HMRC has considered the responses and agreed that action will only be taken against subcontractors that refuse to amend any errors highlighted by HMRC. For genuine mistakes, the subcontractor will be given the opportunity to explain the suspected error and then adjust it themselves if HMRC rules that an amendment is needed. If the amendment is made by the subcontractor themselves, they can continue to offset genuine CIS deductions with no further consequences.

Although a ‘light touch’ approach to initial interest and penalties was encouraged, HMRC confirmed that the usual interest and late payment penalties would be imposed on any additional sums becoming due through amendments. However, the usual ‘reasonable excuse’ defence would apply where relevant.

Evidence

HMRC requested suggestions on what information should be considered ‘proof’ of a CIS deduction. The most common responses included; a bank deposit that matched to an invoice; copies of applications and a statement from the relevant contractor along with an invoice. However, it was raised that there is no ‘one size fits all’ model and a flexible approach which judges each case and evidence on an individual basis would be more beneficial.

HMRC has agreed that it should discuss the evidence required/available with each subcontractor, especially where no evidence has been provided . Where evidence or a claim appears fraudulent, HMRC can choose to disregard the evidence, amend the return and restrict future CIS offsets as discussed above. The usual HMRC review and appeals procedure will still apply to any decision made.

Timescales

A 14-day response time to provide proof of CIS deductions and make any highlighted corrections has been defended by HMRC, despite the overwhelming response that a longer period of time was required.

The 14-day response time will stay in place on the basis that evidence should be held before a claim is made and HMRC will be confirming the verified CIS deduction figure to subcontractors for any amendments applied for.

HMRC has, however, confirmed that where the 14-day timescale will not be met for either circumstance, a mutually agreed timescale can be negotiated, however details on why this extension is needed will have to be provided upfront.

Safeguards

Although the government has confirmed that the usual appeals process will apply, they are considering whether it is appropriate to stop future CIS offsets whilst an appeal is in process.
It was clear from the respondents that the need to protect those who have made genuine errors should be a priority and an open line of communication is needed with subcontractors, to ensure measures are not hastily taken against these types of mistakes, which could have a negative impact on the subcontractor’s business.

Currently, HMRC can prevent future CIS offsets when an appeal is ongoing, however they are continuing to review this policy and are expected to confirm the final position in due course. HMRC has also acknowledged the importance of dialogue with subcontractors and it is reviewing its position following the responses to the suggested process.

HMRC’s full report on the consultation can be found here.

The proposed changes to the CIS process are still due to come into effect from April 2021 and we are therefore awaiting further guidance on how the updated procedures will be implemented.

If you have any specific queries or concerns in relation to this matter, please contact Stuart Daltrey.

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