HMRC consultation, ‘Tackling Construction Industry Scheme Abuse’ explores ways to tackle abuse of the CIS to prevent significant losses of tax. The feedback collected will be used by HMRC to inform draft legislation.
- The consultation was published after the announcement at Budget 2020 and builds on previous engagement back in March 2017. It was originally intended that the feedback would be used to develop draft legislation for inclusion in Finance Act 2020.
- Following a three-month extension due to disruption caused by COVID-19, the consultation closed on 28 August 2020, after Finance Act 2020 received Royal Assent.
- HMRC is analysing the feedback and will publish their response in due course.
The Construction Industry Scheme (CIS) was introduced to combat widescale non-compliance in the UK construction sector. Unfortunately, the CIS is subject to significant abuse by fraudsters and their associates.
The consultation focused on three key areas:
- Proposed new HMRC powers regarding CIS deductions.
- New ideas and existing CIS rules which should be clarified.
- Proposed supply chain measures.
CIS deductions: New HMRC powers
Currently, subcontractor limited companies can offset their CIS deductions suffered against their in-year employer liabilities via Real-Time Information (RTI) reporting on an EPS return. This measure was introduced to ease cash flow for subcontractor companies unable to claim gross payment status.
HMRC is aware of the following types of abuse:
- CIS deductions being claimed by subcontractor companies that do not operate in construction.
- CIS deductions being claimed subcontractors who are not companies.
- CIS deductions being claimed which exceed amounts recorded as withheld for a subcontractor on the relevant Contractor Monthly Return.
It is proposed that HMRC should be given new powers to correct CIS deductions in an EPS return:
- Where the employer is not a limited company.
- Where the employer is not undertaking construction work (as defined in section 74 Finance Act 2004).
- Where the employer does not provide satisfactory evidence of the CIS deductions claimed.
- Where the employer does not self-correct the EPS return to reflect the substantiated position.
- In cases where HMRC suspect the evidence provided by the employer is not genuine.
To prevent an employer from trying to reclaim any unsubstantiated CIS deductions on a later EPS return, HMRC will have the power to block them from setting off further CIS deductions against their employer liabilities for the rest of the same tax year where the correction powers have been used.
- If further valid CIS deductions have in fact been suffered, these must be verified by HMRC before they can be set-off against other liabilities or refunded.
- As these are significant powers, they will carry rights to HMRC independent review and formal appeal through the Tax Tribunal to safeguard the taxpayer.
New ideas and clarification of existing CIS rules
- Interaction with Off-Payroll Working
Where the Off-Payroll Working rules apply, these continue to take precedence over CIS. From 6 April 2021, these rules apply to large and medium-sized organisations outside of the public sector.
- Deemed Contractors
HMRC is aware that some contractors are manipulating both the amount and timing of construction payments and altering their accounting periods to ensure they do not breach the threshold for registration.- Currently, registration as a deemed contractor is required where a business spends more than £1 million on construction on average per year in a three-year period.
- HMRC proposes to simplify the current rule so that construction costs are calculated on a rolling basis with a registration threshold of £3m.
- Materials
The wording of the rule is open to interpretation with some contractors allowing every subcontractor in the chain working on the same project to take a deduction for materials, before applying CIS, even if they did not directly pay for them.- HMRC proposes to rewrite the rule to make it clear that a materials deduction can only be made in relation to materials directly purchased by the subcontractor.
- False registration penalty
The existing penalty does not deter fraudsters from registering for CIS or cloning existing CIS IDs.- HMRC proposes to make the penalty applicable to a ‘relevant person’. This includes an agent, director, company secretary or anyone HMRC believes is in a position to exercise control and direction over the business and/or the person making the CIS registration.
Supply chain measures
Fraudsters are extracting cash from the tax system by inserting themselves into construction supply chains. This makes it difficult for HMRC to reconcile the main contractor’s CIS returns to the subcontractors below.
- HMRC wants to explore what could be done in conjunction with larger contractors to tackle this type of fraud.
- It is proposed that supply chain due diligence should be introduced where large main contractors must notify HMRC of the supply chain for a project or contract together with any concerns.
- Where HMRC is aware of fraud in the supply chain, the main contractor would be notified and encouraged to identify the perpetrator and either remove them from the chain or apply CIS deductions retrospectively to payments. If fraud continues, HMRC could:
- Prevent the main contractor from making any gross payments to subcontractors.
- Hold them responsible for tax losses due to fraud lower down in the supply chain.
Links
CIS: Contractors and Subcontractors
What is the Construction Industry Scheme? Who does it apply to? How does it work?
COVID-19: New timelines for tax policy consultations
Due to the disruption caused by the COVID-19 crisis, HM Treasury and HMRC have extended the deadlines for ten ongoing tax policy consultations and calls for evidence by three months and delayed the publication of other documents announced at Budget 2020.
Construction sector supply chain fraud: consultation
HMRC have published a consultation ‘Fraud on the provision of labour in the construction sector: consultation on VAT and other policy options’.
RTI: Real-Time Information for PAYE
RTI: Real Time Information (RTI) reporting for PAYE.
Off-Payroll Working: At a glance
What is off-payroll working? What is IR35? What are the tax rules for off-payroll working or IR35? How do you check employment status? What is a personal service company?
External link
HMRC Consultation: Tackling Construction Industry Abuse