31 July 2015
Construction businesses have a complex withholding mechanism to administer when paying contractors and failure to comply can lead to claims from HMRC for tax, penalties and interest. In extreme cases failure to operate the system properly can have a devastating effect on the economics of a business.
All contracts for construction work within the UK and its territorial waters (with the exception of work for private householders) are caught within the HMRC Construction Industry Scheme (‘CIS’). This means that every transaction within CIS needs to be reviewed and the appropriate actions taken.
Who is caught by CIS?
- Any ‘mainstream construction’ business carrying out construction operations.
- Any ‘deemed contractor’ being a non-construction business but spending more than an average of £1m per year on construction operations (unless the construction is in respect of a building used in their own business e.g. restaurant chains).
- Property developers who build or renovate property with a view to selling at a profit.
- Property investment businesses might be caught.
- For private householders, CIS never applies.
What do I need to do and when?
- As a contractor, you must verify all your subcontractors with HMRC before paying them.
- Make sure all monthly returns together with payments due to HMRC, are submitted on or before the due dates.
- Keep the engagements of self-employed individuals under constant review.
How can we help?
RSM has a team of experts in the construction tax sector available to help your business. Not only can we review your processes and procedures and assist with your compliance, we can also assist with all and any of the ‘areas to consider’ listed above.
CIS reviews – ensuring that your processes and procedures are compliance
Losing gross payment status can be catastrophic for a business – in addition to any reputational issues and loss of inclusion on preferred supplier lists, there may also be a direct loss of income. 20 per cent of the labour element of invoices submitted to your customers would have to be paid to HMRC rather than retained in your business. Sometimes PAYE deductions can off-set the 20 per cent 'loss' but this will not always be the case.
Reviewing your processes to ensure all mandatory reporting and compliance requirements of CIS are met, is the best way to guarantee your business won’t lose its status.
Self-employed or employed?
HMRC achieve sizeable settlements where they review self-employed workforces and successfully show that the workers are employees for tax purposes.
There is no precise definition in law of what constitutes being self-employed –and the case law which has built up over many years is difficult to understand and often inconsistent. HMRC expect that businesses should be able to make these difficult decisions themselves and can impose penalties in cases where the wrong judgements have been made. It is vital to keep all self-employed engagements to ensure that they remain the right side of the line.
Gross payment status cancelled – prevention is better than any cure
Much of the HMRC review of compliance is computer-generated and based on a rigid and inflexible view of the rules. It takes no account of human error and/or 'reasonable excuse' and can often generate notices to withdraw gross payment status based on very limited information.
Although appeals can be lodged and HMRC can be forced to withdraw notices, a business may be on the back-foot when trying to defend against an HMRC allegation of compliance failure. Dealing with these matters, even if ultimately successful, distracts key people from profit-making activity.
Construction businesses should ensure that all of their compliance issues (including directors’ self-assessment returns/payments) are kept up to date.
Employment business – what you need to consider?
Legislation effective from 6 April 2015 requires employment business to report the payments they make to third parties to HMRC. Even if already caught by CIS, they must now provide details of the individuals they pay who do not appear on an RTI return.
If you engage labour-only subcontractors and provide their labour to others, you need to consider whether these new rules effectively make you an ‘employment businesses’ with an obligation to report.
Working with overseas contractors and subcontractors
Any business entering into a UK construction contract is caught by CIS even when it is not a UK tax-resident. It can minimise the impact by registering for CIS, but if it pays an overseas business gross, it will be liable for any under-deductions together with penalties for failing to return details of the payments.
The CITB is a government agency providing training in the construction industry. To support this, businesses are charged a 5 per cent levy on all labour-only costs – this includes employees such as admin staff and any subcontractors who does not provide materials.
The danger for construction businesses lies in the narrow definition of 'main materials' provided by subcontractors. For example: CITB maintains that skilled bricklayers who do not provide bricks and mortar are labour-only and subject to the 5 per cent levy. CITB Inspectors are achieving settlements covering a number of years based on failure to observe this strict interpretation.