21 June 2021
How could the changes, confirmed in Finance Act 2021, impact your business?
Cost of materials
Tax deductions required under the construction industry scheme (CIS) rules are not applied to the cost of materials. However, the cost of materials can be deducted from the amount invoiced by a subcontractor that is subject to the deduction of tax under the CIS. Prior to 6 April, it was apparent that differing interpretations were being applied as to what constitutes ‘materials’ and which contractor(s) in the supply chain could deduct the cost of materials in calculating the amount subject to deduction of tax.
However, the new rules make it clear that, with effect from 6 April 2021, a deduction for materials can only be made by a contractor when calculating a CIS payment to a subcontractor, where it represents the actual direct cost of materials to that subcontractor and the materials specifically relate to the construction contract between the contractor and subcontractor under which the payment is being made. No deduction can be made by the contractor for materials bought by a subcontractor further down the supply chain.
See further information at gov.uk.
We await HMRC guidance on how contractors are expected to comply with this new rule, including what evidence will be required, but it is thought that subcontractors may have to provide copies of invoices for the materials they have purchased, to substantiate anything they are claiming as deductions on the invoices sent to contractors.
There is a significant change to the pre 6 April 2021 deemed contractor rules, which required that businesses that were not mainstream contractors reviewed their construction expenditure at the end of each period of account. If the average annual expenditure on construction operations over the three years prior to that date exceeded £1m, the business had to register for and operate CIS on any construction expenditure from the start of the next period of account (except for payments relating to property used for the purposes of the contractor’s or a related company’s business where that property was not for sale, to let or held as an investment).
The new rules, which apply with effect from 6 April 2021, require businesses that are not main contractors to monitor construction expenditure more regularly. Where cumulative expenditure on construction operations exceeds £3m within the previous 12-month period, they must register for the CIS as a contractor (if not already registered) and begin operating the CIS on their next payment to a subcontractor for construction operations. This is subject to a discretionary period of grace not exceeding 90 days and the exception described above for payments relating to property used for the purposes of the contractor’s or a related company’s business. This change therefore requires businesses to operate a continuous rolling 12 month check on construction expenditure.
Deemed contractors are able to stop operating the CIS when expenditure on construction operations falls below £3m within the previous 12 month period, or when no further payments on construction operations (including retention or management or administration payments) are expected to be made under any construction contract . It therefore means that those already registered as deemed contractors that now fall below the new threshold, can potentially de-register from CIS, although care needs to be taken when doing this.
It is recommended, therefore, that construction expenditure should now be monitored on a monthly basis by all businesses that may be deemed contractors (whether or not they are already within the CIS) to be able to make decisions on whether to register or de-register.
For current HMRC guidance, see section CISR12050 of the Construction Industry Scheme Reform Manual.
CIS deductions claimed against PAYE
HMRC now has the power to amend unsupported CIS deductions. This measure has been introduced because HMRC is aware that CIS deductions were being made against PAYE liabilities in some cases by non-CIS employers and subcontractor employers that were not companies, that exceeded the sums recorded as having been withheld from particular subcontractors in contractor returns.
This measure allows HMRC to act in real time where there is evidence of incorrect deductions being taken, by allowing the CIS deductions figure claimed in the subcontractor employer’s employer payment summary (EPS) return to be corrected where there is no satisfactory supporting evidence.
HMRC has stated that it will only do this where subcontractors refuse to make corrections when directed to do so, but claimants will be given the opportunity to explain unverified claims or genuine errors.
However, the problem is that HMRC will as ask for evidence to be supplied within a 14-day timeframe. The reasonableness of this tight timescale was raised by many during the consultation on these changes but still applies as originally proposed.
Where HMRC amends the CIS deduction taken against PAYE, the employer may also be prevented from making further CIS set offs in the same tax year, creating cash-flow problems, and interest and penalties can also be charged.
False registration penalty
From 6 April 2021, penalties for false statements or documents made for the purpose of becoming registered for gross payment or payment under deduction apply to individuals or companies that are able to exercise influence or control over a person who is registering for the CIS. This includes 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.
Such persons are liable to a penalty in two circumstances, either:
- where they themselves make a false statement or furnish a false document for the purpose of enabling another individual or business to be registered for the CIS; or
- where they encourage an individual or business to make a false statement or furnish a false document for the purpose of enabling themselves to be registered for the CIS.
For some businesses the new rules will result in significant changes to the records they keep, the monitoring they undertake, and the evidence they require from subcontractors in order to remain complaint.
We recommend businesses review the impact of the changes, plan accordingly, and keep an eye out for additional guidance from HMRC.
If you would like to discuss how RSM can help you navigate these changes and help you manage risks associated with the CIS, such as through CIS reviews or focused training sessions, please get in touch with Susan Ball or Lee Knight.