New rules for the construction sector

From 6 April 2021 HMRC is changing the rules of the Construction Industry Scheme (CIS). What do you need to know?

What is CIS?

The Construction Industry Scheme (CIS) is a tax withholding arrangement where contractors operating in the construction industry are required, in some cases, to deduct money from a subcontractor’s invoices and pass this directly to HMRC as a payment on account of the subcontractor. Contractors with construction operations have to register for the scheme and subcontractors who are not registered can suffer a higher rate of deduction. Subject to a good compliance record, subcontractors may be given gross payment status so that the contractor does not have to make a deduction.

Why the changes?

HMRC believes that there are still significant losses of tax because of abuse of the rules. It consulted on these rule changes in March 2020 and after extending the consultation until the end of August it has confirmed the changes will now come into effect on 6 April 2021.

Set-off powers

Subcontractor companies are currently entitled to offset any deductions that they have suffered from their invoices against any PAYE liabilities that they have for their own employees. This is done by including the set off amount within the employer payment summary (EPS) which in turn reduces the PAYE liability for the period in question.

From 6 April 2021 if HMRC challenges the value of this amount and this is not amended or evidence of the deduction made by the contractor is not provided, HMRC will now have the power to amend/remove the CIS figure submitted on the EPS and disallow the subcontractor from any further offset in the tax year. This will directly impact the subcontractor’s cash flow.

Cost of materials

Contractors can take the cost of materials into account before making a deduction on account of tax from the subcontractor’s invoice. The new regulations require that the materials must have been purchased directly by the subcontractor in order to be deductible.

Deemed contractors

Currently, non-construction businesses can be brought into the scope of the CIS if over the prior three years they have a certain level of expenditure on construction operations, which they must review regularly. This threshold has not been reviewed for some years by HMRC and so now these businesses will need to apply the CIS when construction expenditure exceeds £3 million within the previous twelve months.

CIS registration penalty

HMRC can penalise a person for providing false information when registering for the CIS. The scope of this penalty will be expanded to apply to a wider group of individuals or companies who would be able to exercise influence over the person registering for the CIS. This will include agents, directors, company secretaries or anyone HMRC believes is in a position to exercise influence. These individuals will also be in scope for a penalty if they provide a false statement or document for the purpose of enabling somebody to register for the CIS, or they encourage an individual or business to make a false statement or provide a false document.

As always, if you wish to discuss this with us or know someone who may be affected, please contact us on either 01604 678470 or 01933 312950.