Key changes to the Construction Industry Scheme and how they could affect you
19th Dec 2019
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As a finance leader, compliance is one of the key goals of the job. After all, if a business is found to be in breach of its financial obligations, then there is a real existential risk to it – and all parties could lose out. For those financial directors in construction, it’s even more important to be mindful of compliance as there are so many additional pieces of compliance legislation that govern health and safety, the unusual status of the sector’s labour market and more.
However, there’s something else to think about, too. The Construction Industry Scheme was recently launched, and it aims to ensure that nobody in the contractor supply chain can get away with avoiding VAT. It’s worth noting that one early government report into previous iterations of the CIS suggested that half of contractors flagged the CIS as an administrative burden, so it’s important to be aware that future changes could sap time. This article will explore what the key changes are and will also look at how they might affect individual firms.
What is the scheme?
The Construction Industry Scheme is a policy designed by Her Majesty’s Revenue and Customs (or HMRC) that intends to help construction professionals get their tax affairs in order. It obliges contractors who subcontract out their jobs to make payments that cover the tax and National Insurance contributions of the subcontractor. While it’s essential for contractors to be part of the scheme, subcontractors themselves don’t have to be – although they will face higher tax burdens if they’re not.
Under the scheme, there are quite precise definitions of who counts as a contractor and who doesn’t. Those who directly pay subcontractors are of course counted, but so are those firms that are not directly involved in construction work but pay towards such work. If the average annual spend is over £1m per year in a three-year phase, the firm will be counted. This is crucial as it means that many medium-sized, growing firms with multimillion-pound annual turnovers will be covered by the scheme.
What are the main changes?
Starting next year, the Construction Industry Scheme will be changing the way it collects VAT. Currently, VAT obligations are met by the subcontractors themselves, and the ultimate contractor – or the employer of the subcontractor – is not responsible. Currently, they are only responsible for tax and National Insurance. Now, however, subcontractors will not be the ones charging VAT. That responsibility will fall to the contractor, or the end customer.
For subcontracting firms, this could have a big effect on cash flow. Currently, subcontractors tend to use the cash they collect for VAT purposes for other purposes before the payment deadline comes around and they have made the money back – or, essentially, as “working capital.” That will no longer be possible as the contractor themselves will now be responsible for the chunk of the budget that gets devoted to VAT.
The key date for a finance director’s diary is 1st October 2020. From then onwards, it will be necessary for subcontractors to ensure their invoices include provision for what is known as “domestic reverse charges”. This will make it clear that the client and primary contractor are the ones who must pay the VAT and that the subcontractor won’t be taking any cash. If there is a long chain of organisations involved, the responsibility to pay the VAT will pass on up to contractor who actually takes the cash from the paying client.
Exemptions and exceptions
For finance directors who are starting to worry about the impact that this could have on their firm, it’s well worth noting that there are, in fact, several exemptions. Firstly, if the organisations involved aren’t VAT-registered, then the rules, of course, don’t apply – although with many construction firms now enjoying large-scale contracts, it’s usually the case that a registration has taken place. Organisations that offer auxiliary services rather than primary construction services, meanwhile, are usually also exempt. This applies to surveyors, security system providers, design consultants and more.