Tackling abuse of the CIS
A consultation on tackling fraudulent practices in the construction industry scheme (CIS) has presented solutions to come into force from 6 April 2021. Herminder Sandhu explains what will change.
Subcontractor companies which have suffered deductions from payments by contractors are able to set off those deductions against their PAYE liabilities as an employer.
The proposal in the consultation document would give HMRC the power to correct the deduction claimed where HMRC identify or suspect inaccurate amounts having been set off.
It would also mean the subcontractor company would be prevented from setting any further CIS deductions against its employer liabilities for the same tax year in which the correction power has been exercised. This could have serious consequences, and may signpost a comprehensive HMRC review.
The CIS rules also apply to businesses that operate outside the construction industry, where they regularly carry out, or commission, construction work. Such businesses, termed ‘deemed contractors’ must operate the CIS if their average expenditure on construction exceeds £1m in each of the last three years ending with the last period of account.
HMRC has encountered manipulation of these rules to avoid the CIS. To counter this the rule will be simplified so that expenditure on construction will be calculated on a rolling basis. Registration for CIS as a contractor would be required when the threshold is reached and CIS must be operated on the next payment it makes to a subcontractor.
This area is closely monitored and often challenged by HMRC given that CIS deductions only apply to part of a payment that does not relate to the cost of materials.
The consultation refers to interpretation of the rule whereby every subcontractor in a chain working on the same project claims a deduction for materials used even if they did not directly meet the cost of materials. This means the amount subject to the CIS is reduced at each level in the chain.
The government will reaffirm that a deduction for materials can only be made from a payment where a subcontractor has directly purchased materials used or, to be used, in carrying out the work.
False registration penalty
Although HMRC can impose a penalty on a person for providing false information on registering for the CIS, the power is restricted to the individual or business to whom the registration applies.
There is growing evidence of false information having been used and coercion on persons to register as well as hijacking of IDs. Once registered the fraudsters can take control of a business and then use it to extract monies from the tax system.
The government proposes to amend the rule so that the penalty will apply to a ‘relevant person’ – ie an agent, director, company secretary, or anyone HMRC believes is in a position to command control over the business or the person making the registration.
Supply chain due diligence
Reference is made to a previous CIS consultation in 2017 which highlighted organised fraud on the provision of labour in the construction sector.
Businesses involved in such arrangements deliberately fail to pay tax, NICs or VAT, leading to substantial losses. Whilst such measures as the VAT domestic reverse charge are introduced other possibilities have been put on hold.
Additional proposals now put forward for debate include:
Main contractors to register with HMRC
This will allow HMRC to identify who is working on particular construction sites. It is claimed this would provide valuable information to the site operator as well as reassurance to all parties that payments and deductions will be correctly recorded for tax purposes. It would also help HMRC to understand the supply chain and incentivise all parties to comply with the CIS rules.
Details of supply chain
All main contractors would have to provide full details of their supply chain for a specific project. It is hoped this would encourage contractors to carry out detailed due diligence of those they engage to carry out the work.
Removing a subcontractor
Where HMRC is aware of VAT fraud in a supply chain they could notify the main contractor and encourage them to identify and remove the perpetrator from the chain. Such action could also prompt retrospective CIS deductions from payments those businesses may have received. In cases where the fraud continues HMRC could prevent the main contractor from paying their subcontractors gross and hold them responsible for tax losses due to the fraud lower down the chain.
HMRC activity continues to expand given the colossal revenue losses. It is a reminder for businesses to develop robust due diligence processes to avoid being ensnared unwittingly in another party’s non-compliance.
Another consultation on the CIS will follow in the near future.
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Herminder is a senior consultant at Chartergate Legal Services Ltd specialising in CIS, Employment Status and Employment tax since 2013. He spent a number of years working for HMRC in all compliance areas before joining one of the Big Four firms. He then moved to private practice before specialising further when he joined Accountax Consulting...