Tackling tax abuse in the construction industry
HMRC is seeking to improve compliance and standards in the Construction Industry Scheme (CIS). Samantha Mann digs into the proposals.
Initially intended to close on 28 May, the Tackling Construction Industry Scheme Abuse consultation will remain open until 28 August.
This consultation recognises that a minority of businesses within the construction sector continue to abuse the rules and “falsely reduce their tax liabilities”.
Budget 2020 included the news that from April 2021 HMRC will be able to correct the amount of CIS deductions being claimed on a sub-contractor employers return, where it is suspected, or has been identified, that inaccurate amounts are being claimed.
Since its introduction in the 1970s to address widespread abuse within the construction industry, CIS has gone through a number of iterations. The current scheme requires the contractor to withhold a tax deduction from the sub-contractor, which will either be at the rate of 20%, where they are registered within CIS or 30% where the contractor is unable to verify them through CIS online.
Subject to certain criteria, which will include having a good record of compliance with past tax liabilities, the sub-contractor may be able to apply for payments to be paid gross and not suffer the withholding of tax payments.
The contractor submits a monthly return to HMRC and makes payment of the CIS deductions withheld from sub-contractors and must provide the sub-contractor with a written payment and deduction statement (PDS), which must detail the CIS deductions that have been made each month.
The costs of materials, that are necessary to fulfil the contract, are deducted before applying the tax deduction. This area is also covered within the consultation paper.
Where a sub-contractor is also a limited company and an employer, they are permitted to off-set the amounts they have suffered, against their PAYE and NIC remittances. This is actioned by submitting the suffered amounts through the RTI processes, on an employment payment summary (EPS).
Correcting the EPS
HMRC is concerned that employers are falsely claiming CIS deductions through the EPS when:
- They do not work in construction as defined in legislation
- The sub-contractor is not a limited company
- The amounts claimed exceed those recorded as being withheld on monthly returns
Where this has been found to occur, evidence of eligibility is requested; however, further measures are now proposed that will allow HMRC to correct the figure reported on the EPS and prevent that employer from off-setting further CIS deduction against their employer liabilities for the remainder of the tax year.
Where evidence is not provided to demonstrate the validity of the claim, or where it is suspected that the evidence is not genuine, HMRC will correct the return.
If further CIS deductions need to be reclaimed, they will not be available for recovery until after the end of the tax year and will, first, be subject to verification by HMRC. The employer will begin the following tax year with a clean slate but may continue to be monitored by HMRC.
It is intended that these powers will be introduced from April 2021 and the consultation seeks to explore operational issues that may arise and poses a range of questions relating to record keeping and evidencing claims.
Employers will have the right to request a review or appeal but will not be able to continue to off-set CIS deductions throughout the appeal process.
The current rules define an undertaking as a deemed contractor whereby the undertaking or business, has spent in excess of £1m each year on construction operations. This is established by looking back over each accounting period of the previous 3 years (up to the end of the last accounting period).
HMRC believe that the current rules provide opportunity for manipulation and abuse, and so proposes to change the rules to ensure that the cost of construction spending is calculated on a rolling basis, and in-line with the current threshold. The new threshold will be £3m and when this threshold is to be exceeded, they will need to register as a contractor with HMRC and operate CIS from the next payment they make to a sub-contractor under the contract.
Deductions for materials
The rules for the deduction of allowable materials are to be re-written to make clear that a claim for deduction of materials can only be made by the sub-contractor who has directly purchased the materials that are to be used to fulfil the contract.
Expanding the scope of the false registration penalty
An individual can be penalised where they provide false information when registering for CIS. However, where the individual has been coerced or in some way persuaded, to provide the false information, there is no such penalty that can be applied on a wider scale. To address this, the penalty regime will be broadened to become applicable to a relevant person who may have coerced another. A relevant person may include an agent, director, company secretary or indeed any person that HMRC believes was in a position to exercise control and direction over the person who made the CIS registration.
Challenging artificial supply chains
The paper also delivers early proposals on current considerations to address the challenges presented through complex supply chains, that seek to conceal fraudulent activity and the underpayment of income tax and NIC.
The paper considers methods to improve supply chain due diligence, but first asks what processes are currently in place? The Irish Revenue Commissioners currently have a process that identifies who is working on what sites and project, the paper asks could a similar system work in the UK construction sector?
As we have seen with off-payroll working reforms, HMRC consider the head of the supply chain as being the most able to ensure compliance of the chain. This could have a significant impact in future obligations to carry out extensive due diligence along the supply chain and considers, amongst other things, the need for clear definitions for:
- Main contractor
- Losses due to fraud
- Due diligence activities
Throughout the paper, HMRC focus heavily on the lost revenue due to incorrect claims as a result of fraudulent activity.
Responses can be submitted to HMRC at [email protected] by no later than 28 August 2020.