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Changes to the Construction Industry Scheme (CIS) 2020

Changes to the Construction Industry Scheme (CIS) are directed towards tacking abuse, and take effect from 6 April 2021. They include:

– Cost of materials – there will be more specific rules about what type of expenditure on materials can be deducted before calculating tax. This is to tackle inflated materials costs leading to lower deductions of tax.

– Deemed contractors – aimed at businesses outside the construction industry, but whom might incur substantial construction costs (over £3m). This introduces a requirement to review expenditure on a 12 month rolling basis, and register rather than at the end of each accounting year.

– Increased penalties for supplying false information to achieve Gross Payment Status.

– HMRC will gain the power to amend CIS deductions claimed by sub-contractors on monthly PAYE returns and reverse CIS claims accordingly. This could lead to enforcement proceedings, interest and penalties at much earlier stages in the cycle.

My take on this is that with an increased compliance burden, the value of Gross Payment Certificates are heightened, and as such, construction businesses must ensure that their HMRC compliance history remains unblemished in spite of current pressures on cash..

CIS for contractors and sub-contractors

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The objective behind CIS

The current iteration of the Construction Industry Scheme (CIS) came into effect on 6 April 2007 but it has been refined in the years since its introduction. All permutations have been created to try and overcome the belief that many payments in the construction industry were not reported for tax purposes. CIS prevents this by operating a system which is not dissimilar to PAYE. The payer has an obligation to consider the status of the party to whom payments are made and, in certain circumstances, withhold tax from the payments. As the operation is similar to that of PAYE, it is the PAYE section of HMRC which administers CIS.

What is covered by CIS?

CIS applies to the labour element of a construction contract. Construction contracts are defined in legislation and go beyond simply building structures. Examples of construction operations include painting and decorating and preparative work such as site clearance and scaffolding.

Who is affected by CIS?

The legislation specifically excludes some operations from CIS. Examples include the professional work of architects and surveyors, and security installation. However, if any of those parties take part in the management of construction work then they are within CIS.

For CIS to apply, operations must take place in the UK, including the UK territorial waters, and can include marine construction. The residence of the parties is not relevant; it is the location of the works which are important. This can be overlooked by non-UK businesses seeking contracts in the UK.

Managing CIS

CIS applies to the labour component of construction. If there is one contract that covers all construction operations then CIS considerations will be relevant to the entire contract. This applies even if separate invoices are raised for separate parts of the contract. It may be necessary to split the project into separate contracts so that there is a single contract for labour and CIS would only apply to that contract.

CIS responsibilities for contractors

CIS applies whenever there is a contractor and sub-contractor relationship. The legislation defines both and gives an extensive list of those persons who are treated as contractors for its operation. If CIS is relevant, then the contractor has an obligation to verify the status of the sub-contractor and apply the relevant regulations to payments made to them. It is the impact of payments which is particularly important to understand. This is due to the cashflow impact for the sub-contractor.

If the sub-contractor is not registered with CIS then the contractor must deduct tax at 30% from payments to the sub-contractor. If the sub-contractor is registered then the deductions falls to 20% unless the sub-contractor is registered as a gross status party in which case no deduction is required. The deduction is against the VAT exclusive payment and does not apply to the cost of materials of the sub-contractor. If the sub-contractor does not confirm their cost of materials then the contractor should make a reasonable estimate.

There are regulations which define how the contractor must verify the status of the sub-contractor and the frequency of CIS Returns. All of these administrative tasks must be done online.

If the sub-contractor is a company then tax deducted from payments received by it can be offset against its own PAYE and National Insurance Contributions, deductions under CIS from payments made to its own sub-contractors and Corporation Tax on its profits. If the sub-contractor is not a company then tax deducted is offset against its Income Tax liability and National Insurance Contributions. The sub-contractor who is not a company will therefore claim relief for deductions at a later time than a corporate sub-contractor.

Registering for Gross Status

There are obvious advantages to registering for gross status and there are conditions which must be satisfied before gross status can be attained. These include the method of operating in the UK, turnover thresholds, group structure and demonstrating a good compliance history with HMRC. If the compliance history is damaged during construction operations then HMRC can revoke gross status which may have a catastrophic impact on cashflow. Maintaining a good compliance history with HMRC is therefore paramount.

How we can help

We have considerable experience of CIS matters including split contracts, definitions of contractors and sub-contractors, the practical impact of professionals providing project management services and preventing loss of gross status. All of these ensure that the cashflow impact of CIS is minimised.

Construction Industry Scheme and Gross Payment Status

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Following on from Graeme’s post about the Time to Pay arrangements.

Are you in the Construction Industry? Have you got Gross Payment status? If you have, you’ll know how valuable that status is, and you’ll be well aware that losing that status could lead to a loss of up to 20% of cash inflow. And that would be terminal for many businesses.

In these difficult times of slowing customer payments and restricted funding from banks, it’s easy to allow PAYE and Corporation Tax payments to take a back seat to other creditors. But if you do you could be putting your Gross Payment status at risk.

Under its recently published “Time to Pay” scheme, the Inland Revenue has clarified that businesses entering into an arrangement under it will not lose their gross payment status.

But it’s vital the business agrees the Time to Pay arrangement before payment is due, not after. And whilst there is still a risk that the “computer” will send out automatic notices of revocation, the Inland Revenue has also confirmed these will be cancelled on immediate appeal.

So the message is – use the scheme or lose the status.

The Business Payment Support Service

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One announcement of the Pre-budget report of 25 November was a new service for businesses in temporary financial difficulty that were unable to pay their tax bills. They would be able to spread their bills over a timetable they could negotiate with the business support service of HMRC. This service would cover all taxes paid by the business, including Corporation Tax, VAT, PAYE, Income Tax and National Insurance Contributions. Although interest would be charged on late paid tax it is anticipated that this rate would be lower than that of bank borrowing.

A key requirement is that contact is made with the business payment support service’s helpline before the due date of payment of the tax. The helpline would only be able to deal with requests in advance of the tax being due. If approach is made after the due date then it would not be dealt with by the helpline, but rather by the local tax district dealing with the business’ tax affairs. The local district may be less sympathetic than the dedicated helpline.

Since November, HMRC have issued guidance on the operation of the service. The guidance is welcomed as it covers some very practical matters, such as mechanism where a partnership (or partner of a partnership) is experiencing cash flow problems.

Two particular matters within the guidance that caught my eye were the review of agreements and the interaction with the Construction Industry Scheme (CIS).
The guidance accepts that a payment agreement may be negotiated in good faith but the taxpayer then experiences unexpected, further, cash flow problems and who cannot meet the agreed payment profile. HMRC will consider such circumstances on a case by case basis. Again, the key is to notify HMRC of the further problems before a payment is due.

CIS allows certain contractors in the construction industry to receive payments gross of tax. There are very strict conditions to be able to qualify for gross payments. The guidance confirms that negotiation of a payment profile with HMRC will not deny “gross status”. This is a welcome confirmation as receipt of invoices net of tax can only exasperate a cash flow problem.
In the round the business support service is a welcome announcement and HMRC have issued some helpful guidance. Well done!