Back in March 2020 as part of the Spring budget, the Chancellor of the Exchequer, Rishi Sunak, announced a consultation to tackle abuse of the Construction Industry Scheme (“CIS”). Roll forward one year to March 2021 and following the enactment of the proposals put forward in late 2020, HMRC have updated their guidance for CIS contractors and subcontractors.

When do the new measure come into force?

The new measures came into force from 6 April 2021

What is the reason for these measures?

The aims are:

• To enable HMRC to act quickly where rules are being broken.
• Level the playing field of all those operating within construction, such as by preventing manipulation of the rules to avoid falling within CIS.
• To make sure the CIS applies fairly to everyone liable, such as by removing different interpretations to the cost of materials rules, that could be subject to abuse.

What are the measures?

1. CIS set-off amendment power

For many years now there has been the ability for eligible sub-contracting companies to offset CIS deductions made by contractors against other employer taxes and deductions, including PAYE, NI and student loan repayments. HMRC now have extended powers to amend such set-off claims by companies where they are not satisfied that the contractor CIS deductions are adequately supported (in practice usually a written statement from the contractor for each month or payment made will suffice).  If HMRC do correct or amend claims, the company may be unable to make any further offsets in the same tax year.  It is therefore critical that businesses maintain good records of CIS deductions claimed.

2. Cost of materials

Deductions made under CIS do not apply to the cost of materials.  Prior to the rule changes, differing interpretations were applied as to what constitutes “materials” in this regard.  HMRC have now clarified the position, stating that the cost of materials will only be excluded from the CIS deduction where the materials are directly purchased by the sub-contractor to fulfil a particular contract.  Care should be taken with hired plant, as only that actually hired by the sub-contractor will qualify as materials for this purpose.  Should the sub-contractor use their own plant, such as scaffolding, mixers and so on, costs attributable to such equipment would be subject to the CIS deduction.

3. Deemed contractors

Previous to the new measures, non-construction businesses were able to retrospectively review the level of construction costs incurred to determine whether they then fell within the scope of the CIS as a ‘deemed contractor’ (this would generally be the case if construction-related expenditure exceeded on average £1m for each of the last 3 years).  The new rules apply such that, if cumulative expenditure on construction activity exceeds £3m in the past 12 months, the non-construction business will be required to register for the CIS as a contractor (if not already registered) and begin making deductions where necessary from the next payments made to sub-contractors.  This will require businesses to continually monitor their construction expenditure rather than reviewing the position annually. Where construction expenditure subsequently falls below £3m in the previous 12-month period, or no further construction-related payments are expected, registered entities can stop operating the CIS.

Many businesses can unwittingly fall to be deemed contractors and fail to register and operate the CIS within the timeframes necessary.

4. CIS registration penalty

The measures extend HMRC’s powers to issue penalties for providing false information for the purposes of registering for CIS or Gross Payment Statement.  Whereas previously such penalties could be applied to the business or persons registering, this is now extended to companies or persons who can exert influence or control of the registering party.  Examples include directors, agents, and others HMRC believe have such power.

The penalties will apply to such persons in the following situations:

• They themselves make a false statement or supply a false document to get the other party registered,

or

• They encourage the registering party to make a false statement or supply a false document to get themselves registered

If you have any questions, or would like assistance with the anything regarding the above or regarding CIS (such as gross status, VAT reverse charge, deemed contractors) please do not hesitate to get in touch with your Barnes Roffe contact partner.