The Government is proposing changes to the Construction Industry Scheme (CIS) to be introduced from April 2021.
These include giving HMRC the power to amend CIS deductions in the event of errors or omissions and requiring businesses to apply the CIS when construction expenditure exceeds £3 million over the preceding 12 months. Exemptions to CIS deductions will also be limited going forward and there will be penalties for providing false information.
Proposed revisions in detail
CIS set-off amendment power
Some sub-contractor companies are entitled to set CIS deductions suffered in-year against their employer liabilities as provided by section 62(3) FA04 and regulation 56 S.I. 2005/2045. Where, upon challenge from HMRC, the sub-contractor employer cannot provide satisfactory evidence to support the CIS deductions claimed, and when asked the employer does not amend the CIS entry on their EPS within a certain timeframe, HMRC will instead amend the CIS deduction figure claimed on an EPS. The HMRC amendment will match the CIS deductions sum supported by any evidence held by or provided to HMRC.
HMRC will remove the claim altogether where there is no evidence of any CIS deductions in respect of that company or where the employer is not entitled to set-off in this way. The employer liabilities will be recalculated following the amendment. Where HMRC has to amend the CIS credit claimed on an EPS, the employer may also be prevented from making further CIS set-offs in the same tax year. HMRC’s new powers to amend set-off claims and prevent further set-off claims will be decisions subject to review and appeal, unless the claimant is not a sub-contractor company suffering deductions under the CIS. The new powers will be contained in amendments to section 62 FA04, and the operative detail will be contained in regulations by way of amendments to S.I. 2005/2045.
Cost of materials
The current rule regarding the cost of materials to be taken into account by a contractor when operating the CIS on a payment to a sub-contractor is set out at section 61(1) FA04. This provision must be read with the definitions of a “construction contract” at section 57 FA04 and of a “contract payment” at section 60 FA04. The newly substituted provisions of section 61 FA04 will clarify that, on making a contract payment to a sub-contractor, the contractor must deduct a sum from the payment which is equal to the relevant percentage of the net payment. In calculating the net payment, the contractor must work out the amount of the contract payment less deductible materials costs. A materials cost will only be deductible if it represents the direct cost of materials purchased by a sub-contractor in respect of that particular contract. The change to these provisions will ensure that it is clear that only the sub-contractor directly purchasing materials to fulfil their own contract with their contractor is entitled to a reduction to account for materials costs from the gross contract payment before the CIS deduction is calculated.
Section 59 FA04 sets out the rules for bringing deemed contractors into the CIS. The general rule to determine whether a non-construction business has to operate the CIS is found at section 59(1)(l) FA04. It requires a turnover threshold for expenditure on construction operations to be met, and that the business reviews this expenditure at the end of each period of account. If average annual expenditure on construction operations exceeds £1 million in each of the last 3 years, the business has to operate CIS on any construction expenditure from the start of the next period of account. When average expenditure is less than £1 million in each of three successive years the business no longer has to operate the CIS on construction expenditure: see section 59(3) FA04. The new rules will require a business to monitor construction expenditure more regularly. When the cumulative expenditure on construction operations exceeds £3million within the previous 12 month period, the business will have to register for the CIS as a contractor (if not already registered) and begin operating the CIS on their next payment to a sub-contractor for construction operations. Deemed contractors will be able to stop operating the CIS when expenditure on construction operations falls below £3m within the previous 12 month period, or when no further payments on construction operations (including retention or management/administration payments) are expected to be made under that or any other construction contract.
CIS registration penalty
HMRC can penalise a person for providing false information when registering for payment under deduction under the CIS or for GPS (section 72 FA04). This penalty applies only to the individual or business to whom the registration applies. The scope of this penalty will be expanded to apply to a wider group of individuals or companies who are able to exercise influence or control over a person who is registering for the CIS, this will include agents, directors, company secretaries, or anyone HMRC believes is in a position to exercise influence and control over the business and/or the person making the CIS registration.
Such persons will be liable to a penalty in two circumstances:
- where they themselves make a false statement or furnish a false document for the purpose of enabling another individual or business to be registered or
- where they encourage an individual or business to make a false statement or furnish a false document for the purpose of enabling themselves to be registered for the CIS
The changes to primary legislation to deliver this measure will be published for consultation alongise this TIIN.
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