Consultation on tightening construction industry scheme (CIS) rules

HMRC has launched a 10-week consultation on ways to tackle abuse of the Construction Industry Scheme (CIS) to prevent tax loss, including new powers to correct deductions

From April 2021 HMRC will be able to correct the amount of Construction Industry Scheme deductions claimed on a sub-contractor employer’s return where they identify or suspect inaccurate amounts have been claimed.

HMRC says it is aware of instances where the scheme deductions are being claimed by employers not working in construction; by sub-contractor employers that are not companies; and that exceed the sums recorded as having been withheld for a particular sub-contractor on contractor returns.

In order to tackle this abuse a new provision will be introduced from April 2021 to allow HMRC to correct the scheme deductions figure claimed on the sub-contractor employer’s employer payment summary (EPS) return where there is no satisfactory evidence to support it.

The government’s proposal is to provide HMRC with a power to correct the Construction Industry Scheme deduction figure an employer has recorded on an employer payment summary return; and to prevent the employer from setting further scheme deductions against their employer liabilities for the rest of the same tax year where the correction power has been used.

When seeking evidence of the scheme deductions which a sub-contractor has claimed on an employer payment summary return, HMRC generally expect the sub-contractor to provide the ‘payment and deduction statements’ (PDS) provided by their contractor.

If these are not held HMRC would expect the sub-contractor to ask their contractor for duplicate statements.

If this is not possible then HMRC may accept other suitable evidence, but a deposit entry in a bank account alone is unlikely to be acceptable unless it can readily be matched with an issued invoice.

Other changes set out in the consultation include clarifying the law regarding the Construction Industry Scheme rules on ‘materials deductions’ and ‘deemed contractors’ to minimise misinterpretation and abuse.

It will be made clear a materials deduction for the scheme purposes can be made only from a payment under a construction contract where a subcontractor has directly purchased materials used or to be used in fulfilling that contract.

HMRC says compliance activity indicates that some contractors are manipulating both the amount and timing of construction payments, and that others are altering their accounting periods, to ensure they do not fall within the deemed contractor rules.

Going forward, construction spending will be calculated on a rolling basis. When the cumulative spend on construction operations reaches the prescribed threshold the business has to register for the Construction Industry Scheme as a contractor (if not already registered) and begin operating the scheme on their next payment made to a sub-contractor for construction operations undertaken.

HMRC says most businesses will know the amount of expenditure a construction contract they are entering into will likely incur when it is being negotiated, or at least when the contract is signed.

The contractor may not know exactly when each payment under the contract will be due as this will depend on the project milestones being met on time, but this would not stop a contractor registering for the scheme early in the life of the project to be prepared once their construction expenditure exceeds the deemed contractor threshold.

In line with the existing threshold (£1m expenditure on construction operations in each of three years) the threshold will be £3m.

When a business’s construction expenditure under a construction contract exceeds this figure, they will need to ensure they have registered as a contractor with HMRC and operate Construction Industry Scheme on the next payment they make to a sub-contractor for construction operations undertaken via this contract.

This means businesses will no longer need to look back at the end of each accounting period to check construction expenditure in the previous three years.

In the longer term the government is considering introducing measures to improve the information available to HMRC about construction supply chains and to encourage contractors to undertake more detailed due diligence to support the scheme compliance by all parties within the chain.

These are at an early stage of development and the consultation seeks preliminary views on ways to reduce labour market fraud, which could include introducing a system of site registration.

The consultation closes on 28 May.

Tackling Construction Industry Scheme Abuse

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