Legislation to tackle construction industry scheme abuse

The government is introducing legislation making four changes to the Construction Industry Scheme (CIS) rules in a bid to tackle abuse and strengthen HMRC’s powers to act, which are set to impact contractors, of whom around 250,000 are registered for the CIS

The changes follow a consultation announced at Spring Budget 2020 and will have effect from 6 April 2021.

The first measure provides a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their real time information (RTI) employer payment summary (EPS) returns.

This power will be used to correct errors or omissions relating to the claims, to remove claims, and to prevent certain employers from making further similar claims, where employers do not provide evidence of eligibility and/or evidence of the sums deducted, and do not correct their EPS at HMRC’s request.

Some sub-contractor companies are entitled to set CIS deductions suffered in-year against their employer liabilities.

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.

Secondly the new legislation makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.

The legislation 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 third measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS, so-called ‘deemed contractors’.

Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3m within the previous 12 months.

Finally, the legislation expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.

Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either encourages that person to make a false statement or supply a false document in support of that application; or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.

Treasury estimates suggest the changes will result in an additional £20m of tax in 2022/23 and 2023/24, with an extra £15m forecast for 2024/25.

Useful links:

Changes to tackle Construction Industry Scheme abuse

Tackling Construction Industry Scheme Abuse Summary of Consultation Responses

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