Construction Sector Update

Tue 17 Nov 2020

The construction sector is again in the spotlight from a tax perspective. HMRC published draft legislation on 12 November 2020, taking effect from 6 April 2021, which announced some key changes to the operation of the Construction Industry Scheme (CIS). This will not only impact organisations operating in the construction sector, but will now mean non-construction entities may have an earlier registration point as a deemed contractor if they have significant construction spend during a 12 month period.

Cost of materials

The legislation will be amended to now make it clear that only the sub-contractor who directly incurs the cost of materials purchased, will be able to claim a deduction from any payments which fall within CIS.

This is a significant change to the legislation as HMRC seek to bring clarity to the extent to which subcontractors with net payment status can claim deductions for the cost of materials and reduce the level of tax deductions made.

It brings into light the area of material deductions, which is one of the most difficult areas of compliance for contractors operating within the scheme’.

Deemed contractors

The legislation will revise the definition of a deemed contractor for CIS purposes. Rather than the current definition of only becoming a deemed contractor where construction expenditure is greater than £1 million on an average spend basis over a 3-year accounting period. Organisations will now become a deemed contractor where expenditure exceeds £3 million during the previous 12 months.

Conversely, it means that expenditure of £2m in one year, and £1m in each of the next two years, will mean the deemed contractor rules will not apply when they previously would have done.

Where a business is a ‘deemed contractor’ it will need to register with HMRC for the construction industry scheme. Registration will create obligations to deduct income tax from payments to subcontractors who do not have gross payment status and pay this over to HMRC, as well as various record keeping requirements. A business may be able to immediately de-register if all its subcontractor payments are to be made in respect of work done on buildings for its own use.

The legislation will also allow HMRC to provide a grace period to those contractors who inadvertently or unexpectedly breach the new deemed contractor threshold, so that they have time to set up the required processes to enable them to operate the CIS rules effectively. Such a concession is currently included in HMRC guidance but will be legislated from 6 April 2021.

CIS set-off amendment power

HMRC will now have the power to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns, where insufficient evidence is provided, and organisations do not correct their EPS at HMRC’s request.

CIS registration penalty

Individuals and organisations will now be liable to a penalty if they are considered to exercise influence or control over the person making an application, and either encourage that person to make a false statement or provide false documentation in support of that application.

This is of importance as the Corporate Criminal Offence (‘CCO’) legislation allows for unlimited penalties to be imposed on a business (company or partnership) which cannot evidence it has put in place reasonable prevention procedures with regard to the facilitation of tax evasion. To know more about the CCO legislation, please see our blog post.

Summary

The above changes represent a big statement by the government that the construction sector is still very much considered high risk by the exchequer in terms of the likelihood of fraudulent activity taking place.

The implementation of the CCO legislation in September 2017, has shifted the focus solely from those evading tax, to encompass those who intentionally or unintentionally allow for the facilitation of tax evasion within their supply chain (or even, turn a blind eye) even though they might not be benefitting from the tax evasion. It is therefore crucial organisations demonstrate their compliance with this legislation.

Further, those organisations operating as contractors within the scheme should expect payments to ‘net payment’ status subcontractors to be high on HMRC’s agenda when the next CIS review takes place. HMRC’s ability to dispute any material deductions included on monthly CIS returns has significantly strengthened from 6 April 2021. Failure to evidence that the amounts claimed have been directly incurred by the subcontractor engaged will lead to underpayments of tax and penalties payable by the contractor.

These changes from 6 April 2021 add more burdens to the construction sector, with the introduction of the Domestic Reverse Charge for VAT from 1 March 2021 and the introduction of the off payroll workers legislation from 6 April 2021. Given the close proximity to this new legislation coming into place, there is now only a short window to ensure all processes and controls are updated to prevent any failures from not only a Senior Accounting Officer perspective but also under the Corporate Criminal Office (CCO) legislation. Further details about the CCO, and HMRC’s expectations with regard to complying with this legislation, can be found in our webinar here.

Next Steps

Please do get in touch with your normal Mazars contact or Patrick.crookes@mazars.co.uk and we will be happy to help you further.