Construction industry scheme: draft legislation

13 November: HMRC has published draft Finance Bill legislation to tighten up the construction industry scheme (CIS).

The draft Finance Bill legislation, on which HMRC has invited comments, follows a consultation earlier this year to which ICAEW responded arguing that proposals for tackling CIS abuse were "disproportionate" (ICAEW Rep 57/20).

The draft legislation makes four changes to the CIS rules, fewer than were proposed in the consultation. 

The first will allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their RTI employer payment summary (EPS) returns. This change will enable HMRC to correct errors and remove claims. It will also prevent employers from making further similar claims, where they do not provide evidence of eligibility and/or sums deducted, and do not correct the EPS when HMRC so requests.

ICAEW shall be interested in clarifying HMRC’s procedures here and trusts that providing proof will not become a regular feature of CIS. As noted in the Tax Faculty’s previous representation, many of the problems that this change is intended to overcome could be resolved if CIS were digitalised.

The legislation has also been amended to ensure 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 CIS.

The third measure changes “deemed contractor” rules, which outline when a business from outside the construction sector should operate within CIS. The change means that businesses will have to monitor expenditure more regularly than previously. ICAEW welcomes the increase in the threshold from £1m to £3m, which, as noted in its consultation response, had not been increased since 2007.

The final change expands the scope of penalties for false registration to include applications for gross payment status or payment under deduction. Individuals and companies will be liable to a penalty if false documents or false statements are made to enable themselves or another person to register for these purposes. This appears to involve a more focused approach to known (or potential first) offenders which is to be welcomed.