The Tax Faculty, as with many parts of ICAEW, undertakes a huge body of work on behalf of its membership for the benefit of UK Plc. The positive effects of this work are not always obvious or tangible, but at times there can be seen a direct correlation between efforts and ideas, and the resultant response.

In March 2020, HMRC issued a consultation document aimed at tackling Construction Industry Scheme (CIS) abuse. Comments were invited for the end of May, deferred to August. HMRC will have received many submissions from industry and professions, but it is interesting to cross reference ICAEW’s response to the consultation document (ICAEW REP 57/20) with the eventual contents of the draft legislation.

Background

HMRC has found many instances of businesses within the construction industry collecting VAT and CIS deductions, then failing to report these fully and stealing large sums. The VAT element is being addressed by the reverse charge legislation, due to be introduced in March 2021. The proposed approach to CIS was less straightforward.

Changes to the CIS are due to come into force on 6 April 2021. See opposite for the proposals that were tabled for comment in the consultation document of 19 March 2020.

Regular consultation

A good deal of the March consultation document read as if its authors had an insufficient grasp of CIS and the powers already available to HMRC, and the construction industry generally.

ICAEW REP 57/20 suggested that HMRC reconvenes its CIS Operational Forum (CISOF). This consultation group followed on from the Construction Industry Review Implementation Panel, which oversaw the lead up to, and initial operations of, what is the current scheme. CISOF was disbanded by HMRC due to (in its opinion) there being nothing much to discuss nor any need for consultation.

ICAEW welcomes the fact that CISOF has been reconvened by HMRC and held its first virtual meeting by the end of 2020.

Digitalisation

In justifying the supply chain proposals, HMRC drew attention to the Irish tax system, which has its own version of CIS. A feature of this system (which HMRC did not mention) is that subcontractors may access online the tax deductions reported by contractors. There are more than one million self-employed subcontractors in the UK that suffer CIS tax deduction each year; such a resource would be especially useful when compiling tax returns.

Subcontractors in the Republic of Ireland have had this facility since 2012. Following a consultation on CIS in 2014, HMRC promised this would be in place for 2015. This has never happened.

ICAEW REP 57/20 recommended the digitalisation of CIS. The policy paper makes no mention of this, but through CISOF the matter will be pursued such that at the very least, online access for subcontractors to their reported CIS deductions will form part of Making Tax Digital for self assessment, as well as Real Time Information reporting for PAYE. 

Finally, it is notable that the figures given in the impact assessment for the original consultation document remain the same in the much-diluted policy paper. The policy paper indicates that the figures relate to the CIS set-off amendment power only. The original consultation document indicated that it was an assessment of the government’s current understanding of the impacts of the measures, excluding the supply chain proposals. Surely they cannot both be correct? Imagine how a taxpayer would be treated by HMRC and at a Tax Tribunal were they to make such a careless error to their advantage.

The consultation document of 19 March 2020

The following proposals were tabled for comment.

Correction of CIS deductions claimed

A majority of contractors within the construction industry operate as limited companies. During the tax year, those contractors that do not have gross payment status (GPS) are allowed to offset CIS deductions sustained against PAYE and CIS deductions payable each month. HMRC was uncomfortable with how often deductions sustained were overstated.

HMRC’s original proposal was that where a contractor’s claim for offset deductions in a monthly return exceeded HMRC’s figures, HMRC should not only be able to correct the return but also to deny that contractor any further offsets for the remainder of the tax year.

ICAEW REP 57/20 pointed out that contractors may under-report deductions made from subcontractors for their own cash flow benefit. In such a case, the subcontractor would be penalised for claiming CIS deductions apparently made in their name. Such deductees should be given the opportunity to justify their claims before the offset was suspended.

The 12 November policy paper saw HMRC reduce its proposed power to simply amending the monthly offset, where the claimant (when challenged) was unable to provide satisfactory evidence for their deduction figure. HMRC has reserved the right to deny offsets, subject to review and appeal.

Cost of materials

When a subcontractor incurs expenditure on materials (as defined by CIS, which can include plant hire), the actual cost can be specified on an invoice such that deduction of tax is only applied to the remainder of the sum charged before VAT. HMRC was concerned that in a contract with several tiers of contractors/subcontractors, those further up the chain could claim exemption from deduction for the supply of materials.

HMRC’s original proposal was that only the subcontractor paying the supplier for materials could claim exemption from tax deduction under CIS.

ICAEW REP 57/20 advised that this could affect cash flow adversely within the chain for those businesses without GPS (either by choice or denied such under CIS rules).

The 12 November policy paper retains the proposal as originally drafted. ICAEW reiterated its concerns about the cash flow implication of this measure in ICAEW REP 05/21.

False registration (for gross payment status)

HMRC has compiled a list of past offenders (and their nominees) in respect of CIS and other areas of tax, such that they do not consider that GPS should be granted to businesses under their influence or control.

HMRC’s original proposal was that penalties should apply to these individuals and/or their businesses that may influence others to make false statements or declarations, or provide them with false documents – not just the applicants themselves.

ICAEW REP 57/20 asked for clarity concerning the penalties proposed and for them to apply to those who provide the false information; also for HMRC to acknowledge its responsibility in monitoring the GPS process.

The 12 November policy paper moves away from the original proposal of penalising those who may exercise influence in a false registration (or in the continuance of that business), to those that actually encourage or provide the falsification of documents.

This last area may not seem especially important. What should be kept in mind is its relationship to the other proposals included in the consultation document.

Deemed contractors 

Some businesses do not operate primarily as construction businesses, but commission work that falls within CIS. Excluding work on their own premises, where such annual expenditure exceeds £1m on average over the last three accounting periods (being the year ended 31 March), that business becomes a deemed contractor; it must register with HMRC for CIS and operate the scheme, making monthly returns and deductions.

HMRC’s original proposal was that to avoid the year-end manipulation of contracts and payments to avoid CIS registration, the calculation should move to a rolling monthly figure. If that exceeds £3m for the last three years, the business should register for CIS immediately and apply the scheme to the next payments to the relevant subcontractors.

ICAEW REP 57/20 observed that the annual threshold for deemed contractors has not changed from £1m since the current scheme was introduced in 2007. It was suggested that registration for CIS would not be seen as necessary should expenditure temporarily exceed the threshold.

The 12 November policy paper retains the rolling calculation and makes no mention of temporary expenditure spikes, but reduces the monitoring period to 12 months and increases the threshold to £3m.

Supply chain proposals

HMRC seems discontent to simply impose a scheme on the industry, and has considered expanding obligations..

HMRC’s original proposal was that contractors should undertake more detailed due diligence on subcontractors in terms of their ownership at the beginning and throughout the contract. This would apply not just to subcontractors directly engaged, but potentially five tiers of subcontract down the chain. Tests would include tax registrations and insurance cover as well as whether the directors were ‘fit and proper’. Another suggestion was that payments reported on monthly CIS returns should be separated by each construction site (which should be indicated by number). The main contractor would become liable for tax lost as a result of fraud arising within the chain of contracts.

ICAEW REP 57/20 made the point that much of this work is the responsibility of HMRC. The proposals would mean an enormous amount of work for little outcome; the impact assessment was no more than £20m per year of tax revenue. The conclusion was that “this proposal should not be implemented without further consultation”.

The 12 November policy paper makes no mention of supply chains, although the consultation outcome indicates that the government might keep this area under review.

About the author

Howard Royse ACA, Howard Royse Limited is a member of ICAEW’s SME Business Tax Committee and has been ICAEW lead on CIS matters since 2004