Following requests made by the taxpayer representatives on the Construction Forum, HMRC has released some statistics in respect of the construction industry scheme (CIS). The figures, which cover the period from January 2022 to March 2023, are summarised in the table below.

The most notable statistic concerns the annual yield of CIS deductions, which would appear to be in the region of £9bn for 2022/23. Contrast this with the yield from earlier years of: £3.9bn in 2012/13; £4.6bn in 2013/14; and £5.2bn in 2014/15. These last two statistics were the final figures provided by HMRC to the CIS Operational Forum before meetings ceased to be convened and the forum was formally closed in March 2019 (more on this below).

Source: HMRC Construction Forum minutes for the meeting held on 12 September 2023 (gov.uk).
Note: HMRC is unable to provide information for June 2022. Therefore, the figures for the year ended 31 March 2023 above are the totals for the 11 months for which data is available, multiplied by 12/11. 

As a reminder, CIS is not a tax per se. All tax deducted under CIS is redeemable against income tax and national insurance contributions (NIC) for sole traders and partnerships. For companies, it is offset against PAYE/NIC/CIS/student loan deductions. In each case, the excess is repayable.

Why the increase in gross CIS receipts?

What does this increase in CIS yield tell us? There has not been an enormous increase in productivity in the construction industry – as evidenced by many reports of the shortage of new homes. Meanwhile, availability of raw materials has hampered, not facilitated the industry. 

The recent data suggests that the number of contractors registered for CIS has not increased. In 2013 there were about 160,000 registered firms; for March 2023, there were 145,500 contractors submitting monthly CIS returns. The latter figure is compiled on a different basis, but it seems fair to conclude that there has not been a significant increase in the number of firms operating as contractors over the past 10 years. 

The division of labour within the construction industry has historically been about 60:40 of employed to self-employed, with about two million people working in the industry. Those figures are still broadly the same today – 859,000 active subcontractors – so there has been no more than a 7% increase in subcontractor numbers.

It is possible that more subcontractors are working in ‘the industry’ as opposed to for homeowners and therefore a greater proportion of their income is subject to CIS tax deduction. There is plenty of anecdotal evidence of the difficulty of finding reliable tradespeople, but companies are also struggling in that regard.

Pay rates have increased, but a quick scan of the construction press shows that these are typically in single figures: the broad consensus appears to be that rates were roughly 5.1 % higher at the end of 2022 compared with 2021.

Supply chains

The main reason for the increase in sums collected under CIS would appear to be longer supply chains. If a contractor engages a subcontractor who does not have gross payment status, then 20% tax is deducted from the non-material element of their payment. That subcontractor may then engage other subcontractors, becoming a contractor themselves and perhaps deducting tax from payments made to their subcontractors – and so on. 

Supply chains seem to be getting longer, with five or six links in the chain compared with three or four previously. 

This differs from each contractor engaging more subcontractors to fulfil a task. If more workers or firms are engaged to cover work costing, say, £500k then the same tax (up to £100k) will be deducted whether one, five or 10 subcontractors are paid.

This appears to be a global trend. WTW, a worldwide firm of construction advisers, undertook a wide-ranging survey in late 2022 and found that “large construction projects today are bigger and more complex, with more contractors and longer supply chains than in previous decades”. 

Many of the reports concerning the construction industry and supply chains – there are plenty of them, freely available – talk about materials, but as we know, that does not impact on CIS. We are essentially interested in the labour element of construction. 

The CHAS Jobs Board is a resource for contractors seeking subcontractors with particular skills, in particular locations. It reported record use of its resource in 2022. 

Analysis of the construction industry is not the purpose of this article; the effect of the shortage of trained workers as well as other influences can be viewed elsewhere. Our concern is: how may this, and differing contracting methods, affect the application of CIS?

HMRC’s view

In March 2017, HMRC issued the consultation document Fraud on provision of labour in construction sector, making reference to criminal gangs establishing artificially long supply chains. Quoting from the document, “it can therefore take several months for HMRC to spot mismatches in the data”. 

Although not CIS-specific, it is worth noting that the Home Office in July 2019 issued a consultation document on transparency in supply chains. The principal focus was on tackling modern slavery. However it seems that by this stage, the term ‘supply chains’ was becoming synonymous with fraud. 

Following the closure of the CIS Operational Forum in 2019, came the March 2020 consultation document Tackling construction industry scheme abuse. The proposals included that contractors should allocate individual numbers to sites and projects and report subcontractor information to HMRC “in detail down to, say level 3 or level 5, with less detail below that”. 

Furthermore, the main contractor would be required to notify HMRC of their supply chain for a particular project or contract and could then “flag any concerns to HMRC, particularly around chains that seem unnecessarily long or where entities cannot be readily identified”. The purpose was to encourage businesses to exercise better supply chain due diligence.

In its response, ICAEW said the proposals failed “to appreciate the enormity of work involved in the investigation of subcontractors, their subcontractors and so on”, and that they would create a disproportionate burden for businesses in contrast to the relatively small amount of revenue (estimated at £20m per year) at stake. ICAEW called for the proposals to be dropped, stating that “it is not the responsibility of construction businesses to act like private investigators”.

Thankfully, this idea was soon laid to rest – and it would have been headed off sooner had the matter been discussed at forum level, a point made by ICAEW: 

“It is also regrettable that HMRC disbanded its CIS Operational Forum. This consultation group followed on from the Construction Industry Review Implementation Panel, convened originally before the current Scheme was launched. The representatives of this Forum, from professional bodies and industry, gave their time without cost to advise HMRC on any ongoing problems with the Scheme and to comment on proposals for amendment. The collective knowledge of the members of that Forum would have been of assistance in framing this consultation into a more coherent and sensible document.”

The Construction Forum was established in November 2020, to encompass CIS matters and other tax-related construction industry matters such as the VAT reverse charge. 

What next?

The provision of current figures for CIS yield and activity are not simply a concession for accountants to rummage through and play with. Notice will have been taken within HMRC and elsewhere. 

Those tackling fraud in taxation will continue to request further powers. The changes made by Finance Act 2024 to the gross payment status tests (TTQT) to include VAT compliance is a direct result of that. In the policy paper, the government states that “the measure will tackle serious non-compliance within the construction sector, particularly supply chain fraud involving CIS and VAT”.

Therefore, it seems likely that HMRC will continue to look to tighten the screw on construction businesses. HMRC frequently cites the ‘risk to revenue’ of fraud in the construction industry, but to my knowledge this has not been quantified and that risk must have fallen in recent years as payments in cash have reduced. What is clear is that CIS is a valuable tool as a tax-accelerator for the government, bringing tax receipts in earlier than would otherwise be the case. There is also the hidden benefit for the government of unclaimed deductions in that millions of pounds in deductions go unclaimed each year by subcontractors. 

Further digitisation, in particular the long-promised online subcontractor's account, would be of benefit to the industry. We have been promised that applications for CIS registration will be digitalised from 6 April 2024. Regrettably, HMRC has restricted access to subcontractors or their agents when making requests for details of deductions.

To conclude, members with construction clients will do well to advise them on compliance and the potential pitfalls. The burden, in the short term, is only likely to increase.

Howard Royse ACA, Howard Royse Limited