Spring Statement consultation: extension of security deposit legislation

Government is seeking views, following its announcement at Autumn Budget 2017, regarding the introduction of legislation in Finance Bill 2018 - 2019 to extend the current scope of security deposit legislation to include Corporation Tax (‘CT’) and Construction Industry Scheme (‘CIS’) deductions. This would take effect from April 2019.

Existing process

Currently one of HM Revenue and Customs’ (HMRC’s) compliance tools is the power to require high-risk businesses to provide an upfront security deposit where it believes there is a serious risk to the revenue. There must have either been a failure to comply with return filing and payment obligations, or the personnel actively involved in a current business must have been actively involved in another business that failed to act compliantly. However, the current powers only apply to certain taxes and duties, (including VAT, PAYE, NICs) despite the non-compliant behaviours typically being across all aspects of the businesses’ tax affairs.

There is currently a criminal sanction that may apply if a person doesn’t comply with a requirement to provide a security and the courts may impose an unlimited fine.

Proposals for change

HMRC estimates that extending security provisions to CT and CIS will result in an additional 400-500 cases being in scope for securities action each year. CT and CIS securities will be targeted specifically at high risk businesses that fail to comply with tax obligations or where those behind the business have been associated with previous non-compliant businesses that resulted in a loss of tax. All security interventions will be considered on a case by case basis.

CT securities

CIS operates in a similar manner to PAYE, i.e. there are reporting and payment cycles, however for CT the amount of tax due on a company’s profits is established after an accounting period of up to 12 months. Therefore, in order to calculate securities, it is envisaged that HMRC would engage with the company to seek information to undertake the calculation, supplemented by information available from VAT/PAYE records, Companies House or knowledge of commercial practice and business models.

To mitigate the impact of a company being required to pay an annual tax liability in advance, HMRC have considered allowing the company to pay the security in instalments. 

HMRC explain that their experience from the existing securities regime indicates that the possibility of a criminal sanction plays an important role in changing taxpayer behaviour and therefore, criminal penalties will also exist for failing to provide CT and CIS security when required.

CIS securities

HMRC propose that a security may be required form any person who is required to register as a contractor under the CIS, where HMRC believes there is a risk to the revenue.

HMRC propose that for CIS, it should be an offence for a contractor to make a payment under a construction contract to a subcontractor when they have been required to give security and have not done so.

Consultation details

There are 8 questions that Government require thoughts on – to see these and the full consultation click here. The closing date for comments is 8th June 2018. Government will then publish a summary of responses and draft legislation later this year.

Government will also be publishing a second discussion paper in due course entitled ‘Tax Abuse and Insolvency: A Discussion Document’ which will seek views on tackling the small minority of taxpayers who abuse the insolvency regime to deliberately avoid or evade their tax liabilities, including through the use of phoenixism. This document will consider what measures might be used to ensure that such established patterns of behaviour do not occur in the first place.

Aspire comment

Government see fraud in construction sector labour chains as a significant risk to the Exchequer, therefore it is not a surprise that HMRC are extending their existing powers to implement the extension of security deposits for CIS deductions particularly.

The consultation describes shell companies being set up within construction sector supply chains with the sole intention of taking CIS deductions from subcontractors which are never paid to HMRC and then, when challenged, the shell company goes missing or defaults and a new company is set up to continue the fraud.

Although the above scenario, will only describe a minority of contractors, all contractors will need to ensure that the operation of CIS is understood and that processes are in place to ensure they are operating compliantly to avoid the security provision.

However, Government has stated that they will consider if a security is inappropriate, for example, if there is clear evidence of an inability to pay, or if the business can demonstrate financial difficulties that are a “one off”. Alternatively, HMRC may consider that insolvency action is more appropriate than security action.