Extension of security deposits into Corporation Tax and the CIS

Following the publication of the draft provisions for Finance Bill 2018-19 (“draft provisions”) and explanatory notes on 6th July 2018, Government published a range of policy papers and draft legislation.

One of the key provisions was the extension of security deposit legislation. On 13th March 2018, following the announcement at Autumn Budget 2017, Government published a consultation seeking views on the introduction of legislation in Finance Bill 2018-19 to extend the current scope of security deposit legislation to include Corporation Tax (“CT”) and Construction Industry Scheme (“CIS”) deductions. See our news here.

Alongside the draft provisions, a summary of responses to the consultation, coupled with draft legislation and a policy paper on the extension of security deposit legislation was published.

Currently, HMRC has the power to require high-risk businesses to provide an upfront security deposit where it is considered to be necessary for the protection of the revenue. The extension of the legislation into CT and CIS deductions is set to take effect from 6 April 2019.

The policy paper proposes that the legislation for CT and CIS securities will follow the same approach used for PAYE securities and that the final details regarding HMRC’s powers will be set out in further regulations.

It is proposed that the Finance Bill 2018-19, once it has received Royal Assent, will insert a new section 70A into Chapter 3 of Part 3 of the Finance Act 2004 to legislate this change in relation to CIS. A new paragraph 88A will be inserted into Schedule 18 of the Finance Act 1998 to give similar powers in respect of a company’s CT liabilities.

The new amendments will be targeted specifically at high-risk businesses, where there is clear evidence of non-compliance with tax obligations or personnel actively involved in a current business were actively involved in another business that failed to pay tax due. It will also make failure to provide a security when required to do so an offence, which may be penalised by a fine.

HMRC have estimated that the required changes to its IT systems would cost around £840,000 and estimated that it will also incur operational costs currently in the region of £5 million. It has also been expected that the changes will bring in an extra £150 million to the Exchequer by 2023.

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.

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.   

Simply, this measure is another reason for businesses to ensure that they are behaving compliantly to avoid any additional and unnecessary costs.