Changes to tackle Construction Industry Scheme abuse

On the 12th November 2020, the Government published their Policy paper, Draft Legislation and summary, and a publication of their responses to the consultation in respect of their proposed changes to tackle perceived ‘Construction Industry Scheme’ abuse.

Aspire published a news article March 2020 at the time the proposed revisions were announced in the Chancellors budget which can be found here. 

Current Law

The Construction Industry Scheme rules are currently set out in Chapter 3 of Part 3 (Sections 57 – 77) and Schedules 11 & 12 Finance Act 2004 (FA 2004). As well as in the Income Tax (Construction Industry Scheme) Regulations 2005 (S.I. 2005/2045).

Proposed Revisions

The proposed revisions are set out in Schedule 1 of the draft Legislation, containing provisions amending Chapter 3 of Part 3 of FA 2004. The Section and Schedules have effect for the tax year 2021-22 and subsequent years.

The proposed revisions are:

Section 62 FA 2004 “Set-off amendment” – HMRC Powers

The proposed amendments to this section set out HMRC’s powers where they identify, or suspect inaccurate CIS amounts have been claimed on sub-contractor’s Real Time Information (RTI) Employer Payment Summary (EPS) returns.

A HMRC officer will be authorised to:

1. Correct an error or omission relating to a set-off claim
2. Remove a set-off claim
3. Prohibit a person from making a further set-off claim, for a specified period or indefinitely

The Draft Legislation goes on further to explain that there will be a provision for HMRC to amend returns and remove claims where the claimant is not eligible to make a claim, for example where the claimant is not a company, not a sub-contractor or is registered for Gross Payment Status.

Section 61 FA 2004 “Cost of Materials”

The proposed amendments provide clarity that 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 the CIS.

Section 59 FA 2004 “Deemed Contractors”

The measure changes the rules for determining which entities operating outside the construction sector need to operate CIS. Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply CIS when construction expenditure exceeds £3 million within the previous 12 months.

There will be a grace period to those contractors who inadvertently or unexpectedly breach the new deemed contractor threshold, so that they have time to set up the required processes to enable them to operate the CIS rules effectively.

Section 72 FA 2004 “Penalties”

The measure expands the scope of the penalty for supplying false information when applying for Gross Payment Status or payment under deduction within CIS.

Individuals and companies will now be liable to a penalty if:

• they are in a position to exercise influence over, or control over, the person making the application, and either encourages that person to make a false statement or supply false document in support of that application or
• when they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.

The consultations also expand to the Governments proposed approach to tackling perceived issues in construction industry supply chains, Aspire's article can be found here.

Aspire Comment

Aspire highlighted in March 2020 that the Government accepts that majority of businesses operating within the construction industry operate within the rules. However, the Government perceive that several businesses are not compliant and as such leading to tax loses.

The Government have held conversations with the relevant participators and have received feedback from industry stakeholders. The consultation feedback and Government responses can be found here.

It is clear from client and consultation feedback that such measures may place even more pressure on those operating within the construction industry. Even more so considering that the VAT Domestic Reverse Charge is arriving on the 1st March 2021.

This is yet another step from HMRC to ensure compliance within the construction industry. Therefore, given the potential for greater HMRC powers and penalties, it is imperative that all aspects of the supply chain are aware of the CIS rules and ensure they are compliant. If not, HMRC may well use their powers.

Aspire have extensive experience within the construction industry, should you need additional support, please contact Aspire on 0121 445 6178 or enquire@aspirepartnership.co.uk