People-on-a-building-site

Construction Industry Scheme amendments published

Navin Sharma, Assistant Manager, Employment Tax
17/11/2020
People-on-a-building-site

HMRC has published a policy paper which covers amendments in the Construction Industry Scheme (CIS) from 6 April 2021. The purpose is to prevent abuse of the CIS rules and the changes are expected to generate an extra £20 million for the government in the first year.

What are the key changes?

Deemed contractors - Non construction companies that spend over £3 million in construction operations in a 12 month period, will now need to consider if they need to register.

CIS set offs - Sub-contractors who don’t have gross payment status will need to be aware that HMRC can amend CIS deductions claimed on their RTI returns.

Cost of materials - Contractors will now only be able to remove materials directly incurred by the subcontractor on CIS returns.

CIS registration penalty - Individuals, companies and agents will receive penalties where they influence others or provide false information themselves when applying for gross payment status.

The aim of the changes is to ensure that HMRC can act quickly where the rules are being broken and to ensure a level playing field for all those operating within the scheme.

The amendments apply four changes to the CIS rules, these are outlined below.

Deemed contractors

This measure changes the criteria for determining which entities (whose main business operations are outside the construction sector) need to operate the CIS (referred to as ‘deemed contractors’). 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 operate the CIS when construction expenditure exceeds £3 million within the previous rolling 12 months. Currently, if average annual expenditure on construction operations exceeds £1 million in each of the last three years, the business has to operate CIS on any construction expenditure from the start of the next accounting period. This change is designed to prevent manipulation of the current rules so that a business can avoid operating the CIS.

CIS set-off amendment power

HMRC will be able to amend the CIS deduction amounts claimed by subcontractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns. This will enable HMRC to correct errors or omissions relating to claims, to remove claims and to prevent certain employers from making further similar claims where employers do not provide evidence of eligibility and/or evidence of the sums deducted and do not correct their EPS at HMRC’s request.

Cost of materials

This measure makes it clear that it is only where a subcontractor directly incurs the cost of materials purchased to fulfil a construction contract that the costs in question are not subject to deduction under the CIS. Previously, any purchase of materials would not be considered when assessing the element of an invoice subject to CIS. The clarification to the cost of materials provision will remove scope for different interpretations of the existing rules. The amendment will match the CIS deductions sum supported by any evidence held by or provided to HMRC.

CIS registration penalty

This measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.

Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either:
  • encourages that person to make a false statement or supply a false document in support of that application
  • 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.
This penalty applies only to the individual or business to whom the registration applies, however the scope of the penalty will expand to those who are able to exercise influence over a person who is registering for CIS, for example agents, directors or anyone HMRC believes is able to exercise influence.

Such persons will be liable to a penalty in either of two circumstances:

  • where they themselves make a false statement or furnish a false document for the purpose of enabling another individual or business to be registered
  • where they encourage an individual or business to make a false statement or furnish a false document for the purpose of enabling themselves to be registered for the CIS.

Background to the measure

1. The government announced at Spring Budget 2020, a consultation on measures to tackle abuse of the CIS.
2. A consultation document was published on 19 March 2020 setting out proposals to tackle this abuse.
3. Due to coronavirus, the consultation was extended until 28 August 2020.
4. HMRC held a number of meetings with those working in the sector and their representatives during July and August 2020.
5. The consultation responses have informed this impact assessment.

Further details on the policy paper can be found here.

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Crowe commentary

In our opinion, the changes under the deemed contractors section above, will present the most fundamental change. There will be ongoing monitoring requirements for any business that is not a mainstream contractor, but has business operations that cross into the CIS from time to time. Monitoring will need to be in real time rather than the historic reactive approach. That said, we consider that the increase in the trigger from £1 million on average over the last three years, to £3 million over a rolling 12 months, should make it much easier for a business to avoid becoming a deemed contractor. 

Care will need to be taken when preparing CIS returns to ensure that materials are only disregarded when the sub-contractor directly incurs the cost of materials as part of the contract. More detailed knowledge of the arrangements in the contracts will be required when preparing returns going forwards.

Those completing CIS registration forms will need to take extra care in entering accurate information as fines will be imposed where incorrect details are provided. We expect this is in place due to companies inflating expected construction turnover when trying to obtain gross payment status.

If you would like to discuss the CIS changes in more detail, please contact Caroline Harwood or your usual Crowe contact.

Contact us

Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax
London