HMRC have published draft legislation following a consultation on preventing tax loss from the CIS. Do these changes impact your business?
At the 2020 Budget, the Chancellor announced a consultation on measures to prevent abuse of the Construction Industry Scheme (CIS). KPMG responded to the consultation which sought views on a number of proposals. This article summarises the measures set out in the draft legislation published as a result of the consultation and our views on specific proposals. These measures are intended to take effect from 6 April 2021.
The proposed measures
CIS set-off amendment power
HMRC will have the power to amend unsupported CIS deductions where offsets against PAYE are claimed on subcontractors’ employer payment summaries. Subcontractors will be given the opportunity to explain unverified claims or genuine errors. However, HMRC will be able to remove claims altogether where subcontractors cannot provide satisfactory evidence to support CIS deductions claimed as made by their contractors, or where they are not entitled to set-off in this way.
HMRC have clarified that they will only prevent subcontractors from claiming further offsets in the tax year where the subcontractors refuse to make corrections when directed to do so.
This measure allows HMRC to act in real time where there is evidence of CIS deductions being claimed incorrectly against PAYE. Where there are genuine errors or a misunderstanding, the subcontractor will be afforded the opportunity to explain, and this is welcome. However, where claims are made fraudulently or recklessly, which was a key issue identified in the original consultation, we had proposed that tougher sanctions should apply.
Cost of materials
HMRC’s view is that current legislation on a deduction for the cost of materials is open to interpretation. The draft legislation clarifies that a deduction is only available where the subcontractor itself purchases materials to fulfil its construction contract, not where purchases occur further down the supply chain which are on-billed up to the main contractor.
We consider that in fact the present legislation is intentionally permissive in providing for a deduction where materials are on-billed in this way, at least to the extent of the underlying cost to the relevant subcontractor in the supply chain. In our view, this is logical as applying a CIS deduction in this situation would represent an over-deduction of tax (because materials are involved) which would eventually need to be reclaimed from HMRC.
This amendment represents a key change to the operation of the CIS. Indeed, HMRC recognise in the consultation response document that it could adversely impact on businesses’ cash flow “meaning that they may need to lay off some subcontractors” and that “very small or micro-businesses operating on tight margins could go out of business”. This is concerning and we continue to make representations on this point. In any event we recommend that businesses review their policies on material deductions so that they are compliant from April 2021.
Businesses will be required to monitor construction expenditure more regularly. Where cumulative expenditure on construction operations exceeds £3 million within the previous 12-month period, businesses will have to register for the CIS as a contractor (if not already registered) and begin operating the CIS on their next payment to a subcontractor for construction operations (subject to a period of grace).
This marks a departure from the current position where deemed contractors must register where average annual expenditure on construction operations exceeds £1 million over the last three years. The business must then operate CIS on any construction expenditure from the start of the next period of account.
We understand that deemed contractors will also be able to stop operating the CIS when expenditure on construction operations falls below £3 million within the previous 12-month period, or when construction spend ceases under that or any other construction contract.
The changes mean that the trigger to apply and register for CIS may occur at any point rather than being tied to accounting period end dates. This has the potential to require more tracking by businesses and so place further administrative burdens on the finance/tax teams.
CIS registration penalty
HMRC will extend the scope of the penalty for providing false information when registering for payment under deduction or gross payment status under the CIS. Currently, HMRC can penalise the individual or business to whom the registration applies. This will be expanded to a wider group of individuals or companies able to exercise influence or control over the business/person who is registering for the CIS.
What happens now?
No further measures were introduced in respect of securing CIS supply chains but the Government has indicated that it will consider the consultation responses when developing future proposals.
Given the short lead-in time to April 2021, contractors and subcontractors should now review their systems and processes in light of these proposals and assess whether, and to what extent, modifications may be needed to accommodate them.
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