As announced in the Budget, a consultation was published on 19 March on Tackling Construction Industry Scheme Abuse. This follows on from an earlier consultation on fraud on the provision of labour in the construction sector, which resulted in the new VAT reverse charge now coming in this autumn, with further proposals to tackle fraud now also proposed to be incorporated into the construction industry scheme (CIS) mechanism.
The construction industry continues to be seen by the government as a sector in which some abuse tax rules to extract cash from the government, falsely reduce their tax liabilities and as a result gain an unfair cash-flow advantage over their competitors.
The latest proposed measures target fall, broadly, into 3 categories:
- In those cases where sub-contractor can potentially offset tax deducted at source under the CIS against their own employer tax liabilities, HMRC will, from April 2021, be able to correct the amount of CIS deductions claimed on the sub-contractor employer’s return, if they identify inaccurate amounts have been claimed and notify the sub-contractor but it does not correct its return. HMRC will also be able to amend the return if it identifies a concern and does not receive a satisfactory response from an employer in response to an enquiry about that concern. This is broadly most likely to happen if the subcontractor's set-off/ reclaimed amounts exceed those accounted for by the contractor, as reflected in a payment deduction statement (PDS). In addition, it is proposed that, where this happens, HMRC will have further powers to prevent further deductions/ reclaims throughout the rest of the tax year. Importantly, it is not anticipated that these powers to prevent further deductions/reclaims would be used in the case of error, as then HMRC anticipate that the subcontractor employer would correct the returns themselves. Appropriate late interest charges will also be imposed to prevent any cash flow advantage, and penalties are also possible. Notably, where an enquiry is made the subcontractor will only have 14 days in which to supply evidence to HMRC to support the deduction. This in itself seems very short on a practical level. Sub-contractors should ensure that they obtain appropriate PDS from employers where deductions at source are made. Where the new off payroll rules (under IR 35) operate these will take precedence over the CIS rules, so that contractors will need to consider these first as appropriate. Notably, the new IR 35 proposals have been pushed back for a year to April 2021. See [CLICK HERE].
- Important other definitional changes of the law to prevent abuse in particular:
- a change as to who is a ‘deemed contractor" (ie those who carry on certain construction operations, but whose primary business is not construction). Going forward, rather than operate on a look back basis of an average spend of more than £1m per annum over the last 3 years ending with the last accounting period, it will operateing on a rolling three year basis. Once the £3m threshold has been met on this new basis, payments will be subject to the scheme. HMRC anticipates that this should be relatively easily manageable and that certification could be sought early to prevent non-compliance. The measure will, however, potentially accelerate the operation of the CIS provisions and bring more into the CIS net.
- clarification of the CIS rules on what ‘materials deductions’ are allowable in determining the amount of a CIS deduction, so that a relevant deduction can only be taken once and by the person who actually incurs the cost of the materials in fulfilling the contract. This is to stop a deduction being taken for the same materials at all levels of the supply chain.
- With a view to helping to tackle fraud in the sector, HMRC wants to bring in further measures to improve the information available to them about construction supply chains. The proposal is to "encourage" larger contractors to undertake more supply chain due diligence to support this. One idea is that HMRC could require ‘main contractors’, so those at the very top of the construction chain, to notify them of their whole supply chain for a particular project or contract. Having done the relevant due diligence the idea would be that the main contractor would be able to flag any concerns to HMRC, particularly around chains that seem unnecessarily long or where entities cannot be readily identified. HMRC could then investigate any suspect entities in the chain. Areas for further consideration could include:
- a system of site registration, as in Ireland;
- the definition of a ‘main contractor’ for this purpose: would it be the entity at the top of the chain operating the CIS, or should it include large sub-contractors who also act as contractors? Is a definition by reference to turnover appropriate, or should the standard definitions of very large, large and medium-sized business be used?
- how far down the supply chain should the contractor report and when should the report be made?
- the checks. These could include:
- verifying the sub-contractor with HMRC to check they are registered for CIS, VAT, other taxes;
- checking they are registered with Companies House (if a company or large partnership);
- checking how long they have been trading;
- checking their addresses and telephone numbers are genuine;
- asking for copies of their insurance cover and last accounts;
- checking their workers are eligible to work in the UK;
- checking the directors/partners are “fit and proper” persons
- sanctions or consequences for failure to report.
In addition, HMRC proposes that if it identifies fraud in a CIS supply chain, it will notify the main contractor and encourage it to identify the perpetrator and remove them from the chain, or to ensure appropriate CIS deductions are applied retrospectively. Where the fraud continues, HMRC could stop the main contractor from paying their sub-contractors gross and/or hold them responsible for tax losses due to fraud lower down the supply chain.
HMRC appears to recognise that these proposals could impose a heavy burden and seeks responses as to the proposed questions.
- a system of site registration, as in Ireland;
Following responses to the consultation, wording will be included in the Finance Act 2020/21 to come into effect from 6 April 2021. The guidance will be updated before then.
Return to Budget 2020.