Changes to construction industry scheme rules from April 2021
On 12 November 2020, the government published draft legislation (and accompanying explanatory notes) making changes to the Construction Industry Scheme (CIS). These changes have arisen as a result of the consultation on Tackling Construction Industry Scheme Abuse launched by the government at the March 2020 Budget and, if enacted, will apply from 6 April 2021.
The guidance sets out that the changes have three main aims, which are to ensure that:
- the same rules apply to all those operating within construction;
- CIS applies fairly to everyone who is liable; and
- HMRC can act quickly when the rules are being broken.
The main changes which will implement these aims are as follows:
Definition of “deemed contractors”
CIS rules apply to businesses operating outside the construction sector that are “deemed contractors”. Under the existing rules, a person is a deemed contractor when their expenditure on construction operations is an average of £1 million a year over the last three years. The draft legislation simplifies this rule. It provides that a person will be a deemed contractor when their expenditure on construction operations in any period of one year exceeds £3 million. This simplified test will mean that businesses operating outside the construction sector will need to monitor their construction expenditure on an ongoing basis, rather than once a year.
Cost of materials
A small amendment to the existing legislation clarifies that it is only where a CIS subcontractor directly incurs the cost of materials purchased to fulfil a construction contract that the cost of those materials is not subject to deduction under the CIS. None of the other entities in the supply chain will be able to use the deduction in relation to materials they have purchased. Within a chain of supplies some businesses may be acting both as a CIS contractor and a CIS subcontractor, but it is therefore only where they are acting as a CIS subcontractor that the business will be able to use the deduction.
HMRC powers to correct returns
HMRC will now have the power to correct the amount of CIS deduction a CIS sub-contractor has claimed on their employer payment return where they identify or suspect that the amounts which have been claimed are inaccurate. The draft legislation allows an officer of HMRC to:
(i) correct an error or omission relating to a set-off claim;
(ii) remove a set-off claim; or
(iii) prohibit a person from making a further set-off claim, for a specified period or indefinitely.
CIS registration penalty
Penalties currently apply to any person who knowingly or recklessly makes a false statement or gives a false document when applying to register for gross payment or payment under deduction. The changes extend the penalty rules, so that penalties may also be charged on a second person. To be liable the second person must be in a position to exercise influence or control over the person making the application and either:
(i) themselves make a false statement or provide a false document; or
(ii) encourage the first person to make a false statement or provide a false document.
What actions will need to be taken?
The main immediate change to the ongoing application of the CIS will be for entities outside the construction industry who will need to assess on an ongoing basis whether they are a “deemed contractor” under the CIS, rather than only assessing this on an annual basis. Businesses will also need to check they are not incorrectly claiming a deduction for the cost of materials.
These changes, along with the amendments to HMRC’s powers and rules on penalties, are generally compliance focused and do not propose to materially alter the CIS rules.