From a tax and legislative compliance perspective, 2021 was a busy year. The added burden of Coronavirus financial support measures, Brexit red tape, and of course, the transition to Making Tax Digital has created a perfect storm of business adjustments.
Businesses that operate under the Construction Industry Scheme (CIS) have had to deal with the VAT domestic reverse charge that alters the way contractors and sub-contractors report and pay VAT. Going forward, there are some new requirements that businesses will have to meet to claim their CIS deductions after 2022.
This may sound like another hurdle to overcome. However, fret not. This article simplifies what you should be aware of and need to do.
An overview of CIS
Under the Construction Industry Scheme terms, limited company or incorporated contractors can reclaim CIS deductions by offsetting them against CIS deductions made from subcontractor payments and/or PAYE and NIC deductions made from employees.
CIS deductions suffered are recorded through the company payroll. The deductions are counted as advance payments towards the subcontractor’s tax and National Insurance (NI).
The excess deductions over PAYE/CIS liabilities are offset against corporation tax or VAT through an annual CIS reductions reclaim form using the HMRC gateway for limited companies. For instance, unincorporated entities CIS suffered may only offset against their personal tax and NI obligations via their Self Assessment.
However, it does not apply to tasks such as architecture and surveying, the manufacture of construction material, or scaffolding hire. The CIS rules also apply even if one’s business is based outside the UK if the contractor or subcontractor works within the UK.
For a while now, the HMRC has expressed concerns about how some businesses claim (CIS) fraudulently through their Employer Payment Summary (EPS) RTI return. Some of the common frauds observed were:
- False deductions -
- Overstated claims -
- The contractor’s business not being incorporated -
- The business not operating in the construction industry -
Accordingly, steps have been taken to curtail fraudulent activity. For instance, large contractors are encouraged to identify all the parties within their supply chains and offer reliable information to HMRC throughout the life of a construction project.
Similarly, businesses that are not main contractors are required to monitor the construction expenditure more regularly. If the number exceeds £3m within the previous 12-month period, they must register for the CIS as a contractor if that has not happened already.
CIS deductions claimed against PAYE
HMRC is aware that CIS deductions are often made against PAYE liabilities by non-CIS and CIS subcontractors which are not limited companies.
The taxman now has the power to amend unsupported CIS deductions and act in real-time where there is evidence of incorrect deudctions being taken. The claimants are given an opportunity to explain unverified claims or genuine errors.
CIS applies to most construction work related to a permanent structure or a civil engineering project. It includes tasks such as preparing the site for the foundations, demolishing or dismantling, alterations and repairs, installing HVAC systems, and cleaning up the building interiors after the construction work is done.
Changes announced in April 2021
Given these concerns, an initial set of changes was brought in with a 2021 legislation that empowered HMRC to amend a contractor’s EPS where no evidence was provided for the CIS deductions, or the contractor did not amend the EPS to reflect the accurate CIS deduction amount.
If the HMRC does amend the EPS, it can potentially lead to an underpayment, as a result of which the interest and late payment penalties can be charged where any resulting underpayment is not settled with the following routine PAYE remittance.
The HMRC can also prevent the contractor from claiming or offsetting further CIS deductions for the rest of the income tax year. It is expected that these amendments will help the government collect an extra £20m of tax during the income tax years 2022/23 and 2023/24, with a further £15m expected during the 2024/25 income tax year.
Changes anticipated in April 2022
A further amendment has been added to support HMRC’s anti-fraud measures, in line with which contractors claiming CIS deductions from April 2022 will have to include their Corporation Tax Unique Taxpayer Reference (CT UTR) number.
The online EPS form will be edited to include an extra field for this requirement. This allows HMRC to ensure that only incorporated businesses working within the construction sector claim the deductions and no one else.
HMRC will use its internal systems to check the CT UTR number against its records and verify that the business in question is actually entitled to the deduction. If a business does not provide a CT UTR number with its records or if the number is checked and found fraudulent by the system, the claim will automatically be rejected.
Over to you
CIS lays down special tax rules for businesses operating in the construction industry regarding how contractors handle payments. Not being aware of the specific obligations can put anyone in a tough spot. With Bradleys, you never have to worry about it.
Our smooth accounting and tax services help you stay up to date with industry changes and let you carry on with your business operations hassle-free. To understand more about claiming CIS deductions, please complete our form so we can get in touch with you within one business day.