Insights

Based on our recent experience it appears that HMRC have refocused their efforts in identifying potential tax shortfalls within the construction industry. The construction world has historically been an area that HMRC regularly look at, because in its eyes the sector has a reputation for tax avoidance and non-compliance. It’s the reason why the Construction Industry Scheme (CIS) was originally launched – its purpose being to ensure construction workers and the companies that use their services pay their share of taxes. The problems continue for both contractors and subcontractors because the CIS rules can be easily misunderstood and difficult to apply.

Status continues to be questioned

The question of status (i.e. is the subcontractor genuinely self employed or an employee) continues to be a contentious area. Of all the areas within tax legislation (not just CIS) this is probably one of the greyest and therefore the most difficult to deal with. We understand that HMRC continue to train specialists in this area with a view to having more resources to look into this issue.

If you are unsure of the status of your workers or the implications of getting it wrong it is worth taking advice; if you are unfortunate enough to be the subject of an HMRC visit and they successfully challenge the status of some of your workers it can be very expensive. Preventative measures can make life much easier should HMRC come calling.

What is covered by CIS?

Understanding the grey areas of CIS

One of the biggest problems with the construction industry and CIS compliance is accurately defining what ‘the provision of construction operations’ actually covers. If you don’t know what falls within the definition of a construction operation, you won’t know when CIS measures have to be applied, because there are so many grey aspects to the definition. Clearly, what falls under the remit of construction is much broader than simply providing building services, but what is included? For instance, a business involved with installing entry phones isn’t within the remit of CIS, but a company providing door access systems is. It’s therefore important to be clear about whether your business activity falls under the construction industry scheme and ensure your record keeping is compliant with its reporting requirements. It’s worth spending time to be sure if what you do falls within CIS or not as it could be a very expensive mistake if you get it wrong and ignorance of the rules is no excuse.

Provision of project management services

Project management is another good example of a service that is frequently considered to be outside the scope of CIS when actually it is caught. The provision of project management services (perhaps by the architect) is widespread within the construction world and it’s a common mistake to think that because the services of an architect are outside the scope of CIS, so are their services as a project manager.

Mixed Contracts

A subcontractor may provide a range of services for a contractor, some of which fall within the remit of CIS for tax purposes and some that don’t. If this is the case and there aren’t separate contracts in place for the different services provided, the contractor should deduct tax on ALL labour costs invoiced, regardless of whether the service provided is within CIS or not.

The only way to avoid having to do this is to switch from using a mixed contract to operating separate contracts for each piece of work that’s being completed.

Contractor’s compliance obligations

As part of their CIS compliance obligations, the contractor is responsible for:

• Providing a statement to the subcontractor confirming the payments made and any tax deducted.

• Checking that the material element invoiced by a subcontractor is reasonable.

• Deducting tax from subcontractors at a standard rate of 20% if they are registered net under CIS; if the subcontractor has gross payment status no tax need be deducted. Subcontractors that are not CIS registered should have tax deducted at a rate of 30%.

Ignorance isn’t accepted as an excuse!

Based on our recent experience, HMRC is continuing to perform checks on companies within the construction industry to monitor for CIS compliance. If they find instances where a company is not operating CIS properly and it has neglected to fulfill the requirements that CIS places on them, penalties are payable; something which we are seeing HMRC policing with continued vigour! As always misunderstandings and not being aware of CIS rules and the associated tax obligations are not accepted as valid reasons for non compliance. It’s always best you check that you’re doing things correctly before HMRC point it out to you!

If you have any concerns about CIS compliance please contact Anne Eager by emailing ae@rjp.co.uk.