Are you at risk with non-compliance with the Construction Industry Scheme?

Over the last several months, HMRC has significantly increased its focus on employer compliance under the Construction Industry Scheme (CIS). This uptick in activity follows the government’s announcement of a major investment in compliance efforts, including the recruitment of 5,000 additional HMRC staff last year and a further 500 this year. It’s clear that recovering lost tax revenues is a key priority for the current Labour Government, and CIS compliance is firmly in the spotlight.

What’s the Issue?

The Construction Industry Scheme (CIS) is a tax withholding and reporting regime that applies to payments made by contractors to subcontractors for construction work carried out in the UK or its territorial waters.

The CIS applies to two types of contractors:

• Mainstream contractors: businesses that carry out construction work or supply labour for construction.
• Deemed contractors: businesses not primarily in construction, but which spend more than £3 million on construction operations over a rolling 12-month period.

Operating the CIS can be complex and burdensome. Contractors are responsible for correctly withholding tax and reporting to HMRC, and mistakes can be costly. If tax is under-deducted, the contractor is liable for the shortfall, along with any penalties and interest.

Given the financial risks, it’s essential for contractors to have the right systems and processes in place to stay compliant.

What can go wrong?

The CIS rules are wide in scope, nuanced and regularly change. When non-compliance occurs, contractors are often not even aware of the range of issues that give rise to risk. Examples of areas that can cause risk are:

• Mainstream contractors or deemed contractors not being aware that they are caught by the CIS and therefore not operating the CIS at all
• Not checking employment status of sole traders or not applying the rules under the off-payroll workers legislation when contracting with certain limited companies (both of which take precedent over the CIS regime)
• Overseas contractor and subcontractor issues where work is carried out in the UK
• Not registering with HMRC at the correct time
• When property investment companies become deemed contractors and when they become mainstream contractors
• Not being aware of the very broad range of activities caught by the scheme which are wider than just construction and therefore not applying the CIS regime to certain contracts or invoices
• Not being aware that work totally unconnected with construction can be caught under the CIS due to the mixed contract rule
• Poor visibility of the supply chain and being unaware of subcontractors where CIS should be operated
• Not applying the correct CIS tax deduction rate
• Under deductions arising due to subcontractors inflating the cost of materials and expenses and not having proof or taking reasonable care for checking them (an area that HMRC are finding significant non-compliance)
• Issues when using managing agents.

The above list is not exhaustive. The CIS is very complex and there are dozens of traps and pitfalls for the unwary. HMRC audits can also be very time consuming and expensive to deal with.

How can we help?

We can help with all areas in respect of CIS compliance and planning, including:

• Advise on whether your business is caught as a mainstream contractor or a deemed contractor
• Review (or implement) processes, systems and policies to adhere to the CIS
• Review (or implement) processes in respect of employment status and off-payroll workers legislation
• Undertake a full compliance review in respect of CIS compliance
• Provide training to staff in all areas of CIS
• Managing HMRC employer reviews and assist in securing the best financial outcomes (with a full understanding of how to carefully navigate HMRC and minimise liabilities)
• Make voluntary disclosures to HMRC where non-compliance has taken place
• Assisting subcontractors appeal against the loss of gross payment status
• Provide bespoke technical advice on any specific areas relating to CIS (including contract reviews).

Get in Touch

If you need expert advice, you can contact Jas Rai for a preliminary conversation if you need any assistance in relation to the CIS.

Jas Rai is an experienced employment tax advisor with over 26 years of experience providing bespoke employment tax advice to businesses of all sizes ranging from owner managed businesses to FTSE 100 companies.