However, while the updates to CIS have, in part, helped to mitigate some of the compliance issues in the sector. Errors remain commonplace, which can prove costly – particularly when subcontractors do not have a gross payment status or the worker’s employment status is incorrect since the contractor is liable for additional tax/national insurance(‘NI') due as well as interest and penalties.
What is CIS?
CIS was first introduced in 1971, to combat the compliance problems posed by self-employed workers being paid cash-in-hand and failing to register their income with HMRC, where false names were routinely given to contractors resulting in unpaid tax. Since its introduction, CIS has changed considerably, with the current scheme introduced in 2007 to include a requirement for contractors:
· to verify subcontractors with HMRC by telephone or online;
· to show employment status had been considered prior to operating CIS; and
· the introduction of three subcontractor categories – those with Gross Payment Status (i.e., no CIS tax deduction), those who are verified (20% deduction) and those who are unverified (30% deduction).
The changes introduced last year have further strengthened the CIS, and with HMRC increasing its focus on CIS, it is particularly important that contractors follow the rules carefully and avoid mistakes.
Key considerations and common mistakes
1. The scope of CIS
It is important to remember that only construction operations fall under CIS. Generally, these operations are easily identified, but there are exceptions, such as property investors and developers in the property sector. There can be some grey areas between a property investor and a property developer for CIS purposes. For instance, broadly property investment businesses are outside CIS unless their construction operation expenditure exceeds cumulatively over £3 million over a period of 12 months, in which case, it must register as a ‘deemed’ contractor.
In some cases, a property investor can become a mainstream contractor if it becomes involved in multiple or substantial contracts relating to the development of one or more properties.
2. The Contract
The contract should always be reviewed first– not the payment. The contract will highlight whether the work falls inside or outside the scope of CIS. Be aware of a mixed contract which will have some work within CIS, and some not. In this case, all payments under that contract are brought within CIS.
3. Failing to register as a contractor/subcontractor
Failing to register with HMRC is another key mistake – contractors could be fined £3,000 for not keeping CIS records, in addition to £100 per month for every missed return. The penalty increases with lateness of the return. Similarly, a subcontractor could see a tax deduction rate of 30%, rather than 20%, if they fail to register for CIS and tax returns still must be completed.
4. CIS monthly returns
Some contractors often expect that subcontractors who hold gross payment status do not need to be included on the monthly return because no CIS tax is deducted, but this isn’t the case. All payments made to subcontractors that fall within the scope of CIS must be recorded on the monthly return, regardless of the amount of CIS tax deducted.
5. Employment status
Contractors must ensure a subcontractor is genuinely self-employed, and that working arrangements support this. An error with a worker’s employment status will mean that the contractor is responsible for any underpaid tax or NI, as well as being liable for any interest and penalties.
There is also a penalty of £3,000 for incorrect declaration on the monthly CIS returns.
6. Materials
Contractors should also consider if the materials used are allowable – namely, checking if the cost of materials claimed by a subcontractor are genuine and directly incurred, before excluding it from the amount on which CIS tax deductions are calculated. The wording of the legislation was changed in April 2021, so material costs are only permitted if a direct cost to the subcontractor and if in relation to that particular contract: a rule change introduced to prevent deductions from being incorrectly claimed where there is a chain of subcontractors. HMRC expects contractors to have systems in place to check the cost of materials otherwise they could face additional CIS tax, interest, and penalties.
7. Plant
Finally, plant such as scaffolding, cranes, and compressors are an integral part of any substantial construction project and payments for plant hire are not subject to CIS. However, a tax deduction for the CIS calculation relating to plant hire only applies where the subcontractor has hired plant from a third party. If the subcontractor owns the plant, it cannot be treated as a deduction – meaning that both plant hire and labour costs are subject to CIS. HMRC will pay particular attention to this, so contractors should have robust checks in place to treat plant hire costs correctly.
8. Other changes from 6 April 2021
As mentioned, the changes to CIS in April last year will have implications for the construction sector. Firms need to be wary that HMRC can correct any incorrect CIS tax set-off claims made by limited companies, penalties for providing false information have been expanded to include any individual and from April 2022, limited companies making claims for CIS tax set-offs must complete their Corporation Tax Unique Taxpayer Reference or CTAX reference on their Employer Payment Summary to claim the credit for CIS deductions.
Following the latest changes to the CIS, it is now particularly important that contractors have the processes in place to ensure they do not fall foul of the scheme – failure to do so could result in hefty tax, interest and penalties.
