Less than three weeks after the Budget came ‘tax day’ – a delayed release of Treasury and HMRC policy and consultation documents that would usually have…
The CIS sector is one that is used to change and HMRC scrutiny with the special rules for the deductions from those working in the construction industry.
Last year HMRC issued a consultation, following the Spring Budget 2020, on ‘Tackling Abuse in the Construction Industry’ and the government hope that the changes will result in an additional £20m of tax in 2022/23 and 2023/24, with an extra £15m forecast for 2024/25. These changes will be introduced from April 2021.
At the same time the construction sector also has to focus on the changes to off-payroll working from April 2021 and the introduction of the VAT reverse charge which comes into force on 1 March 2021. A lot for the sector to have to deal with at any time, let alone during a pandemic.
The planned changes to the CIS rules
CIS set-off amendment power
Currently some sub-contractor companies are entitled to set CIS deductions suffered during the year against their employer PAYE liabilities. The change of rules allows HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns.
Where the sub-contractor employer cannot provide satisfactory evidence to support the CIS deductions claimed (when challenged by HMRC), and then the employer does not amend the CIS entry on their EPS within a certain timeframe, HMRC will instead amend the CIS deduction figure claimed. They will also be able to prevent future claims, where an EPS is not corrected.
Cost of materials
This makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
When considering the costs of materials it is also worth looking at the recent first tier tribunal case, Elmpine Developments Ltd (TC7830), where the cost of materials on an invoice were under review following HMRC’s initial refusal to allow the costs.
This brings to the fore the age-old problem of the deductions for the cost of materials from the gross payments to a subcontractor to calculate the net payment, giving the contractor even more to consider.
This changes the rules for determining which entities operating outside the construction sector need to operate the CIS as a Deemed Contractor. It means that rather than reviewing at each year-end to determine the level of expenditure on construction work, a Deemed Contractor will need to monitor the relevant expenditure more regularly and apply the CIS when construction expenditure exceeds £3m within the previous 12 months.
CIS registration penalty
This expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. The change means HMRC can hold the individual or company responsible, where they are able influence or have control over the person making an incorrect or false claim.
Off-payroll changes from April 2021 and the impact on CIS
The off-payroll working rules (IR35) were originally introduced in the public sector in April 2017. Since that time the rules have been tightened and changed. The key difference to the original IR35 rules is that it becomes the responsibility of the end user to identify which services are caught by the off-payroll rules, and who ensures that payment for those services are taxed correctly under PAYE.
The planned changes for off-payroll working (IR35), which were originally intended to be introduced for the private sector in April 2020, will commence in April 2021 and those working in the CIS need to consider how they might be impacted.
The off-payroll rules take preference over the CIS rules.
Under the legislation, medium and large companies will need to assess if contractors providing services through personal service companies (PSCs) would be employees if they were engaged directly. Where this would be the case, the fee payer of the services will have to deduct PAYE tax and National Insurance (NI) on the payments made to the PSCs. If the company is classed as small, then it should be exempt from the planned changes and may need to provide evidence of this; care should be given to companies within a group structure.
The new rules will apply regardless of whether the company engages the PSC directly or via an intermediary such as an agency or payment company.
Those working in the construction sector need to prepare for the new rules prior to 6 April 2021 and ensure that they set up the system and processes to.
- Identify PSCs in any contractual chain
- Make the required status determination of the worker and provide a Status Determination Statement (SDS) to the fee payer
- Review any contracts and agreements in place
- Ensure that any ‘appeals’ from sub-contractors who do not agree the status determination are dealt with within 45 days
- Introduce any changes needed to working practices and procedures and to ensure where appropriate that PAYE tax and NI is deducted via the payroll
There is more information on these changes here.
VAT – Domestic Reverse Charge for Building and Construction Services
Although not an employment issue, it is important to also highlight the domestic reverse charge, commonly referred to as the reverse charge, which is a major change to the way VAT is collected in the building and construction industry and will affect both suppliers and customers that are both VAT and CIS registered.
The changes come into effect on 1 March 2021 and means the supplier will no longer charge VAT on its specified supplies. The customer receiving the supplies will be responsible for accounting for and paying any VAT due to HMRC. View our factsheet and Domestic Reverses Charge FAQ’s for further information.
If you are affected by any of these changes and need further advice, please do not hesitate to get in touch with me or Scott Campbell.