HMRC Construction Industry Scheme

11 March 2021

HMRC Construction Industry Scheme - Background

Businesses required to operate CIS are either “Mainstream” or “Deemed” Contractors

A Mainstream contractor is any business carrying on a business which includes construction operations, irrespective of construction turnover

A Deemed contractor is any business with an average annual expenditure on construction operations >£1m over last 3 years.  This continues until their expenditure on construction operations averages <£1m in each of three successive years

A business can be a Subcontractor to another Contractor or Customer as well as a Contractor engaging its own Subcontractors.

All businesses involved in CIS must register with HMRC in order to gain their own Verification status to ensure they can be paid by their Contractor/Customer and to be able to operate CIS on payments to their Subcontractors.

Where a Contractor pays Subcontractors a Monthly CIS return will need to be completed to account for payments to Subcontractors and any tax deducted, similar to PAYE.  Any tax deducted from Subcontractors is paid to HMRC with the monthly PAYE tax and NIC payments, even though the monthly CIS return is separate to the PAYE RTi filings.

Changes from 6th April 2021:

  1. CIS set-off amendment power

A new power will be introduced to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns.

It will apply where employers do not provide evidence of eligibility and/or evidence of the sums deducted, and do not correct their EPS at HMRC’s request, new power allows HMRC to:

  • correct errors or omissions relating to claims,
  • remove claims, and
  • prevent certain employers from making further similar claims

HMRC will remove the claim altogether where there is no evidence of any CIS deductions in respect of that company or where the employer is not entitled to set-off in this way and the employer liabilities will be recalculated following the amendment.

Where HMRC has to amend the CIS credit claimed on an EPS, the employer may also be prevented from making further CIS set-offs in the same tax year.

  1. Cost of materials

A new measure is being introduced to clarify that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost is not subject to deduction under the CIS.

The newly substituted provisions will clarify that:

  • On making a contract payment to a sub-contractor, the contractor deducts a sum from the payment which is equal to the relevant percentage of the net payment,
  • In calculating the net payment, the contractor must work out the amount of the contract payment less deductible materials costs, and
  • A materials cost will only be deductible if it represents the direct cost of materials purchased by a sub-contractor in respect of that particular contract.
  1. Deemed contractors

A change to the rules for determining which entities operating outside the construction sector need to operate the CIS (‘deemed contractors’) is being applied.

Rather than looking back at the end of each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3 million within the previous rolling 12 months period.

Where average annual expenditure on construction operations exceeds £1 million in each of the last 3 years, the business has to operate CIS on any construction expenditure from the start of the next period of account.

The new rules will require a business to monitor construction expenditure more regularly.

  1. CIS registration penalty

This change expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.

Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either encourages that person to make a false statement or supply a false document in support of that application; or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.

Currently the penalty for providing false information when registering applies only to the individual or business to whom the registration applies.

It will now apply to a wider group of individuals or companies who are able to exercise influence or control over a person who is registering for the CIS, this will include agents, directors, company secretaries, or anyone HMRC believes is in a position to exercise influence and control over the business and/or the person making the CIS registration.

National Minimum Wage/National Living Wage (NMW/NLW)

Changes from 1st April 2021:

 

23 and over

21 to 22

18 to 20

Under 18

Apprentice

April 2021 (new rate)

£8.91

£8.36

£6.56

£4.62

£4.30

 

25 and over

21 to 24

18 to 20

Under 18

Apprentice

April 2020 (current)

£8.72

£8.20

£6.45

£4.55

£4.15

This time, not only is there the ‘usual’ increase in wage rates, but also the fundamental change in the qualification age for the higher level.

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