Changes to the Construction Industry Scheme from April 2021

HMRC have now published their findings from a recent consultation which addresses perceived areas of risk concerning certain aspects of the Construction Industry Scheme (CIS).

As a result, there will be four significant changes to the operation of CIS from April 2021, which are explained below.

Full details can be found at Changes to tackle construction industry scheme abuse

CIS deductions off-set claimed

Currently, where a limited company sub-contractor has suffered CIS deductions, they are able to off-set those deductions against their own employer PAYE/CIS liabilities. In this regard, HMRC have been concerned that some sub-contractors are falsely reclaiming CIS deductions to which they are not entitled or claiming credit for higher amounts of CIS than the amount suffered.

The changes from April 2021 will enable HMRC to adjust the CIS deductions claimed by the sub-contractor on the employer payment summary (EPS), where the sub-contractor is unable to provide any satisfactory evidence to support the amount claimed. In addition, where corrective action has been taken, the sub-contractor may be prevented from off-setting any further CIS deductions against their employer/contractor liabilities.

If there are further deductions to claim, the sub-contractor may have to wait until after the end of the tax year to make the claim and this will also have to be verified by HMRC. 

Deemed Contractors

From April 2021, the deemed contractor rules will be amended to require a business to monitor its construction operation expenditure more regularly than the current requirement of looking back over the last three accounting periods to check if their construction operations expenditure has exceeded the deemed limit (£3m).

The new rules will require the business to look back over the last 12 months to check if their cumulative construction costs have exceeded the deemed limited of £3m – should this limit be exceeded, the business will need to register as a contractor and operate CIS on the next payment they make to a sub-contractor that falls within the scope of CIS.

Under the new rules, a deemed contractor can cease operating the scheme once their expenditure falls below the £3m threshold within the previous 12-month period or the contract has ended and they do not expect to make any further payments that fall within the scheme.

Materials

From April, HMRC will only allow a deduction for material costs where a subcontractor has directly purchased materials used or to be used in fulfilling that specific contract. HMRC will continue to expect the contractor to ensure that the cost of materials being claimed by the sub-contractor is accurate and not overstated.

Expanding the scope of the false registration penalty

Currently, HMRC can penalise an individual for providing false information when registering for CIS but this does not extend to cover another person.

This penalty regime will now be expanded to also be applicable to a ‘relevant person’, which can include an agent, director, company secretary, or anyone HMRC believe to be in a position to exercise control and direction over the individual making the CIS registration.

The penalty of up to a maximum of £3,000 can be charged where HMRC consider that a relevant person has made a false statement or provided false documents, or encouraged an individual/business to make a false statement or provide false documents.

What is clear is that the Government remains focused on ensuring CIS scheme compliance and will continue to police the system and look for ways to address the perception that there is a high level of tax fraud and abuse within the construction industry.