Refresh on common mistakes made on operating CIS

As compliance activity remains high on HMRC’s agenda it is worth refocusing on the common errors that contractors can make when operating the Construction Industry Scheme (CIS), particularly as the new government has promised to support construction in the UK which can only mean that contractors will always be on HMRC’s compliance radar.

It is important that the contractor gets it right, as the onus to operate the scheme correctly sits solely with them and any mistake made can prove costly. If HMRC were to identify CIS errors, it is the contractor who will be liable for any under deducted CIS tax, including any resulting interest and let’s not forget the CIS penalty regime. This can be particularly strict especially when looking at failure/late submission of the monthly CIS300 return.

Some common mistakes that contractors can make when operating the scheme include:

Is the work inside or outside the scope of CIS?

Even though it may appear straightforward as to what constitutes a construction operation within CIS there are plenty of grey areas. It is the contractor’s responsibility to establish whether the work being carried out does or does not fall with the scheme.

Whilst HMRC is unlikely to penalise a contractor for operating the scheme on construction work that falls outside of the scope of CIS, where CIS should have been operated on a construction operation but wasn’t then HMRC will undoubtably pursue any additional liability due.

Employment status

Employment status is a complex area and despite what some might think it is not simply a matter of choice for either a business or the individual subcontractor they engage.

It is essential that a contractor is satisfied that a sole trader subcontractor is genuinely self-employed and that any contract be it written, verbal or implied does support this and also is in line with the actual working arrangements.

Has the subcontractor been verified?

The contractor must verify the subcontractor’s details with HMRC before the initial payment is made to establish which CIS deduction rate is applicable. If there has been a gap of more than two years in using the subcontractor, the contractor must re-verify them with HMRC.

If a subcontractor changes its business structure such as goes from being a sole trader to limited company, a new verification process will need to be undertaken.

Even if a subcontractor advises the contractor of their CIS deduction rate, the contractor should not rely on this as being correct. The contractor should still carry out the on-line verification process with HMRC to confirm the correct position.

Does the monthly CIS return include all relevant subcontractor payments?

All payments made to subcontractors that fall within the scope of CIS must be recorded on the monthly CIS300 return. Some contractors incorrectly believe that only those subcontractors who have suffered a deduction need to be recorded, this is wrong.

Therefore, subcontractors who hold gross payment must also always been included on the returns.

Are the materials costs including plant hire allowable?

It is the contractor who is responsible for establishing whether the direct costs of materials claimed by a subcontractor is genuine, reasonable and has been directly incurred by the subcontractor before allowing those costs to be excluded from the CIS tax calculation.

The actual plant within plant hire (with operative) will only qualify as allowable material costs where the subcontractor can show that the plant has been hired from a third party. Plant owned by the subcontractor does not qualify as deductible material costs for the purposes of the CIS tax calculation.

Materials are one area that HMRC will pay close attention too and will expect contractors to have suitable systems and processes in place to check the cost of materials including plant hire that have been claimed are genuine, reasonable and allowable.

Failure to do so, could leave the contractor open to a substantial CIS tax liability should HMRC consider that the material costs are excessive or not genuine.

Summary

It is important that a contractor fully understands their CIS responsibilities as not operating the scheme correctly can leave a contractor open to significant financial liabilities should HMRC identify errors.

If you would like to discuss any of the issues raised in this article or indeed if you have any questions around the operation of CIS, then please do get in touch.

How can The Guild help?

The Guild has in-house ex-HMRC Employer Compliance and CIS experts who can help you with an HMRC enquiry, whether at the outset of the review or at a point where HMRC demands are escalating.