What is the background?
The Construction Industry Scheme (CIS) was introduced over 50 years ago to tackle perceived tax avoidance in the construction industry. It places certain requirements on businesses that incur construction expenditure including the application of a withholding tax on payments and monthly reporting. The rules are complex and there have been various changes made by the Government over the years including the introduction of a VAT reverse charge and an update to the deemed contractor threshold.
What is the issue?
A deemed contractor is broadly a business that incurs construction expenditure in the course of its business activities, but is not a construction company. The CIS rules can therefore potentially apply to all types of businesses. For example, a company that builds residential homes will almost certainly have CIS obligations. However, a retail company that is building new facilities for its business, e.g. retail premises, may also have obligations arising under the deemed contractor rules (subject to a threshold and certain exemptions). The rules are drafted widely and also apply to types of work e.g. landscaping that may not immediately appear to be a construction activity.
In our experience, the deemed contractor rules can often be overlooked as businesses may find they are incurring construction expenditure for one-off projects or as an ancillary part of their business. This means they do not have a process in place to identify if they become a ‘deemed contractor’ and meet their CIS obligations.
What do businesses need to consider?
Over recent months, we have seen an increase in HMRC activity in the area of ‘deemed contractors’. HMRC are looking to target “non-construction” type industries in their latest issuing of “nudge” letters. For example, recent HMRC interest has looked at the insurance sector as they take the view that payments made to loss adjusters by insurers are potentially within the scope of CIS but this can also apply to other businesses who carry out large amounts of construction type work. If this expenditure is above the threshold of £3 million over a rolling 12-month period, a registration requirement arises on the business together with monthly filing obligations. Failure to do so can result in HMRC recovering any withholding failure (up to 30%) on payments made by the business for construction work, plus penalties.
What do you need to do?
We advise that all businesses regardless of industry sector, review their expenditure and identify any payments made to third parties carrying out construction type work. If the spend appears to be close to or above the threshold for CIS registration, we can assist you by reviewing the type of expenditure to determine whether it is in the scope of CIS and advise on any potential exemptions applicable to minimise exposure to liabilities.
UNW have extensive expertise in dealing with CIS (including an ex-HMRC officer) and we would be pleased to speak to you on any aspects of the above or CIS generally.
If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
