28th June 2016
There has been a significant increase in the level of HMRC activity in regard to reviewing the construction industry tax scheme. As reported in Accountancy Age in January 2016, HMRC investigations into the construction sector have increased 17%, resulting in yields rising from £131m to £154.2m in 2015. HMRC has been actively targeting self employed workers within the sector for the past five years and it seems it will remain their focus in 2016.
The result of these reviews is that a number of errors made by contractors in their operation of the construction industry scheme are being identified.
The typical errors are either that:
- payments are being made without the scheme rules being applied when they should be, or
that the tax to be withheld in cases in which the subcontractor does not hold ‘gross status’ is being incorrectly calculated.
In these cases HMRC seeks to recover the tax which should have been deducted from the payments made when the construction industry scheme was not being fully complied with. In addition to this HMRC usually seeks to charge penalties.
When it comes to the contractor this can result in a significant claim by HMRC. HMRC will not excuse this liability unless it is satisfied under Regulation 9(4) that the subcontractor concerned has made a return of his income or profits in which those payments were taken into account, and paid the income tax and Class 4 National Insurance contributions due or corporation tax due. It is worth noting that the contractor is reliant on HMRC and if HMRC is not prepared to issue a direction there is no right of appeal.
Alternatively the contractor can appeal under Regulation 9(3) but in doing so he would need to satisfy HMRC:
- that he took reasonable care to comply with the construction industry scheme, and
- the failure to deduct the excess was due to an error made in good faith, or
- he held a genuine belief that the construction industry scheme did not apply to the payment.
Where HMRC does not accept an appeal under Regulation 9(3) (and the evidence is that it is generally reluctant to do so) then the contractor can take the appeal before the Tax Tribunal. There are a growing number of appeals which have been taken to the Tribunal but there is no clear line being adopted by the Judges who have heard the cases.
Getting the construction industry scheme wrong can be expensive and it is therefore sensible to take a step back on occasions and ensure that your systems or procedures comply fully with the regulations.
Increased tax gained from HMRC investigations into construction companies in 2015 shows it’s more important than ever to ensure all labour taken on and paid through CIS is genuinely self employed and that care is always taken to operate CIS properly. Investigations into SME’s, which a lot of construction companies are, is now a focus of HMRC in a way that it’s never been before.
If you have an issue with the operation of the Construction Industry Scheme (CIS) or want to ensure that what you are doing is correct, please contact Tom Penman on 028 90 323466.