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Proposed reforms to the Construction Industry Scheme

28 May 2023

A recent consultation has prompted us to think about the Construction Industry Scheme (CIS) and the potential consequences of non-compliance. It is worth considering whether your clients may have CIS obligations, as the penalties for non-compliance can be damaging. We’ll look at the scope of CIS, how it works, and the penalties, before looking at the key proposals put forward in the consultation.

CIS applies to those carrying out construction work as a trade. The term ‘construction’ is wide-ranging and includes building maintenance, repairs, property conversions, decorating, and landscaping. Domestic householders and (currently) property investors are excluded from the scheme.

How the scheme works

Contractors deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Contractors must register for the scheme, verify subcontractors, make the appropriate deductions, and file monthly CIS returns. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.

Contractors need to use HMRC’s CIS Online Service to verify subcontractors and find out the appropriate deductions rate, which could be:

  • 0% - for a subcontractor who holds ‘Gross Payment Status’ (GPS);
  • 20% - for a subcontractor who has registered with HMRC; or
  • 30% - for a subcontractor who has not registered with HMRC.

To qualify for GPS, a subcontractor must meet certain criteria, including:

  • Compliance – tax and National Insurance should have been paid on time in the past; and
  • Turnover – in the past 12 months this should be at least £30,000 for a sole trader or for each partner or company director.

Penalties for non-compliance

Failing to register as a contractor for a number of years could lead to penalties in the tens of thousands of pounds.

In summary the penalties are:

The maximum penalty is currently £3,000 for failing to register. Additionally, there are late filing penalties based on how late the return is:

  • 1 day late - £100
  • 2 months late - £200
  • 6 months late - £300 or 5% of the CIS deductions on the return, whichever is higher
  • 12 months late - £300 or 5% of the CIS deductions on the return, whichever is higher

For returns later than this, there will potentially be an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.

It’s therefore vital that accountants can identify when clients may have CIS contractor obligations. It is worth remembering that ‘property development’ is a trade that involves paying money to construction subcontractors, so property development clients are likely to be CIS contractors. It’s also worth remembering that there’s no lower limit below which you do not need to operate CIS; if your client makes occasional payments to construction subcontractors then they will be within the scope.

An interesting case about a gardener and landscaper that didn’t realise he needed to operate CIS can be read here - Brian Parkinson and The Commissioners for HMRC.

Proposed reforms

A new consultation on the Construction Industry Scheme Reform, was published on 27 April 2023. This considers:

Strengthening the GPS Compliance Test

The consultation looks at whether it would be appropriate to add VAT to the list of taxes HMRC must consider when undertaking the above compliance test for receiving or keeping GPS. The test does not currently consider VAT and therefore it can fail to exclude subcontractors that have committed VAT abuse from GPS.

Simplification for landlord to tenant payments

If a landlord makes a payment to a tenant for carrying out construction work on the landlord’s property, this payment could be within the scope of CIS. If the payment meets the definition of a ‘reverse premium’, then the payment is outside the scope of CIS. Generally speaking, if the payment is to fund works that are structural in nature and the responsibility of the landlord, it will be within the scope of CIS; if the payment is to fund works that are cosmetic in nature (e.g., redecorating), it will be treated as a reverse premium and is outside the scope of CIS.

The consultation acknowledges the complexity of this distinction and the administrative burden it is causing for both landlords and tenants. In light of this, the consultation looks at treating both categories of expenditure as being outside the scope of CIS.

CIS Grouping

The consultation also looks at whether establishing a ‘CIS grouping arrangement’ for certain types of group could allow a single nominated company within a group to be responsible for submitting one single monthly group CIS return on behalf of all companies in the group.

The consultation is open until 20 July 2023 and we will likely hear more at the next Budget or Fiscal Statement.

20:20 Innovation can now help you with CIS as well as Landlords!

For some time, we’ve proudly operated a ‘Property Landlords’ niche knowledge group for a select number of 20:20 Innovation members. For the firms that participate in the group, we work with them to build their technical knowledge, internal resources and marketing content on all things relevant to a property landlord. This includes:

  • Quarterly focus groups chaired by Steve Bicknell, where anything and everything property is brought up and discussed.
  • Monthly newsletters to send to property landlord clients and prospects to demonstrate your specialism
  • Technical factsheets to send to clients and prospects
  • Property tax and stamp duty calculators
  • A 20:20 Innovation property expert logo that can be used in marketing

With CIS compliance becoming an increasing challenge for business owners and practitioners alike we are, from 1 June 2023, broadening the remit of the group to include all things CIS as well.

This is a great time to get involved if you’ve not already and membership starts from just £52+VAT per month. The next focus groups (quarterly meetings) run on 14 and 20 June 2023 so sign up and now and book your place!

For more information, please see our Property Sector Group page or get in touch with your account manager, who will be pleased to help. You can book a demo with your account manager here.

Request a Property Sector Group demo