HMRC kickstarts campaign targeting incorrect Construction Industry Scheme deductions
HMRC have started to issue ‘one to many’ letters to Construction Industry Scheme (CIS) contractors where their records indicate that the contractor may not have applied the correct deductions.
The letter prompts the contractor to verify the CIS tax status of their subcontractors to ensure that they have used the correct CIS deductions rate when calculating the deductions to withhold. Contractors are required to check their records within 45 days of receipt of the letter. Following this 45-day period, a compliance check may be started – whereby any errors found by HMRC will be treated as prompted and penalties may increase as a result.
Interestingly, within the letter, there is no invite to positively confirm once any necessary action has been taken, so a compliance check may be launched regardless of whether the contractor has amended records accordingly within the stated timeframe.
The responsibilities of the contractor
It is the contractor within CIS that bears all the risk. If they do not apply the correct CIS deductions, HMRC will seek any CIS tax not deducted from the contractor. Whilst there is an offset mechanism available where the subcontractor has already included the income in their returns and paid the relevant taxes, there is often a significant time delay in the payment being made and the subcontractor’s reporting and payment deadlines, leaving the contractor exposed to the liabilities.
Since April 2024, VAT compliance has been included in the compliance tests to obtain and maintain Gross Payment Status. This addition is likely to lead to an increase in the number of subcontractors having Gross Payment Status withdrawn. If contractors fail to update their records following a change in the subcontractor’s CIS tax status, the liabilities of CIS tax not deducted will fall to the contractor.
What should a contractor do if they receive a letter?
Most importantly, they should not ignore it. If a contractor receives a letter, we recommend they verify all the subcontractors they have included in their CIS300 returns in the last 12 months to ensure the correct CIS tax status has been applied. If errors are identified, the CIS300 returns should be amended to reflect the correct deductions.
A specialist advisor should also be engaged upon receipt of a letter so that the contractor’s position can be managed appropriately. If errors exist and corrective actions are not taken, HMRC may open a CIS enquiry. These can be very time-consuming to manage and costly as a result of any penalties.
We are here to help
If you have received one of these letters, our specialist employment tax team can help with the review and any necessary corrections. We can also provide the following:
- CIS health check - A comprehensive review to ensure your business is meeting all its CIS obligations.
- Bespoke training – We can deliver bespoke CIS training sessions. These can be delivered in-person or virtually and are a great opportunity for a business to upskill all their team on the complexities of CIS. We often collaborate with our VAT colleagues to include the operation of the VAT Domestic Reverse Charge and other key VAT issues in the construction sector.
If you have any questions, please get in touch with Joanna Gander via the form below or your usual Azets advisor.