Construction Industry Scheme (CIS) determines that on making a payment to a sub-contractor under a construction contract, the contractor must deduct a certain percentage of the payment on account of tax.
CIS was first introduced in 1972 as a means of tackling widescale non-compliance within the industry. The scheme has evolved over time, with new versions in 1999 and 2007, yet its main purpose remains – to prevent a minority of businesses from abusing the rules to extract cash from the tax system and to falsely reduce their liabilities.
Within the 2020 Budget, it was announced that from April 2021 HMRC will be able to correct the amount of CIS deductions claimed on a sub-contractor employer’s return where they identify or suspect inaccurate amounts have been claimed.
There have been clarifications to CIS rules on ‘materials deductions’, here we take a look at the legislation on these deductions and the importance of maintaining efficient processes to ensure accurate costs.
How CIS and ‘materials deductions’ work
Contractors are required to verify the payment status of their sub-contractor, with those that are registered with CIS having a 20% deduction and those that are not a 30% deduction from their payments.
- Contractors must deduct the cost of any materials purchased by the sub-contractor that were needed to fulfil the construction contract before applying the tax deduction to their payment;
- They must provide the sub-contractor with a written statement of CIS deductions made from their payments each month; and
- The contractor records CIS payments and any deductions made on their monthly CIS return, which is submitted to HMRC.
The rule covering deductions for materials has previously been open to interpretation, with some contractors reasoning that a deduction can be made even if the sub-contractor did not directly pay for the materials.
HMRC have now specified that a materials deduction for CIS purposes can only be made from a payment under a construction contract where a sub-contractor has directly purchased materials used or to be used in fulfilling that contract. It does not include the cost of using plant or equipment owned by the sub-contractor.
In short, the sub-contractor must pay for the materials to receive a CIS materials deduction.
Allowable materials deductions is an area HMRC focuses on when undertaking compliance reviews and it is important to understand the costs that can be included and the types of work that are exempt.
Included in the scheme are
- The costs of items such as bricks, paving slabs, piping and fixings – all items that a subcontractor supplies as part of a construction project; and
- The cost of any plant and equipment hired by the sub-contractor from a third party (including consumable items, such as fuel, needed for its operation).
It does not include
- Plant and equipment already owned by the sub-contractor; or
- Scaffolding that is already owned by the sub-contractor – a claim can only be made if additional scaffolding is hired in.
Implementing reviews and cost checks
Contractors must have confidence in their treatment of the cost of materials claimed by sub-contractors. If sub-contractor costs have been over estimated, the contractor may be liable for the additional CIS tax that should have been deducted.
The most effective way of safeguarding against interest and penalties is to ensure the right checks have been put in place to support CIS deductions.
One way of proving that the costs are accurate could be to retain a copy of the sub-contractor’s invoice – paying particular attention to invoices concerning scaffolding or plant hire. Costs can also be checked against the contractor’s builders’ merchant price guide or by using their quantity surveyor’s calculations.
Processes should be documented, with a record maintained to show when costs were checked along-with an explanation of how the cost of materials was allowed. Sub-contractors should also be notified that the cost of materials will be reviewed and their invoices may be scrutinised.
Consequences of inaccurate costs
The scrutiny of any HMRC check depends on their initial findings and the evidence the contractor provides, verbal and written, to demonstrate that the cost of materials is reasonable.
If the right compliance checks are not in place, and it is determined that the sub-contractor has been inflating their prices, the contractor could be liable for a substantial CIS liability and even the removal of gross payment status.
CIS can be a complicated area of legislation, and there are many other elements along-side the materials deduction of cost, including registering for the scheme, monthly returns, mixed contracts and the employment status of workers.
For any help in interpreting the requirements of CIS, please either get in touch with your usual M+A Partners contact or email firstname.lastname@example.org.