Recent changes to the Construction Industry Scheme (CIS) are now in force, placing greater responsibility on contractors to ensure that the subcontractors they engage are fully compliant with their tax obligations.
HM Revenue & Customs (HMRC) now has enhanced powers to pursue contractors where a subcontractor fails to meet their tax responsibilities. This represents a clear shift: it is no longer sufficient for contractors to rely on subcontractors to manage their own tax affairs. Instead, contractors are expected to take an active role in assessing and monitoring compliance.
The changes broadly align CIS compliance powers with existing VAT anti-avoidance provisions, particularly around the concept of businesses that ‘knew or should have known’ of tax fraud within the supply chain.
Greater focus on due diligence
Contractors must be able to demonstrate that they have taken reasonable care when engaging subcontractors. Where HMRC considers that appropriate due diligence has not been carried out, contractors may face significant consequences.
If a business makes a payment under CIS, or claims a CIS deduction, and knew – or should have known – that it was linked to deliberate tax non-compliance (by another party or themselves), HMRC can take action.
- Charge the business tax equal to 20% of the payment made (or the amount of any CIS credit claimed);
- Apply a penalty of 30% of that tax charge;
- Transfer the penalty to an individual officer if the business is a company or similar organisation and the officer is responsible; and
- Immediately withdraw the business’s gross payment status. The period before a business can reapply for gross payment status is also increasing from one year to five years.
Importantly, where a robust due diligence process is in place, HMRC may not apply these measures – even if a subcontractor is later found to be non-compliant. This underlines the importance of having clear, documented procedures.
“Knew or should have known”
As HMRC traces the supply chain and gathers evidence, it will look at whether a person “knew or should have known” that there was deliberate CIS or PAYE non-compliance. This may include:
- What the person knew about the risk of non-compliance in the supply chain at the time; and
- Whether anything about the payments or contracts should have raised concerns
- What due diligence or risk checks the person carried out to identify or manage those risks.
HMRC will consider all the circumstances, and a combination of factors may indicate that transactions were “too good to be true” and linked to deliberate non-compliance.
Weak or incomplete due diligence can strengthen HMRC’s argument that a contractor knew – or should have known – about non-compliance, particularly where there were warning signs (unusual pricing, frequent changes to bank details, missing VAT registrations or inconsistencies in company information). By contrast, contractors who carry out thorough checks, keep clear records and act on any concerns are far less likely to be caught by these rules.
What does this mean in practice?
HMRC has not set out a definitive checklist for what constitutes a “suitable” due diligence process, leaving contractors to determine what is appropriate for their business. However, certain steps are likely to form the foundation of good practice.
These include verifying subcontractors with HMRC before engagement and reviewing their status via Companies House. Ongoing monitoring, rather than a one-off check, will also be key.
There is also increasing discussion around more formal checks, such as obtaining confirmation from a subcontractor’s accountant that they are meeting their tax obligations. While this may not be necessary in all cases, it illustrates the heightened expectations now placed on contractors.
Additional changes
Alongside the enhanced compliance requirements, some administrative updates have also been introduced, including:
- Under CIS, contractors normally deduct tax from payments to subcontractors unless they have gross payment status. Previously, certain public bodies were treated as having this status under a concession, meaning no deductions were made. The rules are now being formalised so that payments to these bodies are simply excluded from CIS altogether, removing the need for the concession.
- The requirement for contractors to submit nil CIS returns was removed in 2015, but this led to confusion and unnecessary late filing penalties. The rules are now changing so that contractors must again submit a nil return each month if no payments are made – unless they have told HMRC in advance. Failure to do so may result in a penalty.
How M+A Partners can help
With the increased responsibility now placed on contractors, it is important to ensure that CIS processes are robust, practical and capable of standing up to HMRC scrutiny. Given the potential financial and operational impact of non-compliance, taking action now is essential.
Our experienced team works with you on CIS returns and wider compliance, enabling you to manage your obligations with confidence and reduce the risk of penalties or loss of gross payment status.
For a broader overview of the scheme, take a look at our CIS factsheet. If you would like to discuss how these changes affect your business, please contact your usual M+A Partners’ adviser or one of our specialists below.
