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Significant revisions to the Construction Industry Scheme (CIS) take effect from 6 April 2021. HM Revenue & Customs (HMRC) has identified problems with the operation of the scheme. The aim is to address the potential for fraud. So, what is the expected impact of changes to the Construction Industry Scheme?

Happily, compliant contractors will be largely unaffected. Yet, it’s advisable to understand how these changes could prove problematic. This is especially important if you’re part of a construction chain.


CIS deductions suffered and claimed against current month’s liabilities

In theory, contractors who are also subcontractors could claim what they liked against employee or subcontractor costs on their monthly Employment Payment Summary. Currently, HMRC has no authority to amend the claim. If the figures are wrong, it cannot insert the correct amount. This situation changes from 6 April 2021. There will likely be a clamp down on claims to CIS deductions. If HMRC can’t recognise deductions, it may remove claims to CIS from contractors’ claims. What’s more, HMRC could levy penalties for incorrect claims.


CIS300 returns

Typically, subcontractors rely on contractors for timely completion of CIS300 returns. Therefore, it’s vital that you receive your payment vouchers. You must also demonstrate that you’ve made the net payment.


Deemed contractors

A deemed contractor is a business that doesn’t undertake construction work. Yet its average annual spend is £1million in any three-year period. The rule change alters the amount and the period. From 6 April 2021 it is £3million. This will be funds spent within the previous 12 months.


CIS registration penalty

Provide false information and you risk a penalty. This applies when registering for CIS or gross payment status. From 6 April 2021 getting it wrong could cost up to £3,000. The key point is the scope of the penalty. It will impact further than the individual or business to which the registration applies. Anyone making or encouraging a false statement will be liable. So will anyone who provides a false document. This includes companies and individuals, such as directors, company secretaries or agents.


Cost of materials

In respect of materials costs, the change is a clarification. It sets out what can be claimed and by whom. This is a potentially complex area. Even the most law-abiding contractors can make mistakes. Are you a net deduction or higher rate subcontractor? If so, we urge you to review your procedures. In tightening up the regulations HMRC will likely check materials costs more rigorously.


So what is the impact of changes to the CIS? Legally, after 6 April 2021, materials costs are deductible only if they represent a direct cost. These are costs the subcontractor incurs for materials for a particular contract. We expect this change could result in problems for contractors.


Subcontractor’s invoice

Generally speaking, documentation is the solution. It will help you comply. Always insist that subcontractors obtain an invoice for materials purchased. Then, get a copy.


Unfortunately, complications arise where subcontractors bulk buy materials to cover several jobs. We have checked the position with HMRC. Quite simply, you require a breakdown of the costs. You can accept the materials costs for your job as valid. However, the subcontractor must demonstrate that the invoice relates to materials for different contracts.


Estimating materials costs

So, what happens if you can’t check materials costs? Say the subcontractor won’t provide a copy invoice. Or there’s no breakdown of the materials for your job. First, obtain a note of the refusal. Then, you can estimate the materials costs.


Beware estimates

This may sound like an easy way out for contractors. Far from it. HMRC will ask how you arrived at the estimate. You could reference information on a supplier’s website. Alternatively, you could prove you’ve calculated the labour costs. For example, the job took four men 40 hours each at £18 per hour.


Unintended consequences

HMRC’s aim is to reduce the potential for fraud. Unfortunately, the impact of changes to the Construction Industry Scheme may have unintended consequences. Law abiding contractors could be caught out.


That’s why we’re now offering free CIS health checks. Call us on 01785 243276 to find out more.


More Info on CIS

Read our blog Common Construction Industry Scheme errors to avoid.