Construction Industry Scheme: Importance of treating the cost of materials correctly
The recent changes introduced from 6 April 2021 suggest that HMRC remain focused in their compliance approach regarding the construction industry arena. Those working within the industry will be aware of the Construction Industry Scheme (CIS) which sets out a contractor’s responsibility when operating the scheme in respect of payments made to subcontractors which fall within the scope of CIS.
The onus to operate CIS correctly rests solely on the contractor and any mistakes can prove costly, as it is the contractor who is liable for any under deductions of CIS tax, including interest and penalties.
Common mistakes that contractors can make when operating the scheme include the following:
Does the work fall within the scope of CIS?
Before CIS is operated, the contractor must be satisfied that the work being carried out is a construction operation within the scope of the scheme. Whilst on face of it this may appear to be straightforward, there are plenty of grey areas.
A contractor needs to understand when to apply the scheme – for example, queries can arise when looking at repairs. Typically, repairs to a building are within CIS but repairs to a system, such as a heating or lighting system, are outside the scope of the scheme. However, repairs to a system can be brought into the scope of CIS under the mixed contract principles.
A mixed contract is a contract that includes some work that falls within CIS and some that does not. In this instance, all payments made under that contract are brought within the scheme.
It is important to establish if the work does fall within the scope of CIS, as getting it wrong can leave the contractor open to additional liabilities should HMRC review the contractor’s business records and identify errors.
Has employment status been considered?
Employment status is a complex area and, despite what some might think, it is not a simple matter of choice for either a business or the individual they engage.
It is vital that a contractor is satisfied that a subcontractor is genuinely self-employed and that the contract and working arrangements support this to ensure that any challenge would satisfy from HMRC, should they carry out a check.
Getting the employment status of sole traders wrong can have serious financial consequences for a contractor, as HMRC will look to the contractor for the underpaid PAYE tax and national insurance contributions.
Have the subcontractors been correctly verified?
Before the initial payment is made, a contractor must verify a subcontractor with HMRC to establish which CIS deduction rate is appropriate and to obtain a verification number. The contractor needs to gather specific information from a subcontractor for the verification process.
Even if a subcontractor advises the contractor of their deduction rate status, the contractor should not rely on this as being correct and instead must carry out the on-line verification process with HMRC.
Care should be taken where the subcontractor’s business structure changes – for example, from a sole trader to a limited company – as a new verification for this different trading entity will be required.
Have all subcontractors been included on the monthly return?
Some contractors wrongly consider that subcontractors who hold gross payment status do not need to be included on the monthly return because no CIS tax has been deducted – this is not correct. All payments made to subcontractors that fall within the scope of the scheme must be recorded on the CIS return regardless of the amount of CIS tax deducted.
Are the materials costs allowable?
Contractors are responsible for checking that the direct cost of materials claimed by a subcontractor is genuine and reasonable and has been directly incurred by the subcontractor before allowing the cost to be excluded from the amount on which CIS deductions are calculated.
HMRC expect contractors to have systems and processes in place to check the cost of materials claimed. Were HMRC to carry out a compliance check and decide that the amount claimed was excessive or had not been incurred by that subcontractor, it will look to recover any under deducted CIS tax from the contractor.
Who owns the plant?
Plant such as scaffolding, cranes, earth-moving equipment, concrete pumps and compressors are an integral part of any substantial construction project and payments for its hire with an operator are subject to CIS.
However, a deduction for purposes of the CIS calculation in relation to the plant hire only applies where the subcontractor has actually hired the plant from a third party. Where the subcontractor owns the plant (including plant being purchased via an HP agreement) this cannot be treated as a deduction (materials), meaning both the plant hire and labour costs will be subject to CIS.
The treatment of plant as materials is an area to which HMRC will pay particular attention, so it is imperative that contractors have suitable processes and checks in place to be satisfied that the cost of plant hire has been treated correctly. Failure to do so, could leave the contractor with a substantial CIS tax liability should HMRC look to check the records and find errors.
How The Guild can help
The Guild has a strong background in CIS compliance and effectively stands between clients and HMRC. Our in-house tax, legal and compliance teams can ensure that your CIS tax and employment status issues are dealt with in the most compliant way possible and help remove your commercial risks associated with engaging subcontractors and operating the scheme.
Take away one more headache and engage the services of industry experts The Guild for your CIS compliance.
Contact us on 020 8515 2995 or at email@example.com and talk to our expert team. We’re here to help.
The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.