Tight timescales introduced by HMRC for CIS set-off deduction disputes
HMRC’s recently published Employer Bulletin: April 2021 sets out the timescales for subcontractor companies to respond to HMRC’s request for evidence, where claims are made in respect of Construction Industry Scheme (CIS) deductions suffered.
This initial timescale is a mere 14 days from HMRC’s initial contact. Furthermore, the same 14 days’ timescale will apply where the subcontractor does not amend their CIS deduction suffered figure once requested by HMRC.
These new rules came into force 6 April 2021 and follow the Government’s recent consultations and review of the operation of the CIS scheme which seek to address areas of perceived risks.
CIS deduction set-off claims
A limited company subcontractor which has suffered CIS deductions is able to set off those deductions against its own employer PAYE, National Insurance, Student Loan repayments and CIS contractor liabilities due to be paid to HMRC. The CIS deductions suffered should be shown on the subcontractor company’s Employer Payment Summary (EPS) and submitted to HMRC as part of the Real Time reporting process.
If, at the end of the tax year after the final EPS and (where applicable) the full payment submission have been submitted there is still an excess of CIS deductions that cannot be set off, the subcontractor company can seek a refund from HMRC or ask that the excess is set against any unpaid tax, such as Corporation Tax.
Only subcontractor companies can use this set off arrangement – it is not available to individual subcontractors or partnerships. Sole traders and partners must record the CIS deductions taken from their payments by contractors on their Self-Assessment tax return.
Changes to CIS deduction set off claims
HMRC will be able to amend the CIS deductions claimed by a subcontractor company via the EPS process, where the subcontractor is unable to provide satisfactory evidence to support the amount claimed. In addition, HMRC can make changes where the subcontractor company does not correct the EPS return at HMRC’s request.
Any amendment undertaken by HMRC will be based upon the CIS deduction figures that HMRC has verified from evidence they hold, or which has been provided to them.
HMRC will also be able to remove a claim altogether where the subcontractor company cannot provide satisfactory evidence to support the CIS deductions suffered or where it is found that the subcontractor was not entitled to set off in this way.
Where HMRC must undertake corrective action, the subcontractor will also be prevented from submitting any further CIS deduction set off claims for the remainder of that tax year. Potentially, this could have serious financial consequences for the subcontractor’s business.
Be prepared to respond quickly
Given the tight timescales set by HMRC, subcontractor companies need to ensure that any contact from HMRC regarding the validity of a CIS deduction suffered set off claim is dealt with promptly.
Unfortunately, it is not yet clear whether the 14 days’ timescale starts from the date of HMRC’s contact or the date that contact is received by the subcontractor company. If, HMRC’s preferred contact is by letter and they take the view that the 14 days start from the date of that letter, this could significantly reduce the response time.
Where a CIS deduction suffered claim is amended, the subcontractor company needs to be aware that this could increase their employer/contractor liabilities due to HMRC and that this additional liability would need to be remitted to HMRC accordingly.
Maintain suitable records
Now, more than ever, a subcontractor company must keep suitable records of the amounts that are claimed back against its employer/contractor liabilities. The most salient document is the payment and deduction statement, which a contractor is required to provide to every subcontractor where a CIS deduction has been made, no later than 14 days after the end of each tax month.
If the subcontractor company has misplaced the statement, it can request a duplicate from the contractor.
If a contractor does not provide a statement as required and the subcontractor company has suffered CIS deductions, it will need to maintain information of the payments and deductions the contractor made to provide this information to HMRC. These details could include:
- the name and address of the contractor
- the contractor’s tax reference number, if known
- the dates the payments were made, the amount of the payment and the amount of CIS tax deducted
- copies of invoices submitted to the contractor
- evidence of the payment received, such as bank statements
Review and appeal process
HMRC decisions to amend CIS deduction set off claims or to prevent further set off claims will be subject to HMRC’s usual review and appeal processes unless the subcontractor is receiving gross payment status or is not a company.
Furthermore, a decision can be reversed or altered should genuine evidence be found and subsequently provided to HMRC.
It is imperative that a subcontractor company holds suitable documentary evidence to support any claim for CIS deductions suffered and that if HMRC do seek to challenge those deductions, that such enquiries are dealt with without delay.
Given the prescribed 14 days’ timescale, it is evident that HMRC will be looking to resolve and amend claims quickly and regularly. Therefore, responses will need to be quick and supported by suitable evidence to satisfy HMRC that the set off claim can be allowed.
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