Policy paper

Changes to tackle Construction Industry Scheme abuse

Updated 26 March 2021

Who is likely to be affected

Those who work in construction, who operate within the Construction Industry Scheme (CIS), or who represent construction businesses.

General description of the measure

This measure makes four changes to the CIS rules:

CIS set-off amendment power

The measure provides a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns. This power will be used to correct errors or omissions relating to the claims, to remove claims, and to prevent certain employers from making further similar claims, where employers do not provide evidence of eligibility or evidence of the sums deducted, and do not correct their EPS at HMRC’s request.

Cost of materials

The measure makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.

Deemed contractors

The measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS (‘deemed contractors’). Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3 million within the previous 12 months.

CIS registration penalty

The measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either encourages that person to make a false statement or supply a false document in support of that application; or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.

Policy objective

These changes are designed to tackle abuse of the CIS rules, making sure HMRC can act quickly where the rules are being broken and so level the playing field for all those operating within construction and make sure the CIS applies fairly to everyone liable. The clarification to the cost of materials provision will remove scope for different interpretations of the existing rule, and the deemed contractor changes are designed to prevent manipulation of the current rules so that a business can avoid operating the CIS.

Background to the measure

The government announced at Spring Budget 2020 a consultation on measures to tackle abuse of the CIS. A consultation document was published 19 March 2020 setting out proposals to tackle this abuse. Due to coronavirus the consultation was extended until 28 August 2020. HMRC held a number of meetings with those working in the sector and their representatives during July and August 2020. A summary of responses to the consultation will be published on 12 November. The consultation responses have informed this impact assessment.

Detailed proposal

Operative date

The measure will have effect from 6 April 2021.

Current law

The Construction Industry Scheme rules are set out in Chapter 3 of Part 3 (sections 57 – 77) and Schedules 11 & 12 Finance Act 2004 (FA04), and in the Income Tax (Construction Industry Scheme) Regulations 2005 (S.I. 2005/2045).

Proposed revisions

CIS set-off amendment power

Some sub-contractor companies are entitled to set CIS deductions suffered in-year against their employer liabilities as provided by section 62(3) FA04 and regulation 56 S.I. 2005/2045. Where, upon challenge from HMRC, the sub-contractor employer cannot provide satisfactory evidence to support the CIS deductions claimed, and when asked the employer does not amend the CIS entry on their EPS within a certain timeframe, HMRC will instead amend the CIS deduction figure claimed on an EPS. The HMRC amendment will match the CIS deductions sum supported by any evidence held by or provided to HMRC.

HMRC will remove the claim altogether where there is no evidence of any CIS deductions in respect of that company or where the employer is not entitled to set-off in this way. The employer liabilities will be recalculated following the amendment. Where HMRC has to amend the CIS credit claimed on an EPS, the employer may also be prevented from making further CIS set-offs in the same tax year. HMRC’s new powers to amend set-off claims and prevent further set-off claims will be decisions subject to review and appeal, unless the claimant is not a sub-contractor company suffering deductions under the CIS. The new powers will be contained in amendments to section 62 FA04, and the operative detail will be contained in regulations by way of amendments to S.I. 2005/2045.

Cost of materials

The current rule regarding the cost of materials to be taken into account by a contractor when operating the CIS on a payment to a sub-contractor is set out at section 61(1) FA04. This provision must be read with the definitions of a “construction contract” at section 57 FA04 and of a “contract payment” at section 60 FA04. The newly substituted provisions of section 61 FA04 will clarify that, on making a contract payment to a sub-contractor, the contractor must deduct a sum from the payment which is equal to the relevant percentage of the net payment. In calculating the net payment, the contractor must work out the amount of the contract payment less deductible materials costs. A materials cost will only be deductible if it represents the direct cost of materials purchased by a sub-contractor in respect of that particular contract. The change to these provisions will make sure that it is clear that only the sub-contractor directly purchasing materials to fulfil their own contract with their contractor is entitled to a reduction to account for materials costs from the gross contract payment before the CIS deduction is calculated.

Deemed contractors

Section 59 FA04 sets out the rules for bringing deemed contractors into the CIS. The general rule to determine whether a non-construction business has to operate the CIS is found at section 59(1)(l) FA04. It requires a turnover threshold for expenditure on construction operations to be met, and that the business reviews this expenditure at the end of each period of account. If average annual expenditure on construction operations exceeds £1 million in each of the last 3 years, the business has to operate CIS on any construction expenditure from the start of the next period of account. When average expenditure is less than £1 million in each of three successive years the business no longer has to operate the CIS on construction expenditure: see section 59(3) FA04. The new rules will require a business to monitor construction expenditure more regularly. When the cumulative expenditure on construction operations exceeds £3million within the previous 12 month period, the business will have to register for the CIS as a contractor (if not already registered) and begin operating the CIS on their next payment to a sub-contractor for construction operations. Deemed contractors will be able to stop operating the CIS when expenditure on construction operations falls below £3m within the previous 12 month period, or when no further payments on construction operations (including retention or management or administration payments) are expected to be made under that or any other construction contract.

CIS registration penalty

HMRC can penalise a person for providing false information when registering for payment under deduction under the CIS or for GPS (section 72 FA04). This penalty applies only to the individual or business to whom the registration applies. The scope of this penalty will be expanded to apply to a wider group of individuals or companies who are able to exercise influence or control over a person who is registering for the CIS, this will include agents, directors, company secretaries, or anyone HMRC believes is in a position to exercise influence and control over the business or the person making the CIS registration.

Such persons will be liable to a penalty in two circumstances:

• where they themselves make a false statement or furnish a false document for the purpose of enabling another individual or business to be registered or
• where they encourage an individual or business to make a false statement or furnish a false document for the purpose of enabling themselves to be registered for the CIS

The changes to primary legislation to deliver this measure will be published for consultation alongise this TIIN.

Summary of impacts

Exchequer impact (£ million)

2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026
-	-	+15	+15	+15	+15

These figures are set out in Table 2.2 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020. These figures cover the CIS set-off amendment power only. The other 3 components of the measure have not affected the Exchequer impact.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Customer experience is expected to stay broadly the same for compliant individuals because they will not need to make any changes to continue to meet their obligations under the CIS.

On a macro level this measure is not expected to have a significant impact on individuals’ finances and so on family formation, stability or breakdown. However, those individual sub-contractors currently claiming a deduction for materials to which they are not entitled will have more tax deducted in-year from their payments for construction work, although this will be available to set against their liability, or for repayment, after the end of the tax year. Moving from non-compliance to compliance in this way could have an impact on family formation, stability or breakdown as these individuals may have less disposable income throughout the year.

If an employer is faced with a tax bill due to over-claimed CIS deductions this could affect their cash-flow, meaning they may need to lay off some sub-contractors. These sub-contractors may have no other source of income which could have an impact on their family formation, stability or breakdown. Similarly, very small and micro businesses operating on tight margins could go out of business, which could have an impact on their family formation, stability and breakdown. The impacts will depend on the amount of income lost and their own personal circumstances.

Equalities impacts

This measure only affects those working in construction or commissioning construction work, some of whom are employers, who are breaking the rules or those facilitating such behaviour. Although 16% of the construction workforce are women and 7% of sub-contractors are from BAME backgrounds these groups are not particularly targeted by this measure.

It is not anticipated that this measure will have an impact on other groups with protected characteristics.

Impact on business including civil society organisations

This measure will help level the playing field for construction businesses by making sure that only those deductions contractors are entitled to are claimed, and that rules cannot be manipulated.

The impact on business administrative burdens and costs is expected to be negligible. Continuing costs could include providing evidence of CIS deductions to HMRC and self-correcting CIS returns. This could affect about 500 businesses who are currently claiming unverified CIS deductions via their employer returns. One-off costs for all businesses operating within construction will be small and limited to familiarisation with the changes. Most of the changes have an impact on contractors, of whom there are about 250,000 registered for the CIS.

Those non-construction businesses undertaking construction operations may have to monitor construction expenditure more regularly to make sure compliance with the new deemed contractor rules, but the number of businesses affected is expected to be small.

The clarification of the cost of material provisions may affect the cashflow of those businesses currently applying the rule incorrectly. This could lead to payment difficulties and the failure of some businesses operating on very tight margins.

Customer experience could be negatively affected for those compliant businesses who may have to provide information to HMRC to confirm compliance with the CIS rules, particularly where their contractor is slow in providing the required information to HMRC, or to appeal HMRC decisions.

Operational impact (£ million) (HMRC or other)

There will be both IT and resource costs for HMRC in developing, applying and policing this measure, and in updating guidance.

HMRC IT and resource costs are expected to be in the region of £8 million.

Other impacts

Other impacts have been considered and none has been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Joanna Were on email: cisconsultations@hmrc.gov.uk