The CIS has existed now for over 40 years, and changes proposed in the 2014 Budget have started to come into effect. How will this affect your business?
Changes to the Construction Industry Scheme (CIS) came into force on 6 April 2015.
The CIS has existed in one form or another since 1972, in a bid to stop undeclared payments and income.
Since then, particularly during the mid 2000s, CIS has evolved to be an imposing regulatory regime affecting those whose day-to-day business involves construction, as well as many whose connection with construction is incidental.
Not root and branch reform
The regulatory net is not being meaningfully lifted – this is not root and branch reform - but several improvements are being proposed.
The Budget 2014 government announcement of proposed CIS improvements was followed by two summer consultations, a December response and the resultant Income Tax (Construction Industry Scheme) (Amendment) Regulations 2015/429.
The proposed changes largely pronounce a reduction of the administrative burden by capitalising on HMRC’s investment in digital services.
CIS administration will have an increased online functionality which is intended to affect cost savings for both HMRC and the industry.
The changes will be implemented in three phases with the first phase taking effect from 6 April 2015.
Headline changes to be aware of include:
From 6 April 2015:
Removal of the requirement for a contractor to make a monthly return to HMRC even if the contractor has not made any payments in a tax month.
At first sight, this is welcome as it appears to both remove the burden of unnecessary monthly reporting and likely injustice if penalties are imposed for ‘nil returns’ where no payments to subcontractors have been made.
However, HMRC won’t know if a lack of a return means a nil return or a failure to provide a return, so it proposes to issue a penalty notice in those circumstances.
A penalty notice may be appealed using the online service and HMRC says that no penalties will be issued when it is established there is a nil return.
Critics will say this process does not reduce administrative burdens; our view is that ‘nil returns’ should continue to be made, as safe and efficient best practice, unless the HMRC is satisfied that this is deliberate and compliant.
Earlier repayment of CIS tax may be made to liquidators in insolvency proceedings.
Interestingly, this change came about as part of consultation that such a change would enable earlier repayments to creditors.
That sounds positive but the legislation is very much discretionary on the part of the HMRC.
The industry should not expect such discretion to be exercised prior to HMRC concluding it has no entitlement to such monies.
Relaxation of requirements for joint ventures to gain gross payment status.
This would apply where one member already has this status and has a right to at least 50 per cent of the assets or the income or holds at least 50 per cent of the shares or the voting power in the joint venture.
This would appear to suit sophisticated developers which operate special purpose vehicles, in the form of a company or other entities such as limited partnerships or limited liability partnerships, for development schemes.
This is a welcome amendment to reduce the number of entities required to be registered within these organisations, provided that a relevant hurdle is met.
From 6 April 2016:
Mandatory online filing of CIS returns.
This change stems from HMRC’s investment in digital services.
The hope is that mandatory online filing should reduce administrative burdens - but functionality of the new system will determine success or otherwise.
It also is not yet known whether the staged reduction in the CIS helpline will, on balance, result in an overall improved service.
Threshold for the gross payment turnover test will be reduced to £100,000 in multiple directorship situations.
A party being paid under CIS will prefer to have gross payment status as this will avoid material deductions being made where CIS requires.
Consultation feedback indicated that many small businesses were prevented from applying for gross payment status because the £200,000 threshold for multiple-partner businesses and multi-director companies was too high.
Halving of the threshold will help those businesses already caught by the CIS net.
From 6 April 2017:
Compulsory online verification of subcontractors.
This is to assist payers to determine whether they can pay gross – or whether they are obliged to make a deduction from payments otherwise due.
Online verification is already available but consultation feedback suggested the system was problematic.
The effectiveness of the new regime will very much depend on the IT platform.
Anyone affected by the CIS should visit the HMRC website to become more familiar with the changes proposed and take the necessary steps to comply.
Matthew Jones is head of the construction and engineering team and Katharine Tulloch is a senior associate at Taylor Wessing