HMRC targeting incorrect construction industry scheme deductions

Experts are warning that Construction Industry Scheme (CIS) contractors are becoming a target for attention from the tax authorities.

HMRC has started to issue letters to CIS contractors if its records indicate that the correct deductions may not have been applied.

The letter prompts the contractor to verify the CIS tax status of their subcontractors to ensure that they have used the correct CIS deductions rate when calculating the deductions to withhold.

Contractors are required to check their records within 45 days of receipt of the letter.

Following this 45-day period, a compliance check may be started – whereby any errors found by HMRC will be treated as prompted and penalties may increase as a result.

Joanna Gander, a senior tax advisory manager at UK top ten accountancy and advisory firm Azets said: “It is the contractor within CIS that bears all the risk. If they do not apply the correct CIS deductions, HMRC will seek any CIS tax not deducted from the contractor.

“Whilst there is an offset mechanism available where the subcontractor has already included the income in their returns and paid the relevant taxes, there is often a significant time delay in the payment being made and the subcontractor’s reporting and payment deadlines, leaving the contractor exposed to the liabilities.

“Since April 2024, VAT compliance has been included in the compliance tests to obtain and maintain Gross Payment Status. This addition is likely to lead to an increase in the number of subcontractors having Gross Payment Status withdrawn.

“If contractors fail to update their records following a change in the subcontractor’s CIS tax status, the liabilities of CIS tax not deducted will fall to the contractor.

“Interestingly, within the letter, there is no invitation to positively confirm once any necessary action has been taken, so a compliance check may be launched regardless of whether the contractor has amended records accordingly within the stated timeframe.”

Latest available figures from the Office for National Statistics indicate that there are 2.2 million workers in the UK construction industry, of which around 674,000 are self-employed.

Joanna advised that any contractor who received a letter should not just ignore it as prompt action was needed to avoid exacerbating any situation.

She added: “We recommend contractors verify all the subcontractors they have included in their CIS300 returns in the last 12 months to ensure the correct CIS tax status has been applied. If errors are identified, the CIS300 returns should be amended to reflect the correct deductions.

“A specialist advisor should also be engaged upon receipt of a letter so that the contractor’s position can be managed appropriately. If errors exist and corrective actions are not taken, HMRC may open a CIS enquiry. These can be very time-consuming to manage and costly as a result of any penalties.”

The specialist employment tax team at Azets, the UK’s specialist business advisor to SMEs, offers businesses a CIS health check and delivers bespoke CIS training sessions.