The Construction Industry Scheme is highly complex – here’s how to simplify it

Accountants suggest the most pressing improvements.

The Government is currently consulting on reforming the Construction Industry Scheme (CIS) to help simplify and improve the scheme’s aims and objectives.

The HMRC-enforced scheme applies to both contractors and subcontractors in the construction industry, and was set up in the 1970s to reduce tax evasion.

Contractors are legally required to register with the CIS scheme prior to the start of any construction work, while registering is optional for subcontractors.

Under the scheme, contractors deduct tax from subcontractors and send this directly to HMRC. Thish counts as ‘advance payments’ towards income tax and/or National Insurance Contributions (NICs). Contractors must also provide a CIS statement – proof of deductions – to subcontractors, which details tax deducted from their earnings.

In some situations, subcontractors end up having too much tax deducted from their earnings over the course of a year and are therefore due a refund by HMRC.

It’s been nearly 50 years since the scheme was introduced and its scope is in need of updating and simplifying.

Proposals and suggestions in the consultation include:

• Adding VAT to the compliance test.
• Enabling HMRC to mandate a channel of application for GPS administrative easements eg, treatments of payments made by landlords to tenants.
• Bringing forward the first annual review of compliance history.
• Introducing a ‘CIS grouping arrangement’ for certain types of groups/entities which would allow a single nominated company within an entity to be responsible for submitting one monthly group CIS return on behalf of all companies in the group.

In addition, the consultation is also asking for suggestions for further simplification measures.

We asked accountants how they’d simplify the scheme and what improvements they’d like to see.

Return to basics to ensure the right businesses are targeted

Clare Bowen, Partner, Monahans

The rules around CIS are ridiculously complex, with a lot of uncertainty around who will or won’t fall within it.

In many cases it isn’t clear cut. Consider someone who has been involved in building an integral part of the building which falls under CIS, and then they need to get someone else in to complete another part of the job. This means they become both a contractor and a contractee for CIS. As a result, they will be having tax deducted, but also need to deduct other people’s tax and can end up getting stuck in this long chain.

Also, it’s relatively easy for an individual at the bottom of the chain who completes a day’s labour to claim 20% back on their tax return. But for a limited company to reclaim, they must claim it either as a credit through their PAYE scheme or apply for a refund from HMRC – which can take months. This long-drawn-out process can really impact businesses’ cash flow – many of which are businesses that the original scheme was not set up to capture.

I think CIS can be improved and simplified in the following ways:

• Refocus on the people that HMRC is trying to capture within this scheme, rather than having businesses ‘falling’ into it by accident.
• Provide clarity on who CIS does and doesn’t apply to. For instance, we have a few relatively large companies who, because their CIS income isn’t high enough, can’t apply for the gross payment status or, businesses whose cash flow is affected.
• Simplify the rules and provide resources by creating flow charts around questions like: ‘Am I involved with something that is the fabric of the building?’ If yes, therefore I must fall under X.

To achieve this, HMRC must revisit the rules and go back to the basics of who they are trying to capture: who is most at risk of not paying tax? Then amending and tightening the rules.

Verdict: HMRC should revisit CIS rules and return to basics to ensure it’s targeting the right businesses and individuals.

Allow subcontractors to claim tax overpayments on a monthly basis and contractors to reverse-charge CIS

Tom Hamilton FMAAT, Director, Erdingsworth Business & Tax Advisors

The scheme is complicated for both contractors and subcontractors.

Subcontractors already registered for self-assessment are also required to inform HMRC if they are also registered as a CIS subcontractor in order for them to benefit from deducted 20% tax rather than 30% for non-CIS-registered subcontractors.

Subcontractors also have to wait to complete personal tax returns to potentially receive any refunds on tax overpayments.

Contractors have the pain of verifying all their subcontractors through the HMRC CIS system to make sure they are deducting the correct tax at source.

CIS suffered on the contractors’ sales is then processed and must be filed by the 19th of the month to ensure they will be repaid for any deducted CIS. This is a massive time constraint for businesses and also has negative implications on cash flow: these businesses have to pay CIS along with PAYE and in some cases, while waiting for CIS deductions to be repaid.

I’d improve CIS by potentially allowing subcontractors to claim any potential tax overpayment on a monthly basis to minimise impact on cash flow. Contractors could be allowed to reverse charge the CIS suffered on their invoice to the final user in the same way that VAT is reverse charged in the industry.

Verdict: CIS could be improved by allowing subcontractors to claim any tax overpayments on a monthly basis and enabling contractors to reverse charge CIS, reducing impact on cash flow.

Allow group registrations and halve turnover requirements

Sandy Cochrane, VAT Partner, Carter Backer Winter LLP

There are many factors that contribute to the complexity of CIS. Subcontractors can register online but main contractors are expected to telephone the helpline. For overseas clients, this can be difficult, especially where English is not their first language. We would suggest that all contractors have access to an online form followed by a conference call if required (attended by the client and their accountant).

The CIS guide for contractors and subcontractors (CIS340) is 85 pages long, 34 of which are appendices – this needs to be shortened considerably to reduce red tape.

Group registration should be introduced, using the same eligibility as for VAT to avoid different rules for entities to grapple with.

Also, deduction of tax at source for businesses not eligible for gross payment status raises serious cash flow issues. We suggest that the turnover requirement is halved to £15,000 for sole traders, £15,000 for each partner in a partnership or director in a company subject to a minimum of £50,000 for the whole partnership or company.

We also suggest streamlining the definitions of construction operations in section 74 of the Finance Act 2004 (and reproduced in Appendix B of CIS340) to provide clarity and make it easier for businesses to comply.

Verdict: Allowing group registrations, halving turnover requirements for sole traders, partnerships and companies and providing more clarity overall will help to improve CIS.

Reduce uncertainty with clearer, more definitive guidance

Andy Vessey, Head of Tax, Kingsbridge

The CIS scheme can be highly complex and lead to uncertainty. It’s an area of scrutiny by HMRC. For the less vigilant, there are several traps and pitfalls which can be costly, particularly if mistakes are deemed to be careless. The scheme applies to a wide range of construction work and deciding which construction operations fall within the definition can be complex, as a review of HMRC guidance CISR14330 will reveal.

I’d like to see clearer, more straightforward and definitive guidance with CIS reforms. I’d like clarity on what constitutes a construction operation, so it becomes absolutely apparent if anything falls outside of this guidance and will not be subject to the CIS scheme.

Verdict: Clearer, more straightforward and more definitive guidance around CIS is needed.

Annie Makoff is a freelance journalist and editor.