Legislation requires the business (the contractor) who has engaged the services of a subcontractor to undertake construction operations on its behalf to deduct CIS tax and report the deductions and payments made to that subcontractor to HMRC monthly via an online submission process.
Whilst this might seem nothing more than an administrative inconvenience, the truth is that the operation of CIS is fraught with additional responsibilities that come with draconian costs and penalties should the business make any mistakes in its operation of the scheme.
PROPERTY INVESTMENT COMPANIES
One of the difficulties facing businesses that operate as a property investment company rather than a property developer is the potential for HMRC to judge that construction work undertaken by a property investment company might be substantial enough for HMRC to consider the business to be a mainstream contractor and required to operate the CIS immediately.
Normally, a property investment business would need to spend more than £3 million over 12 months on construction operations, which could include refurbishment work, to be considered a deemed contractor for the purposes of CIS. Only once the £3 million trigger point is reached would the business need to register as a contractor with HMRC and operate the scheme on payments it makes going forward to its subcontractors that fall within the scope of the scheme.
Difficulties can arise where a business that is normally operating as an investment company takes on a property that requires more than refurbishment or minor construction work, perhaps including a change of use. In these types of contracts, HMRC usually consider that the nature of the trade of the business has moved from investment to development, so care must be taken to consider the impact of CIS on each project the business undertakes.
Recent activity by HMRC suggests that it is actively looking to target property investment businesses that are operating under the misunderstanding that CIS does not apply to them because they have not breached the deemed contractor limit. However, due to the level of construction work undertaken on an investment property HMRC consider that the business is a mainstream contractor either for that particular contract or from day one and should therefore be registered and opening CIS.
IMPACT OF THE AUTUMN STATEMENT ON CIS
The recent Autumn statement provided some interesting changes which are to be introduced from 6 April 2024 to the CIS scheme, that were not initially obvious but need to be considered, especially by businesses that are or are looking to become a subcontractor within CIS and who qualify for gross payment status (GPS).
Subcontractors that register with HMRC can apply to have deductions made from payments received from their contractor at either the net standard rate of 20% or at the gross rate of 0%. Those subcontractors that wish to apply for gross payment status must satisfy 3 tests:
- Business test
- Turnover test
- Compliance test
The compliance test looks at the tax compliance history of the applicant to check that its tax affairs are up to date, and it has submitted its relevant tax returns and paid its payment on time.
The new changes to be introduced will add VAT compliance obligations to the GPS compliance test, meaning that for the first time a subcontractor must be able to demonstrate compliance with its VAT obligation. Failure of this test could result in an application being refused or removed under HMRC's annual compliance review.
Further, legislation changes will be introduced regarding the compliance test meaning that when a subcontractor is first granted GPS, HMRC will bring forward the first review of the subcontractor's compliance check from 12 months to 6 months, reverting to standard 12-month period thereafter.
The grounds for immediate cancellation of GPS will also include VAT along with Income Tax, Self Assessment (ITSA), Corporation Tax Self-Assessment (CTSA) and Pay As You Earn (PAYE) as the taxes where HMRC have reasonable grounds to suspect that the GPS holder has fraudulently provided an incorrect return or information.
Additional regulations are also being introduced from April 2024 that will remove from the scope of the CIS most of the payments that a landlord makes to tenants, which is very helpful as this compliance area has been overly complex for a long time.
HMRC have also announced that it will digitalise the CIS registration application and will no longer normally take telephone applications, apart from those who are digitally exempt. Postal applications will still be accepted for the foreseeable period before it eventually becomes mandatory to register digitally.
The Guild offers compliance solutions to the engagement of sub-contractors in the Construction Industry.
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