04 March 2021 - Article
The Construction Industry Scheme (CIS) was set up to deal with the payment of tax, focussing on the labour side of construction operations, within the construction industry. A construction project typically has a client or a developer instructing works, a contractor who agrees to undertake the works, and tiers of sub-contractors, perhaps even sub-sub-contractors. CIS sets out a framework for tax deduction at source, to tackle tax evasion and the black economy, not uncommon to this industry.
The terminology within this CIS framework can often be confusing. A 'contractor' (the entity making payments under a construction contract) is defined in the Finance Act 2004 (s.59). It can include any person carrying on a business which includes construction operations, or can even include entities by reference to their average annual expenditure on construction operations. Therefore, the word 'contractor' can have a very wide meaning, and it would be prudent for organisations undertaking construction operations to maintain up-to-date accounts, in case they are inadvertent contractors for the purposes of CIS.
A sub-contractor on the other hand, the recipient of such payment is again defined in the Finance Act 2004 (s.58) and can refer to an entity which has a duty to a contractor to carry out the construction operations or provide labour, or can also include an organisation answerable to the contractor for carrying out the construction operations by others. The rate at which a contractor deducts tax is based on the sub-contractor's CIS status, which provides the latter an incentive to register with HMRC, so that it does not overpay its tax. However, CIS has been riddled with complexity that the government decided to streamline and improve its operation.
In December of last year HMRC published a summary of responses following a consultation to improve this scheme. The government will bring about changes to the CIS over the next few years, for example, this will include an online appeals service which will be introduced on an optional basis this year, and further changes next year. A key change was brought about to the 'nil return' requirement on 6 April this year.
As you will know under the CIS regulations (i.e. the Income Tax (Construction Industry Scheme) Regulations 2005) contractors need to file returns. Prior to 6 April this year, if a contractor had made a return or should have made a return under the CIS Regulations but made no payments under the construction contract in the tax month following that return, the contractor had to file a nil return. This needed to be done within 14 days after the end of that tax month. A nil return was not required where the contractor had notified HMRC that it was not going to make further payments under the construction contract within the following 6 months.
From 6 April 2015, a new piece of legislation (a similarly wordy, Income Tax (Construction Industry Scheme) (Amendment) Regulations 2015 (SI 2015/429)) has amended the CIS regulations so that a contractor who has not made any payments to a sub-contractor, as set out above, will no longer be required to submit a nil return. Why is this likely to be helpful? It cuts down on some administrative paperwork for contractors. More importantly the government following the consultation has taken on board the view expressed by its customers that the penalties for not filing a nil return were disproportionate. So if a contractor did not made payments to subcontractors as above, and no deductions were due, the contractor was required to notify HMRC. If HMRC did not receive notification, it sent out a penalty notice as it was unable to verify if a payment was simply late or whether it was a nil return. As of 6 April 2015, HMRC has indicated that no penalties will be pursued if a nil return is established (e.g. where a contractor following an appeal using the new service establishes that it was indeed a nil return). HMRC is updating its guidance to reflect this.