Subcontractor verification is under HMRC’s spotlight.
With records showing that some contractors are making incorrect Construction Industry Scheme (CIS) deductions, HMRC is currently taking a keen interest in the construction sector.
HMRC’s latest compliance drive sees contractors on the receiving end of nudge letters from the tax authority. The letters require contractors to make sure they are making the right CIS deductions from payments made to subcontractors and briefly recap the rules. Any business that gets a letter from HMRC should make action a priority. If a letter is ignored, HMRC may start a compliance check. If it then turns out that HMRC finds mistakes in CIS returns, a higher penalty scale could apply.
In outline, contractors need to:
• verify all new subcontractors before they are paid
• verify any subcontractors they have used before, if they haven’t been included on a CIS return in the current, or previous two tax years and
• make sure that the correct CIS deductions are applied.
Contractors can verify the CIS status of subcontractors using HMRC’s free CIS online tool on gov.uk, or using commercial software. Commercial software will be needed to verify more than 50 subcontractors.
As construction businesses will know, the CIS status of subcontractors impacts how they are paid. In some cases, contractors are required to make withholding deductions, representing advance payment of tax and National Insurance by the subcontractor.
• Only subcontractors who have registered for gross payment status (GPS) can be paid without any deduction.
• A deduction of 20% is required for subcontractors registered under CIS.
• A deduction of 30% is required where subcontractors are not registered under CIS.
There has already been change to the process around applying for GPS this year. Since 6 April 2024, VAT has been put on the list of compliance areas that HMRC will check when someone applies for or wants to renew GPS. HMRC also has more bite when it comes to cancellation of GPS. It can now cancel GPS immediately if it has reasonable suspicion of fraud relating to VAT, PAYE, Corporation Tax or Income Tax.
It is more important than ever that businesses using the CIS are up to date with the scheme rules and confident that they are applying them correctly. We are happy to help you check that your business is fully compliant. Please get in touch for more advice.
If you would like to speak with one of our specialist advisers and discuss this further, please email solutions@ellacotts.co.uk or call us on 01295 250401.
* Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
