HMRC focus on Construction Industry Scheme (CIS) contractors’ compliance

HMRC has said it will be writing to thousands of construction businesses to check compliance with the Construction Industry Scheme (CIS). This is no surprise as the construction industry has had more than its fair share of interest from HMRC over the years.

Administration and compliance of CIS can be problematic for businesses and significant penalties apply when mistakes are made. HMRC’s latest One to Many letter campaign urges contractors to ensure they have correctly verified the CIS tax status of their subcontractors and that they are applying the correct tax deductions on all payments being made.

What to do if you receive a CIS One to Many letter

Despite the suggestion in the letter from HMRC that the business has not been compliant with its CIS obligations, this is not necessarily correct. HMRC tends to take a broad-brush approach with compliance campaigns in the hope that, on the law of averages, they will help to uncover non-compliance by some of the recipients. Notwithstanding this, however, we would always advise to take these letters seriously, even if you believe you have been fully compliant with tax filings and payments.

HMRC has asked CIS contractors to check that they have correctly verified the tax status of the subcontractors it pays, using the formal HMRC verification process. It is recommended that this is done by all businesses who receive these letters. The most important part of this is telling HMRC that this exercise has been completed and that (hopefully) no errors have been found. Failure to notify HMRC of this, runs the serious risk of HMRC instigating a formal audit of the business’s CIS compliance.

CIS compliance errors

While HMRC is only focused on the correct verification of CIS subcontractors in this campaign, this is not the only problematic area in relation to CIS, and it could be the case that HMRC extends the campaign into other aspects of CIS in due course. The highest risk area in this regard, is around the tax status of CIS subcontractors and whether CIS applies at all to payments being made for work undertaken.

If IR35 or employment status tax rules determine a worker to be ‘deemed employee’, it is incorrect to pay them under CIS as they should be paid through payroll subject to the normal PAYE and National Insurance deductions instead. This is an area where businesses commonly make errors, resulting in a loss of tax revenues to HMRC, and we would be surprised if this wasn’t already on HMRC’s radar.