Each year HMRC conduct random checks on a small number of companies
Each year HMRC conduct random checks on a small number of companies that submit returns that include transactions under the Construction Industry Scheme (CIS).
If you receive a letter saying you’ll be on the receiving end of just such a review it is not something to worry about, per se, but there’s always room for some concern that procedures have been applied correctly: no-one wants to be picked out for inspection because the HMRC compliance team has spotted a high risk factor that has raised a red flag or a discrepancy in your return when they compare data from several sources. You see, HMRC now pulls data from your company’s tax return and also from other public sources, such as social media, news feeds and websites.
Does everything tally?
Are you not currently registered under CIS but your web page shows work that sits under CIS?
Take one recent appeal case: here a landscape gardening company’s normal scope of work doesn’t sit within CIS – but an issue arose when they accepted a seemingly simple request to assist with laying paths in a hotel’s garden, which they were already contracted to develop. The issue was that the landscaper hired an experienced subcontractor to help with the path and the work specified to the subcontractor fell within the scope of CIS. HMRC sought and won interest and penalties on the amount deducted in the landscaper’s annual return, which was below the level due under CIS.
And to add to the landscaper’s worries, HMRC also claimed a penalty for failing to make a CIS return!
This type of scenario arises for other businesses that can overlap with construction tasks, such as tree surgeons, which is why it is worth taking advice on your operations under CIS.
We can help prepare a return each year.
Here we look at four areas where HMRC reviews will often focus: materials; subcontractor owned equipment; accommodation, travel and subsistence; mixed contracts.
Here HMRC will want to test how you check that the amount you are excluding is not excessive. If you subcontract someone, then you will almost certainly exclude the cost of any materials they provide from the amount liable to CIS deductions. But you must be able to prove that the ‘cost’ is accurate. The best way to do this is to retain a copy of the subcontractor’s invoice. But simply accepting your subcontractor’s word, or applying a standard percentage is not sufficient – either will leave HMRC scope to challenge the stated return.
Subcontractor owned equipment.
Scaffolding is the biggest concern here, but site fencing or lighting also raise alarm bells. The issue is that a subcontractor cannot claim the cost of supplying equipment under CIS unless he actually incurs a cost in doing so. Therefore, a scaffolding company can only make a claim for materials if they hire in additional scaffolding. If they simply use equipment they already own then no deduction is allowed, and CIS is due against the full charge made for providing and installing the scaffolding. That can lead to a significant discrepancy on a return.
Paying for accommodation, travel and subsistence.
If you pay for subcontractors’ accommodation, or the costs of getting to site and food or drink while at the work location, then this cost is almost always liable to CIS deduction. Only materials or other consumable stores, plant hire and fuel for plant, and the cost of manufacturing prefabricated components can be excluded under CIS. But your subcontractor will still be able to claim tax relief on accommodation, travel and subsistence costs through their own tax return.
Any contract that includes a service liable to CIS deduction brings all services provided under that contract within the scope for deduction. This means, for example, that the exclusion for plant hire (such as diggers and excavators) can be brought within the scope of a CIS deduction if the contract includes the driver. This is known as a ‘mixed contract’. The solution here is for separate contracts to exist: one for the CIS-liable service and one for the excluded service. Separate invoices alone will not be accepted by HMRC; evidence of a separate contract is essential.
So, if you’ve just received notice of an imminent inspection from HMRC, don’t delay in reaching out to us. We can help identify any problem areas relating to CIS for your business, and advise on how to proceed. Remember, a disclosure of any errors prior to inspection will allow HMRC to consider a reduction in penalties – and we might even be able to vindicate the position you took in your original return.
Give us a call today.