A Scottish-based tax expert is warning that Construction Industry Scheme (CIS) contractors are becoming a target for tax authorities, with HMRC issuing letters to CIS contractors if records indicate the correct deductions may not have been applied.
The letter prompts the contractor to verify the CIS tax status of their subcontractors to ensure they have used the correct CIS deductions rate when calculating deductions to withhold. Contractors must check their records within 45 days of receipt of the letter, following which a compliance check may be started with any errors found by HMRC being treated as prompted and result in increased penalties.
Mark Pryce, head of corporate tax with Azets in Scotland, said, “It is the contractor within CIS that bears all the risk and if they do not apply the correct CIS deductions, HMRC will aim to recover any CIS tax not deducted from the contractor. Whilst there is an offset mechanism available where the subcontractor has already included the income in their returns and paid the relevant taxes, there is often a significant time delay in the payment being made and the subcontractor’s reporting and payment deadlines, leaving the contractor exposed to the liabilities.
“Since April 2024, VAT compliance has been included in the compliance tests to obtain and maintain Gross Payment Status. This addition is likely to lead to an increase in the number of subcontractors having Gross Payment Status withdrawn. If contractors fail to update their records following a change in the subcontractor’s CIS tax status, the liabilities of CIS tax not deducted will fall to the contractor.
“Interestingly, within the letter, there is no invitation to positively confirm once any necessary action has been taken, so a compliance check may be launched regardless of whether the contractor has amended records accordingly within the stated timeframe.”
Mark Pryce advised that any contractor who received a letter should take ‘prompt’ action to avoid exacerbating any situation.
He added, “We recommend contractors verify all the subcontractors they have included in their CIS300 returns in the last 12 months to ensure the correct CIS tax status has been applied. If errors are identified, the CIS300 returns should be amended to reflect the correct deductions.
“A specialist advisor should also be engaged upon receipt of a letter so that the contractor’s position can be managed appropriately. If errors exist and corrective actions are not taken, HMRC may open a CIS enquiry. These can be very time-consuming to manage and can incur significant penalties.”
