David Brindley and Jas Jhooty look at HMRC’s increased focus in the Construction Industry Scheme (CIS) space. So what’s the issue?
The CIS is designed to regulate payments to subcontractors working in the construction industry in order to prevent tax evasion and ensure subcontractors pay the correct amount of income tax and NICs. Under the CIS regime, contractors are required to deduct money from payments to subcontractors and pass this to HM Revenue and Customs (HMRC).
HMRC can open investigations mainly to determine if CIS has been applied correctly in particular around the proper treatment of expenses, such as materials costs and equipment hire. During HMRC investigations, contractors and subcontractors are usually required to provide detailed documentation and evidence to support their accounting of materials and third-party plant hire expenses to establish the correct split.
It is important to note that the HMRC investigation will be into the contractor, where the obligation for CIS applies, rather than subcontractors. This can lead to an inequitable position where if the contractor has underpaid or not paid CIS, and paid the subcontractor gross for the work, they are then also obliged to pay any understatement of CIS plus interest and penalties and thus potentially creating a double charge on the contractor.
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