Tax and the Construction Industry (7th August 2020)

On 1st March 2021, the new VAT domestic reverse charge will come into play within the construction industry.  It was originally due to start on 1st October 2019 but was deferred for a year.

HMRC has now announced a second deferral to this anti-fraud measure and it will now start on 1st March 2021.

In simple terms, under the domestic reverse charge, the VAT registered sub-contractor performing qualifying “construction operations” will not charge its contractor VAT for services rendered.  Instead, the contractor will pay the VAT over to HMRC on its behalf.

HMRC also published, on 19th March 2020, a consultation document entitled “Tackling Construction Industry Scheme Abuse”.

 

BACK TO BASICS

Compliance with the considerable CIS tax obligations is a big, regular ask for contractors, in particular, within the industry.  These include:

  • The completion of monthly CIS tax returns;
  • Ensuring the sub-contractors that they use are genuinely self employed;
  • Verifying new sub-contractors with HMRC;
  • Deducting the correct amount of CIS tax from their net registered sub-contractors;
  • Producing statements each month to certify the CIS tax deducted; and
  • Ensuring that the sub-contractor is really performing qualifying “construction operations”.

CIS applies if a contractor engages a sub-contractor to perform construction operations.  In practice, it is the question of “Is this really construction operations?” that can cause particular problems for contractors.

 

CONSTRUCTION OPERATIONS

This term is very widely defined.  As a guide, it covers almost anything that is done to a permanent or temporary building, structure, works or civil engineering or installation, which includes the following:

  1. The construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not) including offshore installations.
  2. The construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land.
  3. The installation (i.e. not repair) in any building or structure of systems (note it has to be a system) of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection.

    It is the installation only.  For example, a sub-contractor repairing an air conditioning system would not be performing construction operations.  Additionally, it has to be the installation of “a system”.  If you simply install fire extinguishers in a building, this is not substantial enough to be classed as “installing a system”.

  4. The internal cleaning of buildings and structures so far as carried out in the course of their construction, alteration, repair, extension or restoration.
  5. Painting or decorating the internal or external surfaces of any building or structure.
  6. Operations that form an integral part of, or are preparatory to, or are for rendering complete, such operations as previously described, including site clearance, earth moving, excavation, tunneling and boring, laying foundations, erecting scaffolding, site restoration, landscaping and provision of roadways and other access works.

 

ACTIVITIES THAT ARE NOT CONSTRUCTION OPERATIONS

 

The legislation states certain operations are held not to be construction operations for the purposes of the scheme.  These include:

  1. drilling for, or extraction of, oil or natural gas;
  2. extraction (whether by underground or surface working) of minerals and tunneling or boring, construction of underground works, for that purpose;
  3. manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;
  4. manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection or delivery of any of these things to site
  5. the professional work of architects or surveyors, or of consultants in building engineering, interior or exterior decoration or the laying out of landscape (but see above);
  6. the making, installation and repair of artistic works, being sculptures, murals and other works, which are wholly artistic in nature;
  7. signwriting and erecting, installing and repairing signboards and advertisements;
  8. the installation of seating, blinds and shutters; and
  9. the installation of security systems, including burglar alarms, closed circuit television and public address systems.

 

DEDUCTION OF CIS TAX

When a contractor verifies a new sub-contractor, HMRC will advise the contractor to pay them either gross or net.  If the sub-contractor is registered net within CIS, they will have a 20% deduction made from their payments.  A 30% deduction is made if sub-contractors are not registered within the CIS.

 

TABLE 1

 

 

Expenditure (excluding VAT) Within CIS?
   
Site clearance and tree felling Yes
Erecting scaffolding Yes
Architects’ fees for designing the home No
Transport of building materials for the construction site No
External cleaning of the building during its construction No
Installation of a heating system Yes
Carpet fitting No
Payment of an architect to manage the project Yes
Repair of lighting circuits No
Installation of blinds and shutters No
Fitting and supplying of fire extinguishers No
Installation of a burglar alarm system No
Transport of material on the building site Yes
Landscaping to complete the building project Yes
   

 

RECENT CIS CONSULTATION DOCUMENT

 

The areas covered by the consultation include the following:

 

  1. CIS DEDUCTIONS CLAIMED AGAINST PAYE

 

The document states:  “HMRC is aware that CIS deductions suffered are being claimed:

 

  • By employers not working in construction;
  • By sub-contractor employers that are not companies; and
  • That exceed the sums recorded as having been withheld for a particular sub-contractor on contractor returns”.

 

HMRC proposed that a “new provision will be introduced from April 2021 to allow HMRC to correct the CIS deductions figure claimed on the sub-contractor employer’s EPS return where there is no satisfactory evidence to support it”.

 

  1. DEEMED CONTRACTORS

 

HMRC feels that the current “deemed” contractors rule is open to abuse and will make changes to rectify the position.

 

Businesses spending above a certain amount on construction operations have to operate CIS when the threshold is reached.  It is proposed that construction expenditure will be duly calculated on a “rolling basis”.  Once the threshold has been reached, the business will have to register for CIS as a contractor, if it has not already done so.

 

The business will then commence operating CIS on the next payment that it makes to a sub-contractor in respect of the construction operations undertaken.

 

  1. DEDUCTIONS FOR MATERIALS

 

The government is going to tighten up the materials deduction rule.  It is proposing that a deduction can only be made where a sub-contractor has directly purchased the materials to be used in completing the contract.

 

 

THE NEW VAT DOMESTIC REVERSE CHARGE FOR BUILDING AND CONSTRUCTION SERVICES

 

This comes into effect from 1st March 2021.  In very general terms, the customer (the contractor) receiving the affected construction services will have to account for and pay the VAT to HMRC instead of the supplier.

This is a considerable change to the VAT construction process and will increase the importance of a business’s existing CIS invoicing procedures and accounting systems.

The reverse charge will broadly affect supplies of building and construction services that also need to be reported under CIS in the UK, at the standard or reduced VAT rates.

The charge does not apply to zero rated or VAT exempt transactions.

 

EXAMPLE

 

An insurance company (the end user) contracts with Bovit to extend its Sawston office, on 1st April 2021.

Bovit sub-contracts the majority of the work to Lewis Ltd.  Both Bovit and Lewis Ltd are VAT registered.  Lewis Ltd does not charge VAT on its bill to Bovit.

Bovit is the customer (i.e. the purchaser of the services) and will account for the VAT due to HMRC.

Bovit will declare the VAT due as output tax on its own VAT return.  Bovit will also be able to reclaim the VAT as input tax under the normal rules.

Therefore, if a contractor receives a service subject to the VAT reverse charge from its sub-contractor, it must account for the VAT in Box 1 of its VAT return and then also recover it simultaneously on the same actual VAT return in Box 4, subject to the usual VAT rules on input tax deduction.

Bovit will now charge standard rated VAT to the insurance company who is the customer and end user.

 

CONCLUSION

 

Big changes will shortly be introduced into CIS compliance.

The clients must have up-to-date software and accounting processes to enable them to account for and cope with the new CIS VAT changes from 1st March 2021.

It seems there are challenging times ahead in the CIS world.