News
The Construction Industry Scheme – A Material Issue?
25 Jul 2022
Anyone operating as a contractor or a subcontractor in the Construction Industry will be familiar with the Construction Industry Scheme (“CIS”). As those affected will know payments made to subcontractors within the CIS can be subject to deduction of tax by the contractor. Of course, if the subcontractor has obtained gross payment status from HMRC then deducting tax ceases to become an issue – although the contractor should make sure they keep evidence of a subcontractor’s gross payment status in HMRC decide to come knocking.
For subcontractors who do not have gross payment status, there can be a misconception that CIS deductions apply only to the labour element of an invoice from a subcontractor. In fact, the deductions apply to everything except the cost of materials which are directly incurred by the subcontractor for the purposes of the contract – which is subtly different. To make sure the right deductions are being made we therefore need to be very clear about what the term “materials” means in this case. The key point is that the amounts not subject to deduction must be actual costs incurred by the subcontractor for the construction project. In addition to materials provided by the subcontractor, the following costs may also be paid without deduction:
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consumable stores.
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fuel (except fuel for travelling).
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plant hire; and
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the cost of manufacture or prefabrication of materials.
So, for example if the subcontractor actually owns the plant used by them in the work and they make a separate charge for providing the plant this charge does not count as materials for CIS purposes and should be paid under deduction.
If HMRC believe that the contractor has failed to take reasonable care in checking whether the amounts claimed on invoices do actually represent materials, then they can recover the under-deducted amount from the contractor. If they decide to a review a contractor’s operation of the CIS, then they will be looking for evidence that the contractor has taken what they consider to be reasonable steps to verify that the costs claimed as materials do actually qualify for gross payment. This can mean for example asking for evidence from the subcontractor to support the amounts claimed as materials (including any plant hire costs incurred and claimed by the subcontractor).
As a result, every contractor within the CIS scheme needs to make sure they have the right processes in place to validate amounts claimed as materials in order to be secure from a future challenge by HMRC. Clearly these procedures need to be proportionate and commercially viable but failing to have such processes in place may one day lead to a nasty shock if HMRC decide there has been an under-withholding.
If you would like to discuss these issues or would like a review of your existing processes, then please get in touch with your regular WR Partners contact or email hello@wrpartners.co.uk
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