Construction Industry Scheme Case Study Zone

Case study 1 – Reducing tax liability & Suspension of penalties

A large construction client received an enquiry from HMRC which looked specifically at the processes they had in place to check the proportion of materials on their subcontractor’s invoices.  HMRC argued that it is the contractor’s responsibility to ask for evidence for the materials costs paid by their subcontractor, but this was not being checked, even when the proportion of the invoice that related to materials was very large.  The subcontractor is only permitted to treat the cost they incurred on materials as the non-labour element of their invoice to a contractor, any mark-up must be treated as a non-materials cost and liable to tax withholding. As a result, HMRC wanted to assess additional tax of £500K on the client in relation to non-qualifying materials.

With our help the client was firstly able to reduce the tax liability to £200,000 and we were then able secure relief from HMRC of £160,000 of this meaning a liability of £40,000.  A further £26,000 may be recoverable from their subcontractors, but this has been a very worrying episode for the company.

In addition to the significant reduction in liability, we also secured suspension of all penalties. We have also helped the client improve their systems and procedures to remove the risk of similar problems in the future.

Case study 2 – Minimise liabilities arising

A property developer that had been registered as a CIS contractor for numerous years approached us having discovered that their CIS returns had only been partially completed, and in some cases, returns not submitted at all.

Initial discussions focussed on correcting the CIS returns and paying any additional CIS tax due over to HMRC.  However, upon closer examination, it was discovered that there were in fact three companies paying subcontractors, and only one had been registered for CIS.

Therefore, given the length of time that the errors had persisted, and the number and value of unreported transactions, it was agreed that the best solution would be to make a disclosure to HMRC and apply to claim for relief directly in respect of taxes already paid by the subcontractor.

This resulted in three separate disclosures, and we are working with the client to minimise the potential liabilities arising.

Case study 3 – Take appropriate action!

A property developer considered themselves to be “money men” rather than CIS contractors because they engaged a main contractor to run the whole project and did not undertake any construction work themselves.

The CIS guidance specifically refers to property developers as contractors in these circumstances and the property developer should have applied CIS and deducted 30% tax from all payments made to the main contractor.

The potential tax liability was initially £20M, but we quickly reduced the tax at risk to £1.5M.  We were then able to claim relief for tax settled by the subcontractor and after a battle with HMRC, secured an outcome where penalties of £17,500 were settled, but no tax or interest.

The moral of the story is that – if you are paying another business for construction services, you must consider whether these payments are within scope of the CIS scheme and take appropriate action before making any payments.

Case study 4 – A cost effective solution

A German company was unaware of CIS before approaching us to assist with their tax affairs after completion of an infrastructure project in the UK.  The nature of the project was clearly inside the scope of CIS and there had been a failure to register, verify subcontractors, withhold tax, submit returns and pay over withheld tax to HMRC.  As no further work was to be undertaken in the UK, it was decided that a disclosure to HMRC was the most cost effective and suitable method of resolving the issue.

Initial calculations put the underpaid CIS tax in the region of £110,000, but a more in-depth review allowed us to treat many of the payments as outside CIS, bringing the total disclosure to around £20,000. We hoped to be able to claim relief for a significant proportion of the remainder on the basis that the subcontractors had already declared the income and paid the taxes due.

We secured partial success, but the client was denied relief for two contractors:

  • The first had either not declared the income or had declared, but not paid the tax due.
  • The second was only in the UK for a short period and had determined that they had not created a permanent establishment and therefore had no requirement to register with HMRC for tax purposes at all.

The first scenario is always a risk for a CIS contractor that fails to apply the rules and the liability will always fall on the contractor to pay the tax they failed to withhold.

The second scenario is extremely harsh because relief is denied on the basis that HMRC have nothing to test the conditions against.  The legislation prevents relief even where the grounds are that it is obvious that if any tax had been withheld, it would be repayable to the subcontractor.  This serves as a reminder that the tax rules are often rigid and penalise businesses for compliance failure even where there has ultimately been no loss of tax to the exchequer overall.

The conclusion is that the client will pay the unrelieved tax due, interest and penalties, but the disclosure route is still significantly more cost-effective when compared to registering late and submitting the returns that should have been submitted at the time.

The client is now approaching the subcontractors to attempt to recover the taxed now paid on their behalf.  If successful, the client will then issue tax certificates to them to enable the subcontractors to secure credit for the tax paid.