HMRC have advised that they have commenced a new ‘One To Many’ letter campaign in respect of Construction Industry Scheme (CIS) contractors, prompting them to verify the CIS tax status of their subcontractors and to check CIS tax has been appropriately deducted and paid.
What is CIS?
Broadly the scheme exists to shift the responsibility for paying tax from the subcontractor to the contractor, in an attempt to combat fraud in the industry.
You may need to register as a contractor if you pay subcontractors for construction work. Broadly, your responsibility is then to deduct tax at the appropriate rate on invoices from your subcontractors
Subcontractors do not need to register, but tax will need to be deducted at a higher rate if they do not.
Our article discusses the details of CIS further, and how Menzies can support contractors and subcontractors. If you are unsure of CIS obligations, we recommend seeking advice as it is a complex area and mistakes can easily be made. The consequences of errors can be very expensive with the contractor responsible for the tax they failed to deduct and pay over to HMRC plus interest and potentially significant penalties.
What is HMRC’s nudge letter about?
HMRC began this campaign on 22 July 2024 and we expect more letters will be sent in the coming weeks and months regarding CIS.
HMRC have wide information gathering powers, and this letter relates specifically to evidence that contractors have been applying incorrect tax rates for their subcontractors. HMRC are asking contractors to verify their subcontractors’ CIS status which a contractor can do via the free online service on gov.uk.
Through the online service you can find out if a subcontractor is registered for CIS and the rate of tax you should be deducting. It is a contractor’s responsibility to verify all new subcontractors before you pay them.
What do I or my business need to do if we receive a CIS nudge letter?
Any letter received from HMRC should not be ignored. You should review your position as a contractor, and verify the CIS status of your subcontractors, to ensure that you have been deducting tax correctly.
If you believe your filings have been made correctly, someone authorised by the business (e.g. a director, or an agent) should respond to HMRC outlining why they believe no additional liabilities are due.
If CIS returns should have been filed and weren’t, or it transpires that they were filed with errors or omissions, then a disclosure may need to be made to HMRC.
If you do not respond, HMRC will likely commence a compliance check. This may be unwelcome as you will have less control over the process, HMRC may demand more information from you, and it can draw out the overall process costing you time and money. Waiting for HMRC to contact you is likely to significantly increase the cost of correcting the problem when compared to the cost of you proactively correcting this without further intervention from HMRC.
Regardless of whether you have received a nudge letter yet or not, CIS problems should be addressed and rectified as quickly as possible because acting now is likely to result in a much lower liability than resolving this later.
Making a disclosure to HMRC
If you have realised you have made mistakes in CIS returns then you may first wish to check if you can rectify the position by amending previously filed returns. Alternatively where you did not realise CIS returns were due for example, a notification can instead be made to HMRC that the business intends to make a disclosure under the Digital Disclosure Service. A disclosure should then be prepared for all years that are within the scope of HMRC assessment. We will work with you to determine which course of action is available and most suitable given the specific circumstances of your case.
If any CIS or employer liabilities have been deliberately evaded, then you should consider whether the Contractual Disclosure Facility (Code of Practice 9 or “COP9”) may be more appropriate and seek guidance from a COP9 specialist, such as Menzies’ Tax Disputes and Disclosures team.
If you need support responding to HMRC, filing CIS returns, or making a disclosure on behalf of a company, contact the Menzies Tax Disputes and Disclosures team today.
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