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Taxation in the construction industry

Published Monday, September 9, 2019

For over 30 years businesses in the construction industry have operated a special scheme to account for tax on payments made between contractors and subcontractors. After a long period of consultation, the 'Construction Industry Scheme' was reformed in 2007. This note discusses the background to this reform, and recent reforms to tackle VAT fraud in this sector.

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Businesses operating in the construction industry – be they companies, partnerships or self-employed individuals – may be contractors or subcontractors: subcontractors are businesses paid to carry out building work for contractors.  Under the construction industry tax deduction scheme – which was introduced in 1971 – contractors have had to make a deduction from any payment made for work done by a subcontractor, to be set against the subcontractor’s liability for tax and National Insurance contributions (NICs). Under certain circumstances subcontractors have been entitled to receive payment gross of tax, under what was commonly known as the ‘lump scheme’.  Significant changes to these rules were announced in February 1994, following concerns that the lump scheme was being exploited to evade tax.  Legislation was introduced under schedule 27 of the Finance Act 1995 and section 178 of the Finance Act 1996, and the new construction industry scheme (CIS) came into operation on 1 August 1999.

In the 2003 Budget the Labour Government announced that a reformed CIS would be introduced from April 2005, following complaints about the scheme’s processes and the compliance costs faced by businesses.[1]  Provision to this effect was made in the Finance Act 2004 (ss 57‑77, schedules 11 & 12),[2] though implementation of the new scheme has been delayed twice: first to April 2006,[3] and then to April 2007.[4]  In November 2006 HM Revenue & Customs (HMRC) launched an advertising campaign on the new features of the scheme.[5]  Detailed guidance material is now collated on HMRC’s site

There have not been any major changes to the new CIS since its launch, and relatively little comment on its operation, though in October 2010 HMRC published research which suggested that in the main the new scheme had met its policy aims.[6]

At the time of the Spring 2017 Budget the Government launched a consultation on options to mitigate the risk of indirect tax fraud in the construction sector – specifically, applying a VAT ‘domestic reverse charge’ mechanism. This is an anti-fraud measure which transfers the responsibility for accounting for VAT on specified goods and services from the supplier to the customer. The consultation also asked for views on tightening the rules around gross payment status (GPS) within CIS: that is, the criteria that subcontractors must satisfy to receive payments gross of tax. In the 2018 Budget the Government announced it would introduce a VAT reverse charge from 1 October 2019.[7]

In the light of responses to the consultation, the Government stated it would not make any changes to the structure of CIS, although HMRC would increase its compliance activity in policing GPS status.[8] Provision for the new VAT rules has been made by secondary legislation,[9] though HMRC recently announced the introduction of the reverse charge would be delayed for one year, until 1 October 2020.[10]

Notes : 

[1]    Budget 2003, HC 500, April 2003 para 3.29

[2]    The operational detail of the new scheme was set out in secondary legislation: the Income Tax (Construction Industry Scheme) Regulations SI 2005/2045.

[3]    Pre-Budget Report, Cm 6042, December 2003 para 3.48

[4]    HC Deb 19 October 2005 c1106W

[5]    HM Revenue & Customs press notice NAT 68/06, 10 November 2006

[6]    HMRC, Evaluating the Construction Industry Scheme : Research Report 106, October 2010

[7]    Budget 2018, HC 1629, October 2018 para 3.72

[8]    HMRC, Fraud on provision of labour in construction sector: consultation on VAT and other policy options - Summary of responses, 1 December 2017 paras 3.8-9

[9]    The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order SI 2019/892

[10]   HMRC, Revenue and Customs Brief 10 (2019), 6 September 2019

Commons Briefing papers SN00814

Author: Antony Seely

Topics: National insurance, Taxation

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