What is HMRC concerned about?
The construction industry is seen as a high-risk sector for tax evasion, with the two main sources of fraud being VAT and Labour. There are many organised criminal organisations that create businesses purely with the intention to avoid paying VAT or CIS tax deductions.
VAT fraud involves mainly charging clients VAT and then failing to pay this over to HMRC. To resolve this, from 01-Mar-2021, the VAT Reverse Charge is being introduced which essentially transfers responsibility for accounting for VAT to the final contractor in the chain (usually the customer) rather than the supplier. Usually the final contractor is a large company that HMRC trusts will pay the right amounts. However, it is important to note that all the VAT registered businesses in the chain still need to file their VAT returns so this won't change.
Labour and Materials
Labour fraud generally involves a contractor who is also a subcontractor who will have CIS suffered as well as CIS deductions. In order to help with cashflow, the contractor can offset the deductions against the suffered amount and only pay HMRC the difference. However, there are instances where businesses exaggerate expenses and thus how much they have suffered so pay less to HMRC.
In other cases, Contractors will have made deductions to subcontractor's pay but these are not declared or handed over to HMRC and there is no easy way currently for subcontractors to confirm that the deductions they have suffered have in fact been paid ot HMRC. What's worse, HMRC will raise a query against the subcontractor as it is their tax that hasn't been received in this case due to fraud by the contractor (employer in this case)
Who should be worried of new proposals?
The proposed solution to the labour fraud issue is to give HMRC greater powers in future so they can directly adjust the CIS amounts reported. HMRC will also be able to black mark contractors and thus disallow them from ofsetting their CIS suffered with the subcontrctor deductions, which of course could have huge implications for a business's cashflow during the year.
So the best thing going forward is to ensure all your CIS reports are accurate and that there is no reason for HMRC to doubt them.
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