Construction Industry Scheme (CIS)

Transcription

1 Construction Industry Scheme (CIS) Need-to-know for Scotland s Property and Construction sector FOR SALE

2 Many property and construction firms will be well aware of the CIS, which was introduced to Scotland in the 1970s. The scheme was designed to crack down on a perceived cash in hand culture within the industry. However, there are many misconceptions and complex exemptions that, if not properly addressed can lead to substantial liabilities. Over the next few pages, we outline some of the key need-to-know points to help you tackle CIS.

3 Property funds and special purpose vehicles A common misconception is that such entities, as they are often non-tax paying, do not fall under the remit of CIS. CIS applies in all cases (subject to certain conditions) where construction operations are undertaken within the UK and its territorial waters regardless of the type of entity that is commissioning the development. Consequently, off-shore vehicles which acquire property or land in the UK for development purposes will be required to register as a contractor with HMRC and operate CIS on all payments it makes to subcontractors. Who are subcontractors? A common myth is that only those that are actually carrying out construction works are subcontractors for the purposes of the CIS. The meaning of subcontractor is far wider and it can catch even professionals and consultants. CIS operates on the basis of the contract and what services are provided under that contract. Essentially, a subcontractor can be a person or body who is under an obligation to carry out construction operations for another part and/or, more importantly, a body or person who is answerable to the contractor in relation to constructions being undertaken by another person or body. It is this latter definition that is often not considered and service providers such as professionals and/ or consultants (eg project managers/ employer s agents) could be within the scope of the meaning of subcontractors.

4 Scope of CIS Construction operations The meaning of construction operations is very widely drawn and as such, construction operations does not simply relate to physical building works but can cover what we would normally regard as maintenance. In most cases it will be clear that the work being undertaken is within the scope of CIS but there can be many instances where the position is not clear and as such a contractor could, invariably, find themselves at a later date having failed to operate CIS correctly. This can lead to unexpected liabilities arising which can, in some cases, be relatively significant. Exceptions Under the CIS, exceptions are very limited and our experience is that HMRC practice is forever changing with regard to the circumstances under which an exception may be applied. The exceptions only applied to those businesses that are not construction businesses (eg supermarkets, retail chains etc) but who nevertheless do incur expenditure on construction operations. Property investors have historically been accepted as being nonconstruction businesses and as such would only be drawn into the CIS as a contractor if its expenditure on construction operations exceed 1 million on average per year over the course of the last three accounting years (ie in excess of 3 million over three years). However, in recent times HMRC has sought to examine what type of construction works are being conducted and it has been of the view that where construction works are being undertaken to convert a building from, say, commercial to residential, then the property investment company is, in reality, acting as a property developer. As a property developer, it is considered that construction operations are a fundamental part of its business and as such CIS would be in point from day one (ie the expenditure limits referred to above do not apply). Great care needs to be taken when considering whether or not the CIS applies and the circumstances under which it would apply.

5 The consequences of getting it wrong There are various penalties that can be applied by HMRC in relation to the failure to operate CIS, as set out below. Incorrect returns Penalties in this regard are tax geared and as such the level of the penalty will be dependent on the potential tax loss to HMRC and the contractors behaviour. In the first instance, a contractor will be held liable for the full amount any deductions that it should have made from payments to subcontractors. HMRC will also seek interest in relation to this amount. Penalties are then considered on the following basis: Careless inaccuracy 0% to 30% Deliberate mistake but not concealed 30% to 70% Deliberate mistake and concealed 70% to 100% Late returns Six months late - tax geared penalty greater of: 5% deductions on outstanding return, or months late - 2nd tax geared penalty as above unless HMRC believe fraudulent activity, penalty then based on behaviour, greater of: 100% of deductions or 3,000 if concealed and deliberate 70% of deductions or 1,500 if not concealed but deliberate Failure to verify Penalty of up to 3,000 for each failure in relation to the carrying out of the verification process.

6 Contact us Grant Thornton UK s Property and Construction team in Scotland has specialist knowledge in CIS and can provide your business with bespoke support and assistance. Lorraine Macphail Head of Property and Construction in Scotland T E lorraine.macphail@uk.gt.com James Andersen Senior Manager T E james.andersen@uk.gt.com Bryan Crawford Director T E bryan.crawford@uk.gt.com 2014 Grant Thornton UK LLP. All rights reserved. Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant-thornton.co.uk V24368