The construction industry has been going through a lot of change in recent years and the signs from HM Treasury and HMRC is there is still more to come. With this in mind, it seems like a good time to take stock and look at the issues we’re seeing concerning clients and what HMRC are focusing on in CIS compliance visits, before considering what could be on the horizon.
What’s concerning clients?
At the front of client’s minds is usually Gross Payment Status (GPS). In an industry that often relies on a good cash flow to stay in business – GPS is key. In addition to the cash flow advantages client’s benefit from by having GPS, many in the industry see GPS as a form of endorsement of a company’s financial standing and reputation, making it key to secure new contracts.
The issues client’s come to us regarding GPS, broadly fall within one of two categories; securing GPS initially, or retaining GPS.
For those clients looking to secure GPS, the advice hasn’t changed – keep directors and partners to a minimum to ensure the turnover test is low so it can be met relatively easily, and keep a close eye on the business’s compliance and the director’s/partner’s personal compliance, to ensure this doesn’t cause the application to be denied.
If a client is worried about losing GPS on account of a compliance failure they’ve identified, the best advice is to be pro-active with HMRC – they’ll always look more favourably on allowing a client to retain their GPS where a voluntary disclosure has been made, than if they have had to make the client aware of the failure.
What are we seeing from HMRC?
HMRC will want to ensure CIS and PAYE are being operated correctly when undertaking compliance visits, to this end HMRC will be looking to:
Review CIS verifications and operation of correct rates of deductions
Sample review invoices
Review the split of materials to labour, and make sure the costs of the materials are accurately reflected
Review the employment status of contractors
The latter is a very hot topic at the moment with the changes to the agency regulations, and more recently, the changes to travel and subsistence. The new rules for Supervision, Direction and Control do not yet seem to be on the radar of HMRC inspectors, but it is only a matter of time until they start exercising these new powers.
Still to come
The legislation changes are not yet fully implemented, and in 2017 we will see a new legislation governing personal service companies working on public contracts, along with a new IR35 tool, which we expect to be similar to the ESI tool currently available. On the face of it, this will have a limited impact on construction – although we will need to wait to see the exact legislation before confirming this – it may be drafted wide enough to include construction contracts within the rail industry that may be caught for instance.
Whilst the initial impact for construction may be limited, if it proves successful in stemming the use of personal service companies, it’s likely the rules will be expanded beyond public contracts both in the private sector and construction industries as a whole.