Simplification of the Construction Industry Scheme (CIS)
HMRC are consulting on specific simplifications and easements for contractors and deemed contractors. Suggestions for more reforms requested
HMRC propose to simplify CIS
HMRC propose simplifying the CIS treatment of payments that landlords make to tenants and introducing administrative easements for corporate groups. These reforms, which should benefit contractors and deemed contractors if introduced, are currently subject to consultation. HMRC also invite suggestions for further reforms to reduce the burdens imposed by the CIS, whilst protecting public revenues. This article summarises HMRC’s specific proposed reforms and how organisations might participate in the consultation. Please also see our companion article on proposed changes to the Gross Payment Status test which form part of the same consultation.
What are the proposals for payments landlords make to tenants?
In summary, certain payments that landlords who are deemed or mainstream contractors make to tenants who contract to carry out construction works fall within the CIS:
- Payments for works that are the landlord’s responsibility, or would otherwise have been carried out by the landlord (e.g. significant structural work), are within the CIS (‘Category A’); and
- Payments for the benefit of the tenant’s business as an inducement to take on a lease (e.g., changes to internal lay out) are outside the CIS as ‘reverse premiums’ (‘Category B’).
Determining which category payments fall within can be difficult for landlords. Some take a cautious approach, applying the CIS when not strictly necessary, which can result in additional administration for both the landlord, who then has to file CIS returns and withhold and remit deductions to HMRC, and for the tenant if they choose to register as a subcontractor and apply for gross payment status to prevent a cash flow impact. The potential effect on the tax and cash flow positions of tenants can also create commercial uncertainty that deters them from entering into new leases.
HMRC therefore propose clarifying the distinction between Category A and Category B payments. The consultation proposes several possible solutions, including:
- Revisiting the distinction made between the two categories;
- Widening the scope of existing CIS withholding exemptions; and
- Raising awareness of Category A payments amongst prospective tenants prior to them entering into leases.
With HMRC inviting comment on the preferred solution.
What are the proposed easements for groups of companies?
For contractors and deemed contractors, the requirement to submit monthly CIS returns can mean significant administration. This is a particular issue for groups with a large number of companies each owning and maintaining one or a small number of properties, where infrequent payments relating to construction operations may be made and each with their own CIS obligations (e.g., in the property sector).
The ‘scheme representative’ easement currently lets groups appoint one company to make CIS payments and returns on behalf of all group companies. However, individual returns must still be submitted for each relevant company as they still have individual reporting obligations.
HMRC are assessing whether a grouping arrangement (similar to grouping arrangements for corporation tax and VAT), whereby one company would make a single monthly CIS return for all companies within the nominated group, would benefit some organisations. The current proposal considers whether eligibility to participate should be based on 75 percent ownership by the group parent with – amongst other conditions – group members jointly and severally liable for CIS deductions.
The scope for further simplification
The consultation also invites views on whether the CIS could be further simplified, either in terms of its scope or the administrative burdens it imposes (e.g. by increased digitisation).
What should organisations within the CIS do now?
The consultation (which closes on 20 July 2023) presents an important opportunity to contribute both to HMRC’s policy and its practical implementation.
Landlords who are contractors or deemed contractors should consider how the proposals to simplify the treatment of certain payments to tenants could best operate and share their views with HMRC. Similarly, groups of companies which currently bear an onerous administrative burden filing multiple CIS returns should consider commenting on HMRC’s proposals for a new grouping arrangement.
More broadly, all organisations within the CIS should consider what ‘grit’ might realistically be removed from the system and share those views with HMRC.
Please contact the authors, or your usual KPMG in the UK contact, if you would like to discuss the potential impact HMRC’s proposals might have for you, or any matters you would like us to consider reflecting in any consultation submissions we make to HMRC.
HMRC are expected to publish a summary of the consultation responses they receive and confirm what proposals will be taken forward later in the year.