The early part of 2021 will see a triple whammy of tax changes for the construction industry. But what are these changes and are you ready?
1. VAT reverse charge
Initially planned to take effect in October 2019, the implementation of the new VAT domestic reverse charge has been postponed twice, but introduction of the new regime is now fast approaching (despite industry calls for the change to be scrapped).
Who will the reverse charge affect?
The charge applies to standard and reduced-rate VAT services:
- For individuals or businesses who are registered for VAT in the UK
- For individuals that are reported within the Construction Industry Scheme
In practice, this means it will apply to services supplied between the majority of contractors and sub-contractors.
What is the reverse charge?
The new VAT domestic reverse charge will change the way in which VAT on construction supplies is accounted for. Rather than the supplier charging and accounting for VAT, the recipient of those supplies will be responsible.
In practice, this would mean that instead of a sub-contractor charging VAT on their services and paying this to HMRC, the employer contractor will be responsible to self-account for VAT on the service.
When is the reverse charge being implemented?
The VAT domestic reverse charge will come into force on 1 March 2021. It was initially planned to start from October 2019 but was postponed to October 2020 to help businesses prepare for the changes. HMRC then delayed the start date again to March 2021 due to the impact of the coronavirus pandemic on the industry.
Why is the reverse charge being introduced?
The domestic "reverse charge" is an anti-fraud measure that has already been introduced for certain services and goods, and is now being introduced to reduce the risk of VAT fraud within the labour supply chain in the construction industry. The aim is to combat "missing trader" fraud, whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill – essentially pocketing an additional profit.
Businesses must take urgent action now to consider whether and how the changes might impact them – taking steps to establish what supplies are caught, reviewing contracts and accounting systems and then notifying suppliers and customers to confirm intermediary or end user status.
Smaller sub-contractors who use VAT as a way to finance their working capital should be aware in particular of the financial impact that the domestic reverse charge may have on their businesses and prepare for any potential cash flow issues.
2. Changes to the Construction Industry Scheme (CIS) rules
The changes have arisen as a result of the government’s consultation on “Tackling Construction Industry Scheme Abuse” and will introduce a number of amendments to the CIS rules.
Who will the changes affect?
The measure will apply to those who work in construction, who operate within the CIS, or who represent construction businesses.
What are the changes?
- CIS set-off amendment power: The measure provides a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information Employer Payment Summary returns. This power will be used to correct errors or omissions relating to the claims, to remove claims, and to prevent certain employers from making further similar claims, where employers do not provide evidence of eligibility and/or evidence of the sums deducted, and do not correct their EPS at HMRC’s request.
- Cost of materials: The measure makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
- Deemed contractors: The measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS. Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3m within the previous 12 months.
- CIS registration penalty: The measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either encourages that person to make a false statement or supply a false document in support of that application; or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.
When is the measure being implemented?
The measure will be enacted from 6 April 2021.
Why is the measure being implemented?
The changes intend to tackle CIS abuse and are designed to ensure HMRC can act quickly where the rules are being broken. The changes are designed to level the playing field for all those operating within construction and ensure the CIS applies fairly to everyone liable. The clarification to the cost of materials provision will remove scope for different interpretations of the existing rule, and the deemed contractor changes are designed to prevent manipulation of the current rules.
3. IR35 Reform
Changes to the off-payroll working rules (IR35) will alter the current position on responsibility for PAYE liabilities when labour is provided through an “intermediary”.
Who will the reforms affect?
The reforms will affect medium and large private businesses with a UK connection and will place a significant tax liability on many construction businesses that engage contractors through an intermediary, as well as affecting the contractors themselves.
What are the changes?
The changes mean that medium and large private businesses with a UK connection will be responsible for determining whether IR35 rules apply to those working for them as contractors, whereas previously the individual contractor was responsible for making this decision. If the off-payroll working rules apply, the contractor’s fees will be subject to tax and National Insurance contributions, which the fee payer will become responsible for accounting for and paying, including the additional cost of employer’s National Insurance contributions (NICs), to HMRC.
When are the changes coming into force?
Originally set to come into effect from April 2020, changes to the IR35 legislation were postponed due to the Covid-19 pandemic and are now set to come into force on 6 April 2021.
Why are the changes being implemented?
The off-payroll working rules are designed to ensure individuals working like employees but through their own limited company, or other intermediary, pay broadly the same Income Tax and NICs as individuals who are directly employed. The concern was that the Exchequer was losing substantial amounts of tax and NICs due to the use of self-employed status in circumstances where, individuals were in fact employees who should have been subject to PAYE rules.
It is now the time to be familiarising yourself with the new rules and seeking advice to try and prevent business disruption. Should you wish to discuss how these changes might impact your business, please speak with a member of our tax team.
Lauren Melnyk