Businesses operating in the construction industry – be they
companies, partnerships or self-employed individuals – may be
contractors or subcontractors: subcontractors are businesses
paid to carry out building work for contractors. Under
the construction industry tax deduction scheme – which was
introduced in 1971 – contractors have had to make a deduction
from any payment made for work done by a subcontractor, to be
set against the subcontractor’s liability for tax and National
Insurance contributions (NICs). Under certain circumstances
subcontractors have been entitled to receive payment gross of
tax, under what was commonly known as the ‘lump scheme’.
Significant changes to these rules were announced in February
1994, following concerns that the lump scheme was being
exploited to evade tax. Legislation was introduced under
schedule 27 of the Finance Act 1995 and
section 178 of the Finance Act 1996, and the new
construction industry scheme (CIS) came into operation on 1
August 1999.
In the 2003 Budget the Labour Government announced that a
reformed CIS would be introduced from April 2005, following
complaints about the scheme’s processes and the compliance
costs faced by businesses.[1] Provision
to this effect was made in the Finance Act
2004 (ss 57‑77, schedules 11 & 12),[2] though
implementation of the new scheme has been delayed twice: first
to April 2006,[3] and then to
April 2007.[4] In
November 2006 HM Revenue & Customs (HMRC) launched an
advertising campaign on the new features of the scheme,[5] and
subsequently the department collated detailed guidance material
for contractors and subcontractors on its site.
There have not been any major changes to the new CIS since its
launch, and relatively little comment on its operation, though
in October 2010 HMRC published research which suggested that in
the main the new scheme had met its policy aims.[6]
Recently the 2017 Budget announced a consultation on policy
options to tackle fraud in the provision of labour in the
construction sector.[7] The
Government is proposing the introduction of a VAT domestic
reverse charge, an anti-fraud measure which transfers the
responsibility for accounting to HMRC for VAT on specified
goods and services from the supplier to the customer.[8] In addition
the Government is also looking at tightening the rules around
gross payment status within the CIS: that is, the criteria that
subcontractors must satisfy to receive payments gross of tax.
This note examines the historical development of the
construction industry scheme, before looking at the
Government’s recent consultation on amending its rules to
reduce the incidence of tax fraud.
Notes :
[1] Budget
2003, HC 500, April 2003 para 3.29
[2]
The operational detail of the new scheme was set out in
secondary legislation: the Income Tax (Construction
Industry Scheme) Regulations SI 2005/2045.
[3] Pre-Budget
Report, Cm 6042, December 2003 para 3.48
[4]
HC Deb 19 October 2005 c1106W
[5]
HM Revenue & Customs press notice NAT 68/06, 10 November
2006
[6]
HMRC, Evaluating the
Construction Industry Scheme : Research Report 106,
October 2010
[7] Budget
2017, HC 1025, March 2017 para 3.48; HM
Treasury, Overview of tax legislation &
rates, March 2017 para 2.30. The consultation was launched
on 20 March; the closing date for comments is 9 June. Details
are collated on Gov.uk.
[8]
For details of how existing schemes operate see,
HMRC, VAT Notice 735: VAT
domestic reverse charge on specified goods and
services, April 2015.
