HMRC started a One to Many (OTM) letter campaign on 22 July 2024, directed at Construction Industry Scheme (CIS) contractors, prompting them to verify their subcontractor population to ensure the correct CIS tax deductions are made on their payments. This follows the recent campaign directed at insurance businesses that commission construction work directly or through a loss adjuster. Both campaigns suggest that HMRC still considers the construction industry an area of tax leakage.
Below, we explain the CIS, OTM letters, and how we can help.
What is the CIS?
The CIS obligates contractors to deduct tax from a subcontractor’s payment and pay the deduction to HMRC. HMRC treats the deductions as advance payments towards the subcontractor’s tax and National Insurance Contributions (NICs) liabilities.
Contractors must register for CIS. There is no such statutory obligation on the subcontractors to register for CIS, however, tax deductions are taken from their payments at a higher rate if they are not registered (30% rather than 20%, or 0% where the subcontractor holds a Gross Payment Status). A new subcontractor must be verified with HMRC before making the first payment to them.
A point often forgotten or ignored by contractors, is that they must undertake a review of their subcontractors’ employment status to ensure that they are correctly treated as self-employed. Not doing so could result in a penalty of up to £3,000 if incorrect employment status is returned on the contractor’s monthly CIS return.
What are OTM letters?
HMRC uses OTM letters to influence compliant behaviour from its target audience. The OTM should not be confused with a compliance check; however, any inaction after 45 days of receipt of the letter may result in a compliance check.
What do contractors need to do?
Since it is the contractor’s responsibility to deduct the correct CIS tax from its subcontractors, failure to do so will result in any tax underpayment sitting with the contractor. However, there is a relieving provision under Regulation 9 of The Income Tax (Construction Industry Scheme) Regulations 2005, which allows HMRC to issue a direction relieving a contractor of their CIS liability.
Non-compliance will not only result in tax being collected from the contractor, but interest and penalties may also be levied.
To avoid any tax underpayment arising, you will need to ensure that you have robust processes, controls and governance in place so you are compliant with the prevailing CIS legislation.
How haysmacintyre can help
If you receive a letter from HMRC, we’re on hand to assist with your response or manage the response directly with HMRC on your behalf.
We can also undertake an assurance review to help determine how robust your processes, controls and governance are in relation to CIS regulations.
Please contact Dinesh Pancholi, Employment Tax Senior Manager, should you have any questions or require any assistance with your CIS compliance processes.
