Quick Guide to Taxation in Building Design and Construction

Like most industries, building design and construction has been hit hard over the past 18 months due to the coronavirus pandemic.  Whilst there was a certain amount of support and monetary relief from the government, as the UK gets back to some form of normality, 2021 has seen a raft of tax changes for the construction industry.

To help you understand taxation requirements in building design and construction, we’ve outlined a quick guide for you.

VAT reverse charge

The Construction Industry Sector (CIS) tax deduction scheme was introduced in 1971 whereby contractors made a deduction from any payment made to a subcontractor, which is set against the subcontractors’ liability for National Insurance contributions (NICs) and tax.  Known as the ‘lump scheme’, which was reformed in 2007, in some situations, subcontractors were entitled to payments gross of tax.

However, as of 1st March 2021, a new VAT domestic reverse charge has been introduced as a way to stop VAT fraud by subcontractors, i.e. they would charge VAT and then pocket it.

The reverse charge means that subcontractors now have to invoice customers that are VAT registered that shows the amount of VAT applied, putting the responsibility of declaring and paying the VAT due on the customer.

Changes to the IR35 rule

Applicable to off-payroll workers in the construction industry, the IR35 rule has been a subject of debate for years.  The IR35 criteria assesses whether the person working for the contractor is doing so in a similar way an employee would, and therefore should pay NICs and tax on the basis of an employee, rather than a self-employed individual.

Since 6th April 2021, the IR35 rules have changed.  It is no longer the remit of the off-payroll worker to determine whether the work they are doing comes under the IR35 rules.  This responsibility is now the remit of the client, or contractor, bringing the building design and construction industry, as well as other private sector companies, in line with public sector IR35 requirements.

Changes to the Construction Industry Scheme (CIS)

With effect from 6th April 2021, there have been four principal changes to CIS for the building design and construction industry.  These changes were made to address abuse of the CIS rules, and allow HMRC to act more quickly if required.  The changes are:

  1. Deemed contractors – the definition of what is considered a ‘deemed contractor’ has changed and simplified.  The new definition is – “a person is considered a deemed contractor when their construction operations expenditure in a 12 month period goes over £3 million”.  Therefore, businesses will have to monitor operations expenditure more often.

  2. Material costs deduction – there is a new amendment that clarifies material costs that are subject to a deduction according to the CIS.  Only material costs incurred directly by the subcontractor in order to carry out the contract can be deducted, preventing other individuals or subcontractors in the supply chain from deducting material costs.

  3. HMRC can now amend deductions – under a new amendment, HMRC has been given the power to amend any CIS deduction claim if they suspect or identify any deduction claims they believe to be inaccurate.

  4. Liability for false statements/information – scope for applying penalties where false information or statements have been supplied in respect of gross payment status (GPS) or deduction payments has been expanded.  This now means that company and individual subcontractors are now liable and could receive a penalty if they have influenced somebody making an application to falsify their statement or provide false information.

At HB Tax, we provide professional advice and services covering all aspects of taxation for companies and individuals involved in the building design and construction industry.  As members of the Chartered Institute of Taxation, you can rest assured that our experience and knowledge is of the highest quality.  Our friendly, highly-approachable team is able to help you with tax advice, accounting, legal support and corporate finance.  Contact us today to get your financial affairs in order.

Get in contact with us to see how we can help you apply for your R&D Tax Credits