Incorrect operation of Construction Industry Scheme (CIS)

We recently came across the following case study discussing the potential penalties and implications for even genuine mistakes in the miss administration of CIS which we thought would be helpful to share.

An accountant took on a small building contractor as a new client, who was registered with the CIS as a gross payment contractor, and worked for both domestic and other construction industry clients.

Whilst doing the clients books the accountant noticed that the builder had quite correctly verified his sub-contractors with the CIS, but he was paying them gross for work completed for his domestic clients and under deduction for work carried out for his construction industry clients.

The accountant pointed out to the builder that all payments to his sub-contractors that had been verified at 20% should have deductions made from them, and in the article that I read the accountant was asking his peers for advice as to the likely outcome of the case, and potential penalties that the builder might face. The advice was as follows:

  • The builder was legally obliged to make a voluntary declaration to HMRC detailing the error, and how much tax should have been paid.
  • HMRC would be entitled to recover this tax from him, unless they accepted his argument that the mistake was genuine, and he had believed that he was not required to make the missing deductions.
  • This argument would only work if his sub-contractors had also declared all of their earnings, and paid the correct amount tax themselves.
  • He would also be at significant risk of losing his gross payment status – especially if he didn’t have a 100% record in his previous administration and payments of the CIS.
  • The option to keep quiet and simply start operating CIS correctly was also discussed, but the advice to the accountant was that if the builder chose this route it was clearly unlawful, and he should no longer represent the client.

A complete sea of pain for the builder no matter what option he chose, with the best case scenario relying on goodwill from HMRC.  This is not a situation anyone would want to fall into, and risk that can easily be avoided simply by outsourcing the supply of your sub-contractors to EEBS who will mitigate all of the above.