In April 2021, HMRC quietly passed new legislation to tackle abuse within the construction industry, specifically concerning materials costs. There was little fanfare when the changes were initially announced, but HMRC has recently been increasing the frequency of CIS compliance checks with a particular focus on subcontractor materials costs.
To ensure compliance, contractors will be required to provide sufficient evidence to support any materials costs on their subcontractors’ invoices. Failure to provide adequate evidence to support the costs identified as materials or any other non-labour items such as plant hire, scaffolding, etc. will mean that the main contractor is liable for any perceived underpayment of CIS tax.
What does this mean for subcontractors?
- You will be required to provide evidence for all materials costs incurred on a particular job, therefore accurate record-keeping in this area is essential. Copy receipts must be provided to your contractor to support any materials costs on your invoices.
- You are no longer allowed to mark-up your materials costs. Any mark-up will be considered part of your labour costs and therefore subject to CIS tax.
What does this mean for contractors?
- You must ensure all subcontractors are providing adequate supporting documentation for any materials costs.
- You must ensure subcontractors are not applying any mark-up on their materials, any mark-up is subject to CIS tax and you are responsible for deducting this and paying it to HMRC.
- In the event of a HMRC compliance check, you will be liable for any perceived underpayment of tax, therefore it is your business that will suffer the consequences. Even if the materials costs are genuine, HMRC will likely consider these costs to be inflated if there is insufficient evidence to support them.
Get in touch
We have seen increasing instances of contractors being hit with unexpected tax bills following HMRC compliance checks, therefore accurate record-keeping is more essential than ever in this sector. If you have any questions or are interested in how our cloud accounting team can assist you with your CIS record-keeping obligations, please get in touch with Luke Irving, cloud accounting manager, by clicking the button below.
