CIS Deductions: What happens if they haven’t been made?   

If a contractor hasn’t made the required Construction Industry Scheme (CIS) deductions from payments to subcontractors, HMRC can step in by issuing a ‘determination assessment’ to collect what’s owed.

How far back can HMRC go?

• 4 years: If the underpayment wasn’t caused by carelessness, HMRC can go back up to four years from the end of the tax year involved.
• 6 years: If carelessness was involved, the period extends to six years.
• 20 years: If deliberate action led to the underpayment HMRC has up to 20 years to take action.

It’s often hard for contractors to prove they made an honest mistake despite taking reasonable care, so 6 years is typically the period that will be considered by HMRC.

What will HMRC assess for CIS deductions?

HMRC will look at the difference between what should have been deducted under CIS and what was actually paid. This may be relevant where either no CIS tax was paid to HMRC or where insufficient tax was paid based on an incorrect or out of date verification of the subcontractor’s tax deduction rate.

Are there any exceptions to CIS deductions?

Yes, Regulation 9 of the Income Tax (CIS) regulations 2005 (SI 2005/2045) provides some relief. If certain conditions are met, HMRC can decide that the contractor doesn’t need to pay the shortfall.

Conditions in Regulation 9

• Condition A: HMRC is satisfied that the contractor took reasonable care but either:

– Made a genuine mistake in good faith, or

– Genuinely believed CIS deductions weren’t required for the payment

• Condition B: HMRC is satisfied that the subcontractor either:

– Wasn’t liable for tax on the payment, or

– Has filed a tax return declared the payments and has paid the tax

Although it’s possible to obtain HMRC’s agreement regarding Condition A, proving reasonable care can be very difficult.

Condition B is often a better option to avoid the financial strain of paying backdated CIS deductions and then trying to recover the money. If condition B applies, the contractor can request that HMRC direct they aren’t liable for the shortfall. For this it may be necessary to obtain evidence the subcontractor has reported and paid the tax before HMRC will make a direction under Regulation 9(5).

Further information

You can read HMRC’s guidance to its officers on Regulation 9 directions in their CIS Reform Manual at CISR83010.

If you’re concerned about missing CIS deductions and want to correct your situation, please contact Alan Rolfe 023 8046 1235 or email Alan Rolfe.