EXPLANATORY NOTE
(This note is not part of the Regulations)
These Regulations amend the Income Tax (Construction Industry Scheme) Regulations 2005 (S.I. 2005/2045) (“the 2005 Regulations”), which contain the principal requirements for contractors and sub-contractors who operate within the Construction Industry Scheme (“the CIS”). These Regulations make provision for Her Majesty’s Revenue and Customs (“HMRC”) to: correct or remove a set-off claim which a person (“the claimant”) has made on an employer return given to Revenue and Customs under the Income Tax (Pay As You Earn) Regulations 2003 (S.I. 2003/2682) (“the PAYE Regulations”); to prohibit further set-off claims being made by a claimant for the remainder of a tax year in certain circumstances; and, in appropriate cases, to revoke decisions made by officers of Revenue and Customs to remove or prohibit set-off claims. These Regulations come into force on 6th April 2021.
These Regulations are made, in part, in exercise of a power contained in Budget resolution number 27, passed by the House of Commons on 9th March 2021 following the Budget held on 3rd March 2021. The resolution has temporary statutory effect by virtue of section 1 of the Provisional Collection of Taxes Act 1968 (c. 2) (“the 1968 Act”) and contains a declaration that it is expedient in the public interest that the resolution should have statutory effect under the 1968 Act. The resolution provides for an amendment to section 62 of the Finance Act 2004 (c. 12) (“the 2004 Act”), inserting new subsections (3A), (3B) and (3C). New subsection (3A) provides that the Commissioners for HMRC may make regulations under subsection (3) of that section including provision authorising an officer of Revenue and Customs to: correct an error or omission relating to a set-off claim; remove a set-off claim; or prohibit a person from making a further set-off claim, for a specified period or indefinitely. New subsection (3B) makes further provision as to what may be specified in such regulations. New subsection (3C) provides that a “set-off claim” means a claim for treating a sum deducted under section 61 as paid on account of any relevant liabilities.
The provisions of Budget resolution number 27 correspond to provisions contained in clause 30 of, and paragraph 6 of Schedule 6 to, the Finance (No. 2) Bill, as published by the House of Commons on 11th March 2021. Assuming that the clause and Schedule are not rejected during the passage of the Bill through Parliament, those provisions will come into force when the Bill receives Royal Assent, and the Regulations made under the resolution will continue to have statutory effect by virtue of those provisions of the Act arising from the Bill. The resolution will in any case cease to have effect after 9th October 2021, by virtue of section 1(3) of the 1968 Act.
These Regulations also make consequential amendments to the 2005 Regulations to take account of amendments which will be made to section 61(1) of the 2004 Act by clause 30 of, and paragraph 4 of Schedule 6 to, the Finance (No. 2) Bill, and which have also been brought into temporary statutory effect by Budget resolution number 27 as read with the provisions of the 1968 Act.
Part 1 of the Regulations (Introduction) provides for citation, commencement and effect. It also provides for definitions of various key terms and phrases applying to these Regulations.
Part 2 of the Regulations (Consequential Amendments to the 2005 Regulations) will have effect in relation to direct costs of materials incurred by sub-contractors on or after 6th April 2021. Regulation 4 in Part 2 makes a consequential amendment to regulation 2 of the 2005 Regulations to amend the definition of “approved method of electronic communications”. Regulations 5 to 8 in Part 2 make consequential amendments to the 2005 Regulations by amending references to “the direct cost to any other person of materials” to read “the direct cost to the sub-contractor of materials”. This gives effect to the changes made by the Finance (No. 2) Bill to section 61(1) of the 2004 Act. These amendments clarify that, when determining which proportion of a contract payment they should make deductions from under section 61 of the 2004 Act before making payment to a sub-contractor, a contractor may only take account of so much of the payment as is not shown to represent the direct cost of materials to that sub-contractor under that construction contract. Regulation 9 inserts new paragraphs (v) and (vi) into regulation 56(8)(a) of the 2005 Regulations, to require that a return submitted under that regulation must state the employer’s Company Registration Number and Unique Taxpayer Reference.
Part 3 of the Regulations (Restrictions on set-off claims) has effect in relation to set-off claims contained in an employer return (defined in new regulation 24A) and submitted to HMRC in respect of the tax year 2021-22 or any subsequent tax year. Regulation 10 inserts a new Part 4A (new regulations 24A – 24M) into the 2005 Regulations, to make provision for an officer of Revenue and Customs to correct or remove set-off claims in various circumstances, to prohibit a claimant from making further set-off claims for the remaining part of a tax year, or to revoke those decisions in limited circumstances.
New regulation 24A contains definitions which are applicable to the new Part 4A of the 2005 Regulations.
New regulation 24B sets out that any notice etc to be given under Part 4A must be delivered using a method of electronic communications approved by the Directions made by the Commissioners for HMRC on 13th March 2012 under regulations 189 and 205(2) of the PAYE Regulations, except where the claimant is one to whom regulation 67D of the PAYE Regulations applies. Where that is the case, paragraph (2) of new regulation 24B sets out that any notice etc to be given under Part 4A must be made in a document or format provided or approved by the Commissioners for HMRC.
Where a set-off claim is made by a claimant who is a sub-contractor and a company, HMRC will be able to check the claim figure (defined in new regulation 24A) given by the claimant in that set-off claim against information that it holds. Where the amount of the claim figure does not match the figure of CIS deductions made according to HMRC’s records (defined in these Regulations as “the verifiable figure”) during the tax period to which the set off claim relates and, as a consequence, an officer of Revenue and Customs reasonably believes that there may be an error relating to that set-off claim, new regulation 24C provides that that officer can require the production of information to the Commissioners of HMRC by an information notice, in order to ascertain whether the claimant was entitled to make that set-off claim or to make a set-off claim in that figure. Paragraph (3) sets out what types of information may be requested. Paragraphs (4) and (5) set out the period of time within which the information must be given. Paragraph (6) sets out when an information notice may be given. Paragraphs (7) and (8) set out procedural requirements for an information notice. Paragraphs (9) to (12) set out the rules for applying for an extension of time to comply with an information notice, and when this may be given.
New regulation 24D sets out that where the claimant complies with an information notice within the required time period, and an officer of Revenue and Customs is satisfied that the claimant was entitled to make the set-off claim in question in the figure specified on that claim, the officer must allow that set-off claim.
New regulation 24E sets out that, if a claimant complies with an information notice within the required time period and, based on the information provided, an officer of Revenue and Customs reasonably believes that the set-off claim contains an error because the claimant did have CIS deductions made during the tax period specified on the set-off claim, in a lesser sum than the figure specified on the set-off claim but in a greater sum than the verifiable figure, the officer must re-determine the CIS deductions made during that tax period (defined in these Regulations as “the revised verifiable figure”).
New regulation 24F sets out the two situations in which a set-off claim made by a sub-contractor can be corrected or removed. A set-off claim made by a sub-contractor cannot be corrected or removed unless an officer of Revenue and Customs has given an information notice under new regulation 24C requesting additional information, and only within the time period set out in paragraph (14) of regulation 24F. The first situation is where the claimant has not complied with the information notice (paragraph (2)). The second situation is where the claimant has complied with the information notice and, on the basis of the information supplied, the officer is satisfied that the set-off claim contains an error or was made on the basis of an error (paragraph (3)). Where one of these situations occurs, paragraph (4) provides that the officer of Revenue and Customs must, by notice, require the claimant either to remove the set-off claim (where the officer’s view is that the claimant was not entitled to make the set-off claim) or to correct the set-off claim (where the officer’s view is that the claimant was not entitled to make the set-off claim in the figure in which the claim is made). Paragraphs (6) and (7) set out the information which needs to be included on the notice. Paragraph (5) states that the claimant must comply with this notice within the period of 14 days beginning with the date on which the notice was issued, and paragraph (8) sets out that the claimant can apply for an extension of time. Paragraph (9) allows an officer of Revenue and Customs to give an extension of time so that the claimant must comply with the notice within the period of 42 days beginning with the date on which the notice was issued; and paragraph (10) allows the officer to refuse an extension of time in certain circumstances. Where the claimant has not complied with a notice to remove a set-off claim, paragraph (11) states that an officer can remove the set-off claim. Where the claimant has not complied with a notice to correct a set-off claim by the date specified in that notice, paragraphs (12) and (13) state that the officer can correct the set-off claim by replacing the claim figure with either the verifiable figure or the revised verifiable figure (in a case falling within regulation 24E).
New regulation 24G provides that an officer of Revenue and Customs may remove any set-off claim made by a claimant who is:
- not a sub-contractor under the CIS;
- not a company; or
- a sub-contractor registered for gross payment under section 70 of the 2004 Act, and who has not had any CIS deductions made from contract payments made to them throughout the tax period in respect of which the set-off claim is made.
New regulation 24G(5) provides that an officer of Revenue and Customs may only exercise the power of removal under that regulation in relation to a set-off claim made in respect of a tax period falling within, in the case of a claimant who is a sub-contractor, the current tax year or any of the preceding tax years. In a case involving any other claimant, the power may be exercised in relation to a set-off claim made in respect of a tax period falling within any tax year.
New regulation 24H provides that an officer of Revenue and Customs may revoke any earlier decision to remove a set-off claim under regulation 24G, provided that they are satisfied that the set-off claim was removed as a result of an error made by an officer of Revenue and Customs. New regulation 24H(2) sets out when such an error is deemed to have been made.
New regulation 24I provides that an officer of Revenue and Customs must give notice to a claimant within 7 days of making any decision to: remove or correct a set-off claim under regulation 24F; remove a set-off claim under regulation 24G; or revoke the removal of a set-off claim under regulation 24H. New regulation 24I(2) to (7) sets out the information which must be specified in the notice, and other procedural requirements.
New regulation 24J provides that, where an officer of Revenue and Customs has removed or corrected a set-off claim under new regulation 24F made by a sub-contractor during the tax year in respect of which the set-off claim was made, an officer of Revenue and Customs may also prohibit that claimant from making any further set-off claims for the remainder of that tax year. Where a claimant is prohibited from making any further set-off claims for the remainder of a tax year, the officer of Revenue and Customs must serve a notice. New regulation 24(3) provides that the start date of any prohibition must be 14 days from the date that the prohibition notice is issued. New regulation 24J(2) to (4) sets out the information which must be specified in the notice, and other procedural requirements.
New regulation 24K provides that where a claimant has been prohibited from making further set-off claims for the remainder of a tax year under new regulation 24J, following a correction or removal of a set-off claim by an officer of Revenue and Customs, that prohibition can be revoked with immediate effect where an officer is subsequently satisfied that the claimant was entitled to make the set-off claim. Where an officer of Revenue and Customs revokes a prohibition under new regulation 24K(1), that officer must give a notice to the claimant. New regulation 24K(2) and (3) sets out the information which must be specified in the notice, and other procedural requirements.
New regulation 24L makes provision about appeals to a tribunal against a correction or removal of a set-off claim and against a prohibition on making any further set-off claims for the remainder of tax year. Paragraph (2) sets out the sole ground of appeal against the removal of a set-off claim under regulation 24F(11) or the correction of a set-off claim under regulation 24F(12). Paragraph (4) sets out the sole ground of appeal against the removal of a set-off claim under regulation 24G(1) on the basis that the claimant fell within 24G(2) because they were not a sub-contractor. Paragraph (6) sets out the sole ground of appeal against a prohibition under regulation 24J(1). Paragraphs (7) and (8) set out procedural requirements for appeals. Paragraphs (9) and (10) provide that, where an appeal is brought by a subcontractor under paragraph (1) against the correction or removal of a set-off claim by an officer of Revenue and Customs, and an officer of Revenue of Customs has prohibited that sub-contractor from making further set-off claims as a result of the set-off claim which was corrected or removed, that prohibition will stand unless: a review of the correction or removal of the set-off claim which is under appeal is upheld by HMRC in the claimant’s favour, in which case HMRC must also cancel the prohibition; or the tribunal sets aside the correction or removal of the relevant set-off claim, in which case the tribunal must also set aside the prohibition. Paragraph (11) sets out the tribunal’s powers when notified of an appeal under paragraph (1) or paragraph (3), and paragraph (12) provides for the equivalent powers where the tribunal is notified of an appeal under paragraph (5). Paragraph (13) provides that, where an appeal under paragraph (5) is notified to the tribunal, and an appeal brought by the same claimant under paragraph (1) against the correction or removal of the set-off claim which led to the prohibition was notified to the tribunal at an earlier date, the tribunal may only determine the appeal brought under paragraph (5) after it has determined the appeal brought under paragraph (1).
New regulation 24M provides that, for the purposes of section 101(4) of the Finance Act 2009 (c. 10) relating to late payment interest, where a claimant becomes liable to pay an additional amount (either of tax under the PAYE Regulations or of earnings-related contributions under the Social Security (Contributions) Regulations 2001 (S.I. 2001/1004)) as a result of the correction or removal of a set-off claim on an employer return, that amount becomes due and payable on the date on which the employer return which contained the set-off claim that has been corrected or removed was submitted to HMRC.
A Tax Information and Impact Note covering this instrument was published on 12th November 2020 and is available at https://www.gov.uk/government/publications/changes-to-tackle-construction-industry-scheme-abuse/changes-to-tackle-construction-industry-scheme-abuse.