Through policy change after policy change, the construction sector has been hit with changes to tax administration over and above other organisations. Is the line between housebuilder or construction firm and tax collector beginning to blur?
Construction companies already do their fair share when it comes to tax collection and are well versed in collecting and reporting taxes such as employee income tax and national insurance contributions (NICs) on behalf of HMRC through the pay as you earn (PAYE) system. The larger businesses (those with a wage bill exceeding £3m in a year) also need to report and pay the apprenticeship levy.
The interesting aspect of the levy for housebuilders and construction businesses is that many have established their own in-house academies to provide the training and development they see as essential. This need to take control of developing a sustainable skilled workforce themselves, means the apprenticeship levy could become a sunk cost and just a reporting burden to some in the sector.
The construction industry scheme (CIS) is a tax regime that primarily applies to the construction sector and requires construction contractors to deduct an amount from payments due to many subcontractors performing construction work and to pay these sums over to HMRC. Operating the CIS regime can be an onerous and complex task with significant sums involved given that the rates of CIS deduction, where required, are either 20% or 30% on broadly the labour element of the construction services received. The construction firm can often be awkwardly stuck in the middle of needing to keep essential subcontractors on side as well ensuring compliance with the CIS rules.
The tax administration burden for construction firms is set to increase further due to new off-payroll workers rules, which will change the rules known as IR35 and are due to be implemented for the private sector by April 2020. This highlights an additional regulatory burden arising if businesses use individual sub-contractors via personal service companies.
So, from April 2020, housebuilders or construction companies that are not small will be obliged to determine and evidence the status of each relationship with individuals operating through a personal service company, in order to establish whether or not that relationship is one of employment for tax purposes. If so, the housebuilder or construction company will be required to deduct income tax and NICs from payments for the services and account for it to HMRC through PAYE. To date, personal service companies have been obliged to deduct tax and NICs.
This is on top of greater complexity in corporate tax reporting due to developments in law on the utilisation of tax losses and claiming tax relief for interest paid on borrowings leading to the potential need for two additional ancillary returns to the corporation tax return; and domestic reserve charge changes which come into effect from 1 October 2019 which may put the obligation of accounting for VAT on many construction services onto the recipient of the services (the housebuilder or construction company, unless exempt from the charge) rather than the service provider.
And finally, housebuilders who construct homes that are valued over £500,000 will be required to consider and comply with the annual tax on enveloped dwellings (ATED) regime. The ATED regime applies an annual tax on the value of residential property owned by companies provided the property’s value exceeds £500,000. However, there are reliefs available, but they must be claimed on an annual basis. So, for most housebuilders the ATED regime should only give rise to a compliance burden and not a tax cost.
In total, there are potentially around 13 taxes/tax reporting obligations that construction businesses need to administer which could be diverting resource to administration rather than focusing on unlocking the potential from a development site and filling gaps in the housing supply. Which begs the question, has HMRC transferred too much responsibility to the sector?
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Construction company or tax collector?
Through policy change after policy change, the construction sector has been hit with changes to tax administration over and above other organisations. Is the line between housebuilder or construction firm and tax collector beginning to blur?
Construction companies already do their fair share when it comes to tax collection and are well versed in collecting and reporting taxes such as employee income tax and national insurance contributions (NICs) on behalf of HMRC through the pay as you earn (PAYE) system. The larger businesses (those with a wage bill exceeding £3m in a year) also need to report and pay the apprenticeship levy.
The interesting aspect of the levy for housebuilders and construction businesses is that many have established their own in-house academies to provide the training and development they see as essential. This need to take control of developing a sustainable skilled workforce themselves, means the apprenticeship levy could become a sunk cost and just a reporting burden to some in the sector.
The construction industry scheme (CIS) is a tax regime that primarily applies to the construction sector and requires construction contractors to deduct an amount from payments due to many subcontractors performing construction work and to pay these sums over to HMRC. Operating the CIS regime can be an onerous and complex task with significant sums involved given that the rates of CIS deduction, where required, are either 20% or 30% on broadly the labour element of the construction services received. The construction firm can often be awkwardly stuck in the middle of needing to keep essential subcontractors on side as well ensuring compliance with the CIS rules.
The tax administration burden for construction firms is set to increase further due to new off-payroll workers rules, which will change the rules known as IR35 and are due to be implemented for the private sector by April 2020. This highlights an additional regulatory burden arising if businesses use individual sub-contractors via personal service companies.
So, from April 2020, housebuilders or construction companies that are not small will be obliged to determine and evidence the status of each relationship with individuals operating through a personal service company, in order to establish whether or not that relationship is one of employment for tax purposes. If so, the housebuilder or construction company will be required to deduct income tax and NICs from payments for the services and account for it to HMRC through PAYE. To date, personal service companies have been obliged to deduct tax and NICs.
This is on top of greater complexity in corporate tax reporting due to developments in law on the utilisation of tax losses and claiming tax relief for interest paid on borrowings leading to the potential need for two additional ancillary returns to the corporation tax return; and domestic reserve charge changes which come into effect from 1 October 2019 which may put the obligation of accounting for VAT on many construction services onto the recipient of the services (the housebuilder or construction company, unless exempt from the charge) rather than the service provider.
And finally, housebuilders who construct homes that are valued over £500,000 will be required to consider and comply with the annual tax on enveloped dwellings (ATED) regime. The ATED regime applies an annual tax on the value of residential property owned by companies provided the property’s value exceeds £500,000. However, there are reliefs available, but they must be claimed on an annual basis. So, for most housebuilders the ATED regime should only give rise to a compliance burden and not a tax cost.
In total, there are potentially around 13 taxes/tax reporting obligations that construction businesses need to administer which could be diverting resource to administration rather than focusing on unlocking the potential from a development site and filling gaps in the housing supply. Which begs the question, has HMRC transferred too much responsibility to the sector?
