Satwaki Chanda discusses the new security deposit legislation which applies from 6 April 2019 and its potential implications for contractors in the construction industry scheme.
Under the construction industry scheme (CIS) payments made for work carried out in respect of construction services are subject to withholding tax. The amount of the deduction varies from 20%-30%. In certain circumstances, the parties can apply for payments to be made gross.
The scheme is aimed primarily at construction businesses (FA 2004, s 59(1)). However, the scheme also applies to ‘non-builders’ whose annual construction expenditure exceeds £1 million over a three-year period.
What is the security deposit legislation?
From 6 April 2019, contractors may be required to provide security to HMRC. The rules are targeted at contractors with a history of non-compliance and where HMRC consider it to be necessary for the protection of the revenue (Income Tax (Construction Industry Scheme) Regulations 2005, SI 2005/2045, Pt 3A).
The requirement to give security is not limited to the contractor, but can also include the following persons:
- A personal representative (for individual contractors);
- Where the contractor is a company, an officer such as a director, company secretary or similar person;
- Where the contractor is a member of a corporate group, the scheme representative; and
- Where the contractor is a partnership, any partner may also be required to give security.
HMRC must notify each person required to give security, specifying the following matters:
- The value of the security;
- The type of security to be given. Security need not be limited to cash payments, but may include guarantees or a performance bond issued by a financial institution;
- The date on or before which security is to be given; and
- The period of time for which security is required.
Where there is more than one person required to give security of a specified value, liability for the amount due is joint and several. However, the requirement to give security will not apply if the contractor successfully applies for a deferment of tax under time to pay arrangements.
Appeals, penalties and exemptions
There is an appeal process available to any person receiving a HMRC notice to give security. It is also possible to apply to HMRC to reduce the amount of the security where there has been a change in circumstances, either for the contractor or for the person giving the security (who may be distinct from the contractor). In particular:
- A person giving security may apply to reduce the amount due to hardship or because he is no longer on the list of specified persons liable to give security (as when a person ceases to be an officer of the company); and
- The contractor may also apply for a reduction because the value of the security exceeds the amount necessary to protect the revenue or where it is no longer necessary to protect the revenue.
Failure to comply with the regulations is a criminal offence and is punishable by a fine (FA 2004, s 70A(4)).
Certain contractors are exempted from the security deposit rules. In particular, public bodies and government agencies are excluded since there is no risk to the revenue in these cases.
Practical Tip:
The security deposit legislation applies on the discretion of HMRC where they consider there to be a risk to the revenue. Falling foul of these rules could have a significant cash flow impact – it is therefore all the more important that contractors ensure that they comply with the CIS rules in a timely and efficient manner.
