Taxation in the construction industry - 2021 diary dates and beyond

It looks like 2021 is going to be a busy year for taxation changes affecting the construction industry. Here are some of the highlights:

Reverse charge VAT comes into force - 1 March 2021

The recipients of some construction services (and related goods) will have to account to HM Revenue and Customs (HMRC) for both output and input VAT. This is most likely to affect contractors and sub-contractors. It will not apply to end users who do not supply construction services themselves such as developers, universities, the NHS and retailers.  Zero-rated supplies of services (or related goods) won’t be affected either.

This is potentially very significant for the construction industry.  For more information click here for a detailed blog by tax lawyer Tim Waters, which was written before the change was originally due to come into force in October 2019.

CIS (Construction Industry Scheme) changes - 6 April 2021

Under CIS, contractors deduct money from a sub-contractor’s payment and pass it to HMRC. The deductions count as advance payments towards the sub-contractor’s tax and National Insurance.

Contractors must register for the scheme. Sub-contractors do not have to register, but deductions are taken from their payments at a higher rate if they are not registered. For more detail on the scheme click here.

There are a number of changes affecting CIS, which will come into force on 6 April 2021.  These include:

  • The introduction of a CIS set off amendment power. This allows HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns;
  • Clarification on deduction for CIS; and
  • Expansion of the CIS registration penalty for supplying false information. Click here for further information.

The key change however is a subtle but important one. The definition of ‘deemed contractor’ is changing. At the moment a deemed contractor is an entity whose construction expenditure on average, is more than £1 million a year in any three-year period. From 6 April 2021, a deemed contractor will be anyone who has a construction expenditure which has exceeded £3 million in the previous 12 months.

Organisations outside of the construction industry, with a large construction spend should monitor their expenditure and regularly review whether they fall within the definition of ’deemed contractor’ or not.

IR35 (off-payroll working) changes – 6 April 2021

Currently, where an individual’s services are supplied to a client via the individual’s personal service company (PSC) (or similar intermediary), the PSC or intermediary is responsible for determining whether the individual should be treated as an employee of the client for tax purposes and, if so, paying the correct amount of tax.

From 6 April 2021 this will change. Clients will become responsible for deciding the employment status of every worker who operates through their own PSC or intermediary, (even if there is also an agency in the contractual chain) if two out of three of the following conditions apply to the client:

  • Annual turnover of more than £10.2 million
  • A balance sheet total of more than £5.1 million
  • More than 50 employees

The changes go beyond the construction and FM industries, but may have a material effect on these industries.

On 15 February the Government issued a briefing to support businesses in complying with IR35. Click here to read more.

This change was originally due to come into force on 1 April 2020 but was postponed by a year – see a blog here about the postponement, and a further blog about courses that HMRC is running regarding the changes.

Construction Industry Training Board (CITB) Levy reduction -2021 (date to be confirmed)

The CITB levy applies to all employers ‘engaged wholly or mainly in construction industry activities’. The levy is used to support construction employers to make sure the industry has the skilled workforce it needs. How much levy is paid is based on the total wage bill each year.  Levy rates in 2020 remained at 0.35% for PAYE and 1.25% for Net CIS.

In 2021 it is proposed (but has not yet been confirmed) that the rate be reduced by 50% for one year.

Cladding tax -2022

And lastly, something planned for 2022. The Government has announced a proposal for a new tax on the residential development sector which will help pay for combustible-material remediation on tower blocks. The tax, which will apply to the “largest property developers”, will raise “at least £2bn over a decade”, according to housing secretary Robert Jenrick.

The Government will “consult on the policy design in due course”.

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