Draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2016

(Limited Text - Ministerial Extracts only)

Tuesday 8th March 2016 General Committees

[The Financial Secretary to the Treasury (Mr David Gauke)]

I beg to move,

That the Committee has considered the draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2016.

It is a great pleasure to serve under your chairmanship, Ms Dorries. We are considering an order that deals with subcontractors in the construction industry scheme. Members may know that it is a withholding regime that applies to the construction sector. The order requires the approval of the Committee and will apply from 6 April 2016.

As Members may know, the majority of subcontractors in the construction industry can be paid only after their contractors have made a deduction from their payment on account of their annual tax liability. Under the existing rules of the construction industry scheme, set out in sections 57 to 77 of the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005, subcontractors who meet certain qualifying conditions can apply to be paid gross. Therefore, they do not have a withholding deduction taken from their payments.

Gross payment status helps businesses to improve their cash flow and reduces their administrative burdens. Some 82,000 subcontractor businesses are entitled to be paid gross in that way. To qualify to be paid gross, subcontractors must pass three tests that are set out in law: the business test, where the subcontractor must show that they are running a business that includes or consists of construction operations; the turnover test, where the subcontractor must show that their business has a minimum turnover as set out in law; and the compliance test, where the subcontractor must show that they have complied with their tax obligations to Her Majesty’s Revenue and Customs over the previous 12 months. If the subcontractor qualifies for gross payment status, HMRC will tell the subcontractor and all the contractors they work for that the subcontractor can now be paid without deduction. Gross payment status is kept under annual review and can be taken away if the subcontractor does not keep to their tax obligations.

In 2014, the Government held discussions with the industry and published a formal consultation on improving the administration of the scheme. That was well received and generated 43 responses, mostly in favour of the outlined changes. As a consequence, the Government now propose to relax the compliance test for gross payment status. At present, a subcontractor needs to show good compliance across a wide range of tax obligations. From April 2016, a subcontractor will need to meet only three specific obligations within the compliance test. They will need to file any contractor returns on time where they also have subcontractors of their own; pay any monthly liabilities to HMRC as a contractor or employer in their own right; and file their self-assessment or corporation tax return on time. Those changes will make it simpler for subcontractors to achieve gross payment status. They contribute to the Government’s vision for a tax system that is simple to understand and easy to comply with. I hope those explanations are helpful to the Committee. In conclusion, I commend the order to the Committee, and I am happy to answer any questions that right hon. and hon. Members may have on its provisions.

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[Mr Gauke]

I thank the hon. Member for Wolverhampton South West for his questions. He touches on the change to the threshold for the turnover test to £100,000 and asks when he will be able to see the statutory instrument. That SI, together with the online filing mandation, will be laid next week. It will not necessarily be the highlight of his week, but that will be among the things emerging from the Treasury and HMRC next week.

It might be helpful to set out what we are doing to reduce the administrative burden of operating the construction industry scheme. HMRC is improving the online verification service and the CIS online filing service. It is making it easier for subcontractors to obtain gross payment status by reducing the threshold for the turnover test to £100,000 in multiple directorships and partnerships, and amending the regulations to reduce the number of obligations in the initial and annual compliance tests. It is introducing a digital service to allow subcontractors to view their payments and deductions online. HMRC is removing the obligation to file a nil return where a contractor has not paid subcontractors, and it is allowing earlier repayment where a company subcontractor is subject to a winding-up proceeding during the tax year—both measures were implemented in April 2015.

The hon. Gentleman raised the matter of those who, on religious grounds, do not wish to file online. I think some—not all—members of the Plymouth Brethren, for example, object to using computers. HMRC will make provision for persons falling into that category, in very much the same way as was done for real-time filing of pay-as-you-earn. Although not new, this is an issue and HMRC will seek to address it.

The hon. Gentleman asks about estimates of the consequences of these measures. I assure him that he has not missed anything. They have not been published, but they will be shortly—at Budget next week, I anticipate. He has a few days in which to look forward to that.

I do not think these changes throw up too many new challenges for HMRC’s IT systems. HMRC is continuously improving its services and its IT capability. I could take some time to set out the progress that has been made on that front, Ms Dorries, but will say only that HMRC is very much alive to the need to ensure that it is delivering an up-to-date digital service.

In assessing the impact of the measures, as is often the case with tax measures, there is a number of competing objectives. First, there is the need to protect a substantial amount of tax revenue—and the construction industry scheme does precisely that—but to do so in a way that keeps the regulatory burden on businesses and individuals to a minimum. The reforms are intended to continue effectively to protect revenue, which the construction industry scheme is designed to do. HMRC estimates that the construction industry scheme ensures compliance in the construction sector by monitoring payments of subcontractors, which protects £5.2 billion a year. Proper monitoring and the protection of revenue are important, but we want to reduce the regulatory burden and we hope that the measures before the Committee are steps toward getting that right.

I hope that I have given helpful clarification and that the draft order has the support of both sides of the Committee.