Prevail Accountancy aims to support our construction industry customers in every aspect of the financial management of their business – and CIS returns and CIS audits are no exception. In this blog, we detail the experience of working with our customer during an audit to show you what it’s like to be on the receiving end of a CIS audit and what you can do to prepare.

Thousands of UK construction companies complete returns under the Construction Industry Scheme (CIS). And, each year, some of them will be audited.

By explaining our experience working with our customer, we’ll show you what’s it like to be subject to a CIS audit…. and what you need to do to prepare.

CIS audit: The notification

When you receive a notification of this nature, it’s easy to feel panicked and wonder “what have I done wrong?”.

Our customer was confident that together we had completed all their CIS returns correctly, so they didn’t feel worried about the notification. Instead, they reached out to us to help them get organised.

Changes made to CIS returns

As preparation, we asked ourselves what HMRC would want to know. Based on this, our client began to compile all relevant information. We scheduled a Teams call between Prevail Accountancy and the company directors to prepare and gather relevant evidence.

As it happened, our customer had made some changes to a recent CIS return and we thought initially that the audit might be taking place so HMRC could review those changes.

HMRC states, “The principle for the monthly return is that it should reflect what the contractor has actually paid and deducted in the month it covers. HMRC recognises, however, that contractors will sometimes make mistakes on their monthly returns. Where this happens, we’ll not automatically look for penalties or take away the contractor’s own gross status as a subcontractor. We’ll usually only take these actions in the more serious cases where we believe the error or omission has been caused by the contractor’s negligence or intent.”

In these instances, it’s perfectly acceptable to correct the error and inform HMRC via the usual mechanism (either the free HMRC CIS online service or your chosen recognised commercial CIS software). Then, the appropriate balancing payment or deduction can be made.

In the case of our customer, this was all in order so they went into the meeting feeling prepared and confident.

During the audit

The meeting with the auditors took around an hour and half. Two HMRC auditors attended. They asked our customer questions about record keeping, due diligence and how they managed relationships with their subcontractors.

A member of the Prevail Accountancy team attended the meeting to support the process and provide necessary financial detail, where appropriate. It was a good meeting. Our customer had nothing to hide and we had prepared well, so we could answer all questions.

One aspect HMRC was keen to understand was how our customer accounted for travel. The auditors wanted to make sure that our customer understood how contractor travel costs should be treated. Travel is part of the service provided, unless it is a reimbursed cost. Our customer was required to produce their bills to demonstrate that they deducted CIS on travel.

In addition, our customer’s approach to checking the correct accounting of services vs. materials was reviewed. HMRC wanted to be reassured that our customer wasn’t taking their contractors’ word for it on how the ratio of delivered services to consumed materials broke down.

Our customer keeps excellent records, including all sales orders and invoicing, so they were able to compare the original services/materials breakdown with the invoiced amount. This meant they were able to provide all the documentation requested and no further action was required.

Triggered by the failure of subcontractors

During the audit, it became evident that the CIS audit had been triggered by the poor practices and insolvency of companies that had worked as subcontractors for our customer.

Our customer had already stopped working with one of these subcontractors prior to their insolvency. Our customer was aware that the contactors had gone bust but had already decided they didn’t want to continue to work with them some time previously. It was these subcontractors’ practices that HMRC was investigating.

For our client, the realisation hit home: they understood that a CIS audit can be triggered by something done not by them but by anyone in their supply chain.

This means a CIS audit could happen to any business filing under CIS – even if, like our customer, you are doing everything right.

Our customer’s learnings from their CIS audit

Even though we were successfully able to answer all questions posed by HMRC, our customer came away from the CIS audit experience with some important takeaways.

These included:

The importance of good recordkeeping can’t be underestimated. Detailed purchase order records helped our customer to answer HMRC’s questions confidently.
You can’t just take your contractors’ word for it – you need to do your own due diligence to make sure what they are telling you is correct.
If a breakdown of services and materials doesn’t look right, don’t ignore it – investigate it. You need to reassure yourself that records are accurate because you may be asked to explain them.
It’s important to make sure you are dealing with subcontractor travel costs correctly. For example, do you know whether the costs are being reimbursed? It’s important to understand this because it affects how you deal with travel costs on your CIS returns.
Do it right: have the proper contracts in place and verify before paying.
Even if you are doing everything right, you may still be subject to an audit. If someone in your supply chain does something wrong, crosschecks can pull you into HMRC’s investigations.

Ultimately, the biggest learning our customer came away with from the audit was that they were in a great position to deal with audits and enquiries of this nature. Their recordkeeping was clear and accurate and no further action necessary.

Our customer valued our support at the meeting and in helping them to answer questions. They told us: It’s important to work with a strong construction-focused accountant. It put us in a much better position than other companies. If your accountant doesn’t have a background in construction, they’re not going to be much help with HMRC or in their knowledge of CIS.

In summary

Being audited shouldn’t be a stressful experience if you are on top of the numbers. It’s great to have support during an audit – and this could be from your lawyer or accountant, if they have right experience. However, it’s not essential to get external support – provided you are putting the right contracts in place, verifying invoices and payments and maintaining good records.