What Every Contractor Must Know About HMRC’s OTM Letter

HMRC recently initiated a One to Many (OTM) letter campaign for the Construction Industry Scheme (CIS) contractors. The letter prompts the contractors to verify the CIS tax status of their subcontractors and ensure that the CIS tax deductions on all payments are being made accurately. Here is what you need to know about the CIS scheme and the HMRC letters.

What is a Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) is an HMRC scheme where the contractors make advance tax payments to HMRC on behalf of their subcontractors. It is a special scheme where the subcontractor must be a self-employed individual working for the contractor but not as an employee. The contractor deducts tax payments from the subcontractor at a rate of 20% if the subcontractor is registered for CIS and 30% if not registered.

The CIS scheme applies to people working in the construction industry. Also, everyone in the construction industry is not self-employed. So, contractors have to decide if their workers are employed or self-employed.

What is the HMRC One to Many (OTM) letter?

The One to Many (OTM) letter is an approach where HMRC sends one standard message to many taxpayers. The OTM letters help HMRC to influence the taxpayer’s behaviour so that they comply with the regulations. OTM letters are often confused with compliance checks. However, it is not a compliance check. The HMRC OTM letter includes communication that is both digital and non-digital and is issued directly to the taxpayers through an intermediary, agent or third party.

The OTM approach aims to provide information on

• what HMRC wants the taxpayers to do
• what happens if taxpayers do or do not respond
• what follow-up response activity HMRC will undertake
• how HMRC will measure whether the approach is successful

Details of HMRC’s OTM letter to CIS Contractors

HMRC began its OTM letter campaign to the CIS contractors on 22 July 2024, and it will continue over the weeks to come. According to the letter, some contractors are making incorrect CIS tax deductions, so HMRC wants contractors to verify their CIS status.

Here is what HMRC advises contractors to do:

• Verify all new subcontractors before you pay them
• Verify subcontractors you have used before if you have not included them on a CIS return in the current or last two tax years
• Make sure you apply the correct CIS deductions
• Regularly verify the CIS status of all your subcontractors

If you do not take any action after receiving the OTM letter or keep sending the wrong CIS amount, you may have to pay the tax yourself. Or HMRC might start a compliance check. If HMRC finds any errors on your CIS returns during the compliance check, the tax authority might impose penalties. You can either use the CIS online service or the commercial software to verify your subcontractors’ CIS status.

Conclusion

The Construction Industry Scheme (CIS) is a special scheme where the contractor pays the subcontractor’s taxes to HMRC in advance. HMRC usually sends a One to Many (OTM) letter if it wants to send one common message to many taxpayers. Recently, HMRC sent out OTM letters to CIS contractors because some contractors were making the wrong tax deductions. It is crucial to verify the CIS status of your subcontractors because if you do not take any actions, HMRC will start a compliance check, which can lead to other consequences.