Contractors and subcontractors in the construction industry face an administrative minefield in understanding and fulfilling their obligations under a new CIS tax system
by Mhair Charlton
09 March 2007
We can't say that we haven't been warned about the Construction Industry Scheme (CIS) with the first government announcement of the scheme almost two years ago and a temporary reprieve granted last October. Even so, we are sure to see a last minute scramble to get ready for April 2007. Contractors and subcontractors in the construction industry are facing an administrative minefield to ensure that they meet their obligations under the new scheme.
First, it is important to clarify who exactly will be affected by these changes and although 'contractors' and 'subcontractors' in the construction industry are the ones highlighted, these terms go much wider. Contractors don't just cover construction companies and building firms, this categorisation also includes many businesses, government departments and local authorities normally known in the industry as 'deemed contractors'.
Businesses spending on average less than £1 million a year on construction need not worry about the changes.But if your construction turnover or expenditure varies each year it is still worth taking advice and ensuring you are not caught out by the limit.
The stark reality is that these changes will be horrendous if proper measures aren't implemented in time and there really are no excuses. For those within the industry who have planned ahead the transition to the new scheme will be relatively straight forward. Ignorance simply won't wash as an excuse for poor compliance and you could find yourself facing financial ruin with the onset of devastating direct monetary penalties as well as protracted cash flow difficulties. If gross payment is withdrawn, a full 12 months must elapse before it can be regained. That is exactly the stark reality facing any contractors and subcontractors that fail to comply.
The main reason for withdrawal of gross payment status will be the subcontractor's tax compliance record. In the new system the Revenue will only be looking at the compliance record for the previous 12 months. So if you are up to date now you stand a better chance of avoiding Revenue scrutiny and the consequential adverse effects of this.
The fact that you may have a gross payment certificate which expires sometime in 2008 or 2009 will be irrelevant after 6 April 2007, the Revenue will be able to cancel gross payment status at any time.
HMRC is going to get tough on CIS and poor compliance only has one ending - and it certainly won't be a happy one. As a contractor or subcontractor, the onus is on you to know how to operate the new CIS. You'll need information on registration, what the verification process entails and what information contractors need to provide on a monthly basis. Compliance with these changes is mandatory not optional.
A more insidious aspect of the new CIS is the employment status declaration included in the contactor's monthly return. This is the Revenue's latest attempt to reclassify subcontractors as employees. The contractor must declare that he has considered all contracts undertaken by subcontractors during the month and none of these could be classified as contracts of employment.
The financial effects of getting this wrong can be enormous; firstly there is a penalty of up to £3,000 which can be applied for each month the incorrect declaration continues, secondly the contractor will foot the bill for the PAYE and NIC which should have been deducted. Thirdly, an incorrect status declaration amounts to poor compliance with the scheme and is punishable by withdrawal of gross payment status.
Getting the status of subcontractors right is essential and one of the most important tools in defending any attack by the Revenue is written terms and conditions. The Revenue is not the sole arbiter of determining employment status, this is a very grey area and their viewpoint can certainly be challenged.
Don't be afraid to take advice on any aspect of the CIS - at the end of the day we spend our time examining the minute details and implications so our clients can get on with the business of running their business knowing that their tax obligations are looked after.
Mhairi Charlton is corporate tax partner at Armstrong Watson
Summary of the CIS legislation
The new proposals will come into force in April 2007 when HM Revenue and Customs ends its complex card system. It will be replaced with a telephone and online verification service so that contractors can check the tax status of any subcontractor. A monthly return detailing payments made to subcontractors in that month will replace the voucher system. An employment status declaration will also be introduced to ensure that contractors are constantly considering whether their subcontractors are correctly treated as self-employed.