Changes to the Construction Industry Scheme

Changes to the CIS come into force in April this year with the aim of clamping down further on the evasion of tax and NI contributions in the industry.

The aim is to clamp down further on the evasion of tax and NI contributions – a custom the Treasury believes is still prevalent under the existing scheme. HMRC estimates that it is currently losing some £130 million a year through employees being wrongly treated as subcontractors by contractors.

Although the changes have been delayed for a year, it is feared that many in the industry – employers, contractors and subcontractors – are still unprepared for the new regime.

Main changes

From 6 April 2007, the following changes will apply:

• There will no longer be a requirement for CIS cards, vouchers or certificates.
• The verification scheme for subcontractors will be simplified.
• Contractors must make a monthly declaration as part of their monthly PAYE/NI payment run, to confirm that they have considered the employment status of all subcontractors and that the return, based on that, is correct.

Penalties will be incurred if mistakes are made.

Review of status

HMRC is keen to clamp down on contractors who treat individuals and companies as subcontractors when, in reality, they are employees. Simply calling someone a subcontractor does not necessarily make him one. If the reality is that he spends the bulk of his time working for one contractor, then HMRC might well deem him to be an employee.

It is important for contractors to document their arrangements with subcontractors to try and avoid this. On each new job, the subcontractor should sign a new contract for services (which only has to be a simple document). The longer that he works for one employer, the more likely it is that that he will be deemed to be an employee.

The HMRC’s website provides an ‘Employee Status Indicator’. This is designed to help contractors determine whether ‘subcontractors’ are, indeed, self-employed or not. The results of this are not binding on HMRC. For any searches where there is some doubt, we recommend that contractors input the same data in a duplicate search and print off the results. These may be useful in the event of a dispute with HMRC at a later date.

Contractors must sign a monthly status declaration, as to the status of each subcontractor.

Verification process

As there will no longer be any CIS cards or certificates, it will be up to contractors to verify details of any new subcontractors with HMRC. They will not need to those they have used in the previous two tax years.

Existing cards should not be thrown away just yet since they contain a lot of useful information. We also recommend that vouchers be retained for the time being. HMRC has said that it will advise as to when these may be disposed of.

A contractor can verify a subcontractor over the phone or online. HMRC will need the following information:

• for a limited company – the company registration number
• for a partnership – the names of the partners, the trading name, the partners’ respective NI and Unique Tax Reference (UTR) numbers and, in the case of an LLP, the registration number
• for a sole trader – his NI number.

HMRC plan to send every construction business a list of all subcontractors it has paid since 2005. These will not, therefore, have to be verified. It is important to be aware that HMRC will rely on the information submitted to them by contractor. In sending out these lists, they are not confirming that the details provided to them are actually correct. The onus is on contractors to carefully check that the information in these notifications is correct and advise HMRC if it is not.

As under the current CIS, an application for verification can produce a number of possible results. HMRC can direct that payments be made gross (without deduction); net (ie with the standard 18 per cent tax withheld); or what is referred to as ‘unmatched’, meaning HMRC has no record of the subcontractor. In this case, the contractor will have to deduct tax at the new higher rate of 30 per cent.

HMRC will supply a verification reference number, which will be the same for all subcontractors verified at the same time. For any subcontractor they cannot verify, an extra letter will be tagged on to the end of the number, making it unique to that subcontractor. The reference numbers of all unverified subcontractors will need to be included in the contractor’s monthly return. Also the subcontractor will need this number in order to claim any over-deduction of tax.

Procedures under new CIS

The new CIS is supposed to save on paperwork and cut down on administration but, at this early stage, it is difficult to see how this is going to happen.

First of all, contractors are now going to have to produce monthly (rather than annual) statements of all payments made to subcontractors. There is no standard form of statement. They also need to submit a monthly return.
All contractors should by now have received initial correspondence summarising the subcontractors they have been paying. As stated above, this should be carefully checked and any errors notified to HMRC.

If a contractor is currently paying a subcontractor on CIS5 or CIS6, he can continue paying gross, as long as the current certificate expires after 6 April 2007. Otherwise, the contractor will need to reapply. If he is paying under CIS4, he will pay net (the deduction has increased from 18 per cent to 20 per  cent, which HMRC argue is nearer to the likely final tax due). New subcontractors, not known to HMRC and without a UTR, will be subject to a 30 per cent deduction, as mentioned before. The idea is to encourage those subcontractors to regularise their position with HMRC without delay, to avoid the higher rate deduction.

Monthly filing

Contractors will need to produce monthly payment statements – these will replace the old CIS23, CIS24 and CIS25 vouchers. The details must be produced to HMRC by the 19th of each month. Similarly, contractors must also file monthly returns (replacing the annual CIS36 forms). The deadline for paper submissions is 19th of the month or 22nd for electronic submissions.

Penalties

Penalties currently stand at £100 for late submissions and up to £3000 per return for incorrect submissions. Persistent non-compliance can result in gross payment status being revoked. There is a strong rumour that there is to be a 6-month freeze on penalties, but this has not been officially confirmed at the time of writing.

Further information

Assistance is available online. There is also a helpline (0845 366 7899) although apparently there are only 70 operators, presumably working in shifts, so it may not be easy to get through. Also, a number of software programs, such as Sage 50 CIS, are being introduced to assist contractors.

… and finally

It remains to be seen how the new CIS will work in practice. On the face of it, there will be more work for contractors rather than less, despite HMRC’s insistence that the amount of paperwork will be cut. Time will tell.

Graeme Roberts is now working alongside our commercial property team to provide expert construction law advice. Graeme specialises in all aspects of non-contentious construction law including the drafting and negotiation of building contracts, professional appointments and collateral warranties. A qualified solicitor, he was a partner in a City firm before joining the London office of a multi-national contractor as European General Counsel. A member of the Society of Construction Law, he now works as a consultant.

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