THE NEW CONSTRUCTION INDUSTRY SCHEME

FINANCE ACT 2004

Background

As many of you will be aware, there have been calls from within the construction industry for many years for the government to overhaul the Construction Industry Scheme and reduce the administrative burden involved in operating it.  The administration of the current scheme is particularly onerous for many small businesses, which cannot afford the admin support necessary.  At long last, after two false starts, the new scheme is almost ready to roll out from 6 April 2007.  The delays to date have been caused by the government’s inability to guarantee the online support required for the operation the new scheme and their failure to liase early enough with the industry’s software providers, so that they could tailor their packages to accommodate the additional reporting required.

The new scheme, as with most recent governmental changes has as one of its main aims, the switch to electronic lodgement of information.  This enables the government to achieve its targets for reducing Civil Service Staff numbers.  In the past, similar changes have led to a breakdown in service to taxpayers and their agents, reflected in an inability to speak directly with anyone who knows your tax affairs well and can therefore solve your particular problems.  We expect that this scheme will be no different.

Overview of the changes

The new scheme is scheduled to commence on 6 April 2007 and on that date, all existing card, certificates and paperwork will become obsolete.  The new scheme retains current principles of categorising some subcontractors as exempt and entitled to gross payment and others as registered subcontractors, who can be paid under deduction of tax. However, the new scheme envisages a further group, containing subcontractors as opposed to employees, but who do not posses a registration card.  Payments to that group will pay tax at a rate, which could be equivalent to higher rate income tax, i.e. 40%, but is in practice, likely to be 30%.

The general definitions of contractors, subcontractors and construction operations is largely unaffected by the changes.  However, there is one important exemption and that applies to persons, who are not in the construction industry themselves, but who become involved in construction operations relating to property used by them or another company in the same group, in the course of their trade.  Thus, a manufacturer for example constructing new property for use in their own trade will no longer be required to account for payments under the scheme, even if the previous expenditure limits are exceeded.

In addition, small payments are exempted from the scheme if the payments are made by public bodies or businesses out with the building trade, in respect of engagements, which do not fall under a construction contract and the total payments, excluding cost of materials, are less than  £1,000 in total.  Regulation 24 also excludes a payment from being a contract payment, if it is made by a body of persons, which was established for charitable purposes.

New Procedures

The new legislation requires all contractors to consider the employment status of their workers before considering whether CIS applies.  This puts the onus on businesses to implement procedures for assessing the status of anyone they engage to perform work. This is a very important point, because if the employer does not arrive at the correct conclusion, then the business may suffer severe penalties arising as a result of any enquiry, which successfully re-categorises the subcontractors as workers.  The Revenue does not appear to consider that the reverse position is possible.

Once the contractor has established that the worker is a subcontractor and not an employee, the new procedures can be applied.  The contractor must verify the status of the subcontractor, if they have not been verified in the current, or two preceding tax years.  In November 2006, HMRC will send all registered contractors a list of all the subcontractors that they have used in the last three tax years and these will not require to be verified come April 2007.  The list will be revised in March 2007 and it is vital that you keep the list provided in a safe place, because that is your authority for paying those subcontractors in the manner specified.

If you are engaging someone not on the list, you will contact HMRC, either by telephone, online or in writing, providing the subcontractor’s name, NI no/company registration number and UTR.  The Revenue will rule on how you should pay them and provide a reference number for you to retain as proof of the fact that you carried out the procedure.

As far as subcontractors are concerned, anyone holding a valid CIS 5 or a CIS6 certificate on commencement date, will be treated as having been registered for gross payment.  Those holding a valid CIS4 card will be treated as registered for payment under deduction.  No further checks on status will be necessary, the status can be assumed unless the contractor is notified otherwise by HMRC.

Every contractor will have to make a return each month, within 14 days of the end of the tax month, to correspond with PAYE & NIC deadlines.  This return is called a CIS300 and on it, the subcontractor must list all payments made under the scheme during the month, analysed by recipient.  For subcontractors from whom you deduct the higher rate, you will also have to quote the HMRC’s verification reference number.  Each contractor will also have to provide details to each recipient of payments made to them during the month. Quite how this reduces the administrative burden on employers escapes us at present. 

Most importantly, the contractor will have to sign a declaration each month that none of the contracts to which the return relates is a contract of employment.  Even if no payments have been made in the month, a nil return is due.    Penalties will apply for late or incorrect returns and a contractor could also risk losing their exempt status.

Action Plan

• Check your status at present and in particular, check when your present certificate/card expires and renew it early if necessary.
• If you hold a CIS4 card, consider whether an application for a CIS6 might succeed.
• Keep up your compliance obligations, as the Revenue will be able to revoke your current status.
• If you are a contractor, check whether your current software will enable you to file on line, or whether you will require to file manually.
• Make sure you have procedures in place to evaluate any new subcontractors that you will take on in future.
• Make sure that you initiate procedures that will enable you to capture the information that you require to file returns timeously.