New Construction Industry Scheme

The new CIS Regulations, which come into effect from 6 April 2006, have recently been published and Carl Whittaker of Qdos Consulting analyses some of the main points and implications for contractors in the construction industry.

1.  Status of Subcontractors
The new rules do not change matters significantly for contractors. They will still be expected to have made a decision on their current subcontractors and these should all be on the correct basis at the start of the next Income Tax year with all the supporting documentation in place.

For new subcontractors they will have to make a decision whether they are indeed self employed or employed. They will have online access to HM Revenue & Customs' (HMRC)'s own status tool. However to achieve a completely accurate decision some knowledge of status issues will be essential. We would suggest that contractors consult their accountants, status experts or Qdos consultants who would be pleased to assist ensuring that the contractor has correctly assessed the status of their workforce and that they are not exposed to further demands from HMRC. Under the new rules the contractor will have to make a monthly declaration that no payments have been made under the CIS scheme to workers with an actual or a notional contract of employment.

2.  Making Payments
Having decided that the subcontractor is indeed self employed the next step is find out if payments can be made gross or under deduction of tax at the standard rate or the higher rate. If the contractor has made payment to the same person within the last two years payments can be made on the same basis. If the recipient is new to the contractor then the contractor must contact the HMRC by post, telephone or online. They will run the Tax Treatment Qualification Test (TTQT) and inform the contractor if he can pay gross or under deduction of CIS tax at the standard rate, currently 18% or the higher rate, which could be as high as 30%. It is extremely important to give precise details as, if the HMRC computer does recognise the payee, it will instruct the contractor to deduct the higher rate when a gross payment may have been appropriate.
By the 19th of each month the contractor will have to pay over the tax deducted and additionally he will have to complete the status declaration. Further, on the 19th of each month, the contractor will have to provide a written statement to each subcontractor giving full details of the payment made and the tax deducted.

If a contractor fails to submit a monthly return, HMRC will charge a penalty of £100 and if the contractor has more than 50 subcontractors then the penalty will increase by a further £100 for each additional 50 subcontractors. The penalty will be repeated for every month the return is outstanding.

3.   Concessions
HMRC recognise that these new rules are being published close to the implementation date and there is a great deal of work to be done to include these new rules in various software packages. They have therefore made some concessions:

(a)  The introduction of penalties for late CIS returns and payments will be deferred for six months although they will still count against the contractor's record, which will be considered on application for the renewal of their CIS certificate.

(b)  Under the new rules the contractor is allowed to make two late payments in a year without prejudicing his compliance record. However as a concession HMRC are to allow the contractor to make three late payments in the first year.

(c)  HMRC will advise each contractor of those payees they have record of over the last two years who the contractor can pay on the same basis. If the subcontractor does not appear on the list, then their details must be submitted to HMRC for instruction of how the payment is to be made.

(d)  HMRC will extensively test the TTQT system before it comes into use.

4. Concerns
(a)  When a contractor takes on a new subcontractor he will need in every case to consider his status i.e. is he genuinely self employed or should he be an employee of the contractor. If he is an employee the contractor must deduct PAYE tax and class 1 national insurance. Currently the combined rate of employees and employers class 1 national insurance is 23.8%.

The contractor may use the HMRC's online status tool. Clearly the accuracy of the resultant decision will depend on the accuracy of the information inputted. We are concerned that some contractors who do not understand the issues will therefore not achieve an accurate decision. Rather than input inaccurate information onto the HMRC's status tool they should seek assistance from their advisors before making a decision on status.

(b)  We trust that the HMRC's TTQT system will indeed be tried and tested by next April as subcontractors who are expecting their payments gross may have a nasty shock if a deduction if 30% is taken from their payments because the computer does not recognise their name or number inputted by the contractor.

(c)  Because of the shortage of time before implementation, those contractors using software to manage their current monthly payments may have to wait sometime before their updated software arrives and hopefully it will arrive in time for them to become conversant with the changes before April next year.

(d)  The current estimate of additional revenue gained by having firms change their subcontractors to PAYE is £30 million and this is set to rise with the new system. We are gravely concerned that many subcontractors have been moved to PAYE unnecessarily and we feel contractors should take advice before taking this step.

If you have any doubts queries or questions on the above please do not hesitate to contact Qdos via Contractors Unlimited website.

Find out more about  Qdos Consulting and Tax Protection Products

Posted 05/09/05

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