Construction Industry Scheme Update
The Construction Industry Scheme was radically overhauled in 2007. The new rules are designed to put a greater responsibility on the contractor to ensure everything is being accounted for correctly. You should ensure that you able to comply with the scheme as the Revenue will levy heavy fines for non-compliance.
The main features of the revised system are as follows:
Verification
The new regime saw an end to the old system of cards and certificates. Instead, the contractor needs to 'verify" the status of each new subcontractor before making a payment.
This can be done either online or by telephone. The Revenue will then instruct the contractor to
follow one of three options:
- That the payment should be made gross.
- That the payment should be made net of a 20% deduction (an increase over the old 18% rate).
- That payment should be made net of 30% - this would apply where a subcontractor cannot be matched by the Revenue to their records (probably because the subcontractor has not registered with them). The contractor will be allowed to pay them but they will suffer a deduction at a higher rate.
Returns
The old annual returns were replaced by monthly returns that show all payments made to subcontractors. These need to be filed by the 19th day in the following month and there are penalties for late submission of a return of up to £100 per month that the return is late and per every 50 subcontractors paid. Nil returns will be required even if no payments have been made - the penalties will be applied regardless.
Returns can be made either online or on paper. Nil returns can be made over the telephone where necessary.
Vouchers
Contractors are no longer required to issue vouchers with each payment made, however it is mandatory that a payment advice should be issued with every payment that is made net of a deduction. Although there are no set forms that should be used, please see our Guide
To Payment Advice Statements for guidance to what these must contain.
Employment status
One of the primary objectives of the scheme is to "To help construction businesses to get the employment status of their workers right". The new scheme places a greater responsibility on the contractor by requiring a declaration on each return that the people who have been paid are genuine subcontractors and should not be treated as employees. This will mean that serious thought needs to be given to cases where there is some doubt over employment status. The maximum penalty for an incorrect return is £3,000.
There are a range of indicators that need to be reviewed to determine employment status but it is, nevertheless, a subjective matter. To help contractors the Revenue have an "Employment Status Indicator" tool that is available on their website
(www.hmrc.gov.uk/calcs/esi.htm) but, having said this, it is widely believed that the system is biased towards determining that an employment relationship exists.
Filing Online
When it comes to verification or the filing of the monthly return, the Revenue provide free software which is available over the internet. In order to use this, the contractor will need to obtain an Activation PIN which will be used to register for CIS Online Services. This free service should be sufficient for the needs of smaller contractors. However, the Revenue also has a list of approved third party software providers if their own service proves to be inadequate.
Summary
The new system was introduced to try and solve the construction industry"s long standing issues of poor compliance and tax evasion. However, it does seem that there is a real risk that honest taxpayers will suffer heavy fines for mistakes and oversights unless they are well prepared.
NEW CIS – A GUIDE TO PAYMENT ADVICE STATEMENTS
The contractor must provide a written statement to every subcontractor from whom a deduction has been made within 14 days of the end of each tax month. A tax month runs from the 6th of one month to the 5th of the next month so the statement must be provided by the 19th of the month.
The statement may be issued by electronic means but only where:
the contractor and subcontractor agree to this method, and
the statement is in a form that allows the subcontractor to store and print it.
The statement can be issued on the basis of one for each tax month or one for each payment if this is more frequent. Contractors may choose the style of the statements but they must include the following information:
- the contractor's own name and employer's tax reference
- the end date of the tax month in which the payment was made, such as "tax month ending 5 May 2007" or the date of payment where the statement relates to a single payment
- the following details of the subcontractor
- name
- unique taxpayer reference number (UTR)
- the personal verification number provided by the Revenue if the subcontractor could not be verified and a deduction at the higher rate has been made
- the gross amount of the payments made to the subcontractor
- the cost of any materials that has reduced the amount against which the deduction has been applied
- the amount of the deduction.
There may be other information that a contractor may want to put on the statement to enable the subcontractor to understand the payment that has been made. For example, this may include the amount of Value Added Tax (VAT) charged by the subcontractor.
It is good practice for a contractor to give a subcontractor a payment statement where the payment has been made gross, but there is no obligation to do so.
Duplicate statements
If a statement does not reach a subcontractor or it is otherwise lost the subcontractor may ask the contractor for another copy. Contractors may issue duplicates in such cases but the duplicate must be clearly marked "Duplicate" to avoid any confusion with the missing statement if it is later found.
For further information relating to the impact of new CIS legislation please contact Charles Green on 020 8652 2450 or email .
For further information relating to the impact of new CIS legislation please contact Charles Green on 020 8652 2450 or email .
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