CIS: one year on

The new Construction Industry Scheme has been in operation for just over a year. Mike Evans takes this opportunity to review its progress and comment on some of the main problems for businesses and their advisors

The new Construction Industry Scheme (CIS) is a tax deduction scheme that was introduced by HMRC to deal with a transient workforce, cash payments and what was perceived as continuing dubious and poor business practices, as well as ‘helping construction businesses get the employment status of their workers right’. HMRC also aimed to reduce the industry’s administration costs, while improving compliance. HMRC is satisfied with its performance – appears to be working well and is an improvement on its predecessor. So what are the main areas of concern that remain?

Gross payment

Gone are the ‘tickets’ that were required to verify whether a subcontractor could be paid gross without deduction of tax, or had to be paid under deduction. These were either a CIS4 Registration Card or a CIS5 or CIS6 exemption certificate. The card could be temporary or permanent, but without one a subcontractor could not get paid, while the exemption certificates had to be renewed every three years. They are no longer relevant and under the new CIS: gross payment status will continue after the expiry date of the old certificate unless and until HMRC takes it away.

The warning for subcontractors is that HMRC can remove their gross payment status with only 90 days’ notice, subject to an appeal process, if they fail to comply with the rules of the new CIS. In November 2007, HMRC began reviewing about 107,000 subcontractors whose gross payment status was carried over from the old scheme because they had a valid exemption certificate when the new CIS started in April 2007. Probably the most common reason for losing gross payment status is the failure to pay HMRC on time – this includes any PAYE and NICs deducted from employees, as well as CIS deductions and any taxes due from the subcontractor or the business. The compliance test also includes timely submission of returns, and subcontractors should be familiar with the CIS343 factsheet guidance on obtaining gross payment status.

Dispensing with the ‘tickets’ has required a new verification procedure for establishing the tax payment status of new subcontractors. This must be undertaken before a new subcontractor is paid for the first time; failing this, HMRC can impose penalties. The verification process is fairly straightforward and can be done online using HMRC’s free software, third-party software or Electronic Data Interchange; alternatively, subcontractors or agents can telephone the new CIS helpline on 0845 366 7899 to verify a subcontractor. HMRC will provide a verification reference number that must be recorded and noted on the payment statement that contractors must provide to any subcontractor paid under the new higher rate of deduction (30 per cent). The standard rate of deduction under the new CIS is 20 per cent, which matches the new basic rate of income tax and should apply to all registered subcontractors. The 30 per cent rate has to be applied if the subcontractor’s details are not matched when verified by a contractor.

Submitting returns

Another issue is the failure of subcontractors to submit the new CIS300 monthly returns, which replaced the CIS36 annual return and the monthly vouchers that previously had to be submitted to HMRC. Starting in October 2007, HMRC issued nearly 90,000 penalty notices to contractors that failed to submit one or more monthly return on time, and more are being issued every month. The filing date is the 19th of the month – 14 days following the end of the tax month. So, the month ending 5 June 2008 has a filing date of 19 June.

The new returns can be submitted in paper form or online. HMRC has recently warned that some subcontractors are missing the 19th deadline because they are sending paper returns in the wrong envelopes or using insufficient postage, resulting in delayed delivery.

Contractors have to complete declarations to confirm that every subcontractor included on the return has been verified, if required, and that no individual is employed under a contract of employment. The employment status of subcontract labour is coming under closer and more frequent scrutiny. Contractors and their advisors need to address this issue before the taxman calls.

Mike Evans is an Employment Taxes & CIS Consultant with MY Consultancy