Following a lengthy lead-in time, the new Construction Industry Tax Deduction Scheme (CIS) is due to finally come into operation on 6 April 2007.
The key changes that will impact on those affected are:
- Sub-contractors must register with HM Revenue & Customs ("HMRC") for either gross payment or payment under a reduced deduction, and will no longer have to produce evidence of exempt status or CIS registration in the form of certificates and registration cards;
- The sub-contractor needs to provide the contractor with basic ID details (such as national insurance number and unique taxpayer reference), which the contractor confirms with HMRC. HMRC then inform the contractor of the sub-contractor's status and the contractor makes a gross or net payment to the sub-contractor as necessary;
- Where a sub-contractor is CIS registered and a payment is to be made net of tax, it will be deducted at a rate of 20%;
- Sub-contractors not registered under the scheme will suffer a tax deduction of 30% to encourage registration;
- Annual returns are being replaced with monthly returns. The first of these returns is due on 19 May 2007 and, unless the contractor has notified HMRC that it will not be making any payments for six months, this requirement applies even if the return is a nil return;
- The consequences of submitting a return late under the revised provisions is a flat rate penalty of £100 and a further £100 penalty for each 50 sub-contractors on the return. The penalties are harsher if it is determined that the error is made either intentionally or negligently;
- Contractors are now under an obligation to declare on each return that no payments are made in respect of a contract of employment. It is therefore important that the contractor clarifies the employment status of the sub-contractor. If contractors need help to make a decision on a sub-contractor's employment status, HMRC are offering assistance via the CIS Helpline (see below) or the Employment Status Indicator (ESI) tool on the HMRC website at http://www.hmrc.gov.uk/calcs/esi.htm
- The tests to determine sub-contractor status are mainly unchanged, although under the new regime the compliance test is now more structured; Contractors will be entitled to assume the status of the sub-contractor, once checked, for the remainder of the current tax year and two subsequent tax years;
The status of a sub-contractor is subject to continuous review. Therefore the withholding requirement (or ability to pay gross) could alter at any time if, for example, the sub-contractor's application would fail if made at that time, the sub-contractor has made an incorrect return or provided incorrect information, or the sub-contractor has failed to comply with the CIS rules. These are just a summary of the key points of the new CIS. HMRC is due to send out a "New CIS Update" to all registered contractors, which should cover the main elements of the scheme, together with a "Contractor's timetable" listing all the key CIS dates and deadlines.