6 October 2007 is a date that at first appears to have little significance with regard to the new Construction Industry Scheme (new CIS). The new CIS will have been in operation for six months, and hopefully many of the initial glitches and problems will have been resolved during this honeymoon period.
In March 2007 HM Revenue & Customs (HMRC) said that they were not going to issue penalties for late returns during the first six months of the scheme. That six-month period will end on 6 October 2007, from which time we can expect HMRC to start taking compliance very seriously. The scheme introduced monthly contractor returns and there are automatic penalties for erroneous returns (maximum £3,000) or delayed submission (£100 per return for each 50 or part 50 subcontractors).
In the construction tax world "status" is of utmost importance. This extends from employed versus self employed to "payment status", where the privileged are paid gross, the middle classes subject to 20 per cent withholding tax on payments in respect of labour, and the disenfranchised "punished" by an almost unsustainable 30 per cent withholding.
While limited companies can offset CIS deductions against their PAYE liabilities, for sole traders and partnerships (and speculative property developers that perhaps subcontract the construction operations) there is no offset and serious cash flow issues can result.
The new CIS introduced the tax treatment qualification test (TTQT) – a largely automated process that evaluates the compliance of subcontractors, business owners and directors to judge whether their compliance history merits gross payment status. HMRC recently indicated that 40 per cent of gross payment subcontractors have compliance errors that could have resulted in the withdrawal of gross payment status.
Subcontractors registered for gross payment will be scheduled for (at least) an annual review and may lose their gross payment status at any time. Subcontractors can appeal (within 30 days) but if unsuccessful cannot reapply for 12 months.
Construction businesses facing difficulties with the new CIS scheme are advised to consult their advisers without delay – particularly given the relatively inadequate 30-day appeal window.