The proposed new Construction Industry Scheme (CIS), which deals with contractors’ and sub-contractors’ tax, is due to come into effect in April 2007. As we know, the terms “contractors” and “sub-contractors” have a wide meaning for the purposes of the scheme. Contractors include Government Departments and local authorities as well as construction companies, building firms, partnerships and individuals. The type of work that is covered by the scheme includes not only standard construction work but also alterations, repairs, decorating and demolition, carried on within the UK.
The proposed changes will mean that contractors and sub-contractors will no longer need to hold either a CIS 4 Registration Card or a CIS 5 or 6 Sub-Contractors Tax Certificate but H M Revenue & Customs will require that a new sub-contractor’s status is verified by the contractor. This can be undertaken by telephone, web-access or by electronic message. A verification number will be required to identify the sub-contractor. There are complex ‘roll over rules’ so that a sub-contractor paid under the old scheme may be paid under the new scheme without verification. These rules allow contractors to continue to pay a verified sub-contractor if they have been paid and reported to H M Revenue & Customs in the previous 2 tax years.
Additionally, under the new CIS, contractors will be required to file monthly returns, giving details of the sub-contractors that have been paid, how much has been paid, the material costs included in the payments and, where appropriate, how much was deducted on account of tax. The returns will include a signed declaration that none of the sub-contractors are working under a contract of employment and that they have all been verified with H M Revenue & Customs. The contractor is required to provide a written statement to every sub-contractor from whom a deduction has been made. There will no longer be any annual returns as all the necessary information will be provided on the monthly return.
The process by which sub-contractors register with H M Revenue & Customs will continue unchanged, but applicants will also be able to apply using the Internet. There will still be a requirement for the sub-contractor to complete an application form and attend a local tax office with two proofs of identity, including evidence of current address and NI number.
The changes have been met with a number of concerns on the part of industry members.
The replacement of the present system of vouchers, with the introduction of monthly returns and the obligation to enter into a contract with each sub-contractor prior to the verification process described above, will create an extra administrative burden on the contractor. For the avoidance of doubt, if the contract is dated after the verification call was made, we understand that this would constitute an incorrect return in the eyes of H M Revenue & Customs Compliance officers with the result that the contractor loses his own certificate such that he could now only be paid net.
The focus behind these verification procedures is H M Revenue & Customs’ clamp down on non-compliance, specifically in the area of labour-only sub-contractors. The issue of whether a labour-only sub-contractor has been correctly treated as a self-employed person or should have been treated as an employee is a cause for concern due to the potential for substantial penalties being imposed for incorrect verification declarations and/or failure to submit an appropriate declaration. Where the H M Revenue & Customs considers that the sub-contractor has been incorrectly categorised, it is the contractor who will be liable for the shortfall in tax deductions.
It is feared that due to these concerns created by the new scheme, there may be a move of skilled labourers to the private household sector (which is not covered by the new scheme), as well as increasing industry costs due to increased administrative burdens.
On the face of it, it looks like the H M Revenue & Customs has shifted the responsibility of policing tax collection onto the contractor and can only benefit from penalties resulting from the application of the new scheme to those who get it wrong. However right or wrong that is, it would seem that the H M Revenue & Customs will need that added income to fund the extra Inspectors that may be required to deal with the potential increase in identity fraud on the part of sub-contractors as a result of the proposed changes.