Tax experts warn of CIS timebomb

Tax specialists at Grant Thornton are warning contractors and subcontractors to be extremely careful over how they categorise their workforce after a second batch of 54,000 HM Revenue and Customs (HMRC) ‘leverage letters’ were sent out over the May Bank Holiday weekend.

The letters were sent to targeted contractors and subcontractors. In the case of contractors, those whose returns show that they pay a significant proportion of CIS 4 holders, and in the case of subcontractors, CIS 4 holders themselves.

These letters advise contractors that they should consider with care the employment status of their subcontract workforce, and, where necessary, ensure that they are recategorised as employees, prior to the commencement of the new CIS system, set for April 2006.

There are currently more than 600,000 CIS 4 holders, the vast majority of whom will be classed as ‘labour only’. Since the last recategorisation exercise in 1997, there has been a drift back to self-employment.

Kathryn Hiddleston, head of construction at Grant Thornton, said: “Following the mailing of the first batch of leverage letters, last August, when 13,000 contractors were targeted, we understand that HMRC has paid follow-up visits to some 4,500 businesses and in 75% of cases, some or all of the labour only subcontractors have been reclassified as employees.

“It is also our experience that the HMRC is seeking to apply this retrospectively, with large financial claims being made. Status is now high on the HMRC’s agenda, and it is keen to review as many cases as possible before next April.

She continued: “There is a further danger where workers are wrongly categorised. The new CIS system relies on a monthly return, which contains a signed declaration that all subcontractors shown are genuinely self-employed. Making an incorrect status decision, and therefore a wrong statement, renders the return incorrect. Two such returns in a three-year period could jeopardise the contractor’s own gross payment status.”

Hiddleston recommended that all construction businesses using labour only subcontractors review their working arrangements as a matter of urgency. “We have heard in the past that the

HMRC is going to get tough on employment status – but this time, it looks as if it means it. If anyone has any concerns they should contact