CIS: Taxing times (News analysis)

Alan Nolan, director of KPMG’s employment tax in construction group, reflects on the New Construction Industry Scheme and the implications for the UK construction sector.

The New Construction Industry Scheme (CIS), effective from April 2007, brings with it the potential for identity fraud, leaving contractors exposed to possible lengthy tax investigations. In the event that negligence can be established by HM Revenue & Customs (HMRC), construction businesses across the UK, which act as subcontractors, stand to lose gross payment status as a consequence of their actions.

Many contractors have already begun to take tax compliance more seriously and have taken steps to consider new software and drafted policies and procedures to ensure that they do not fall foul of the new compliance regime.

Worryingly, there are still a large number of contractors that have yet to fully consider the implications of the CIS changes, which are radical and, unless fully understood, can be considered downright dangerous for the health of a business.

Top of the pops

How can a new scheme take the industry back to the days of the seventies when Slade, Wizard and The Sweet were at the top of the pop charts – dark days indeed? Under the existing CIS scheme, subcontractors produce CIS identification, containing photographs, in the form of CIS4 registration cards, and CIS6 certificates.

If a business incurs expenditure in excess of £1m, it can apply for a CIS5 card which, although it does not have a photograph, has to be produced using a certifying document.

The subcontractor is required to produce the plastic card for inspection by the contractor, who in turn is required to make a number of checks to ensure that the person producing the card is the authorised user.

These checks include taking a specimen signature and verifying the photograph of the person who has produced the card. Altogether, this is a pretty secure system, with contractors being held to account if the required checks have not been made.

In addition, the cards come with a supply of vouchers which, for some reason, bear no resemblance to the number of the card they accompany.

Incidentally, have you ever wondered why it is that the CIS4 goes with the CIS25, the CIS6 is paired with the CIS24, and finally the CIS5 is married up with the CIS23 and contractors are given a CIS36 return to complete at the end of the year?

New scheme

Due to the level of alleged fraud being perpetrated under the current scheme, it was announced by the Paymaster General that the CIS was to change.

There were three main reasons cited for the change: to reduce the administrative burden on the industry; to help contractors meet their tax obligations on time; and to provide assistance in getting the status of subcontractors right.

Despite a number of embarrassing false starts, the new scheme comes into effect on 6 April 2007.

So what do these changes mean? The much-heralded changes include the disappearance of the CIS cards and vouchers and the introduction of 12 monthly returns to replace the one annual return – reducing the administrative burden on the industry.

Under this new scheme, contractors will be required to verify new subcontractors in three ways: by telephoning a call centre; via HMRC’s online verification service; or through third-party software. Incidentally, contractors will not be able to use the HMRC online service if they have more than 50 subcontractors.

The first monthly return, due on 19 May 2007, will be pre-populated with data from existing vouchers submitted under the new scheme. Therefore, it is vital that all vouchers are submitted on time as those subcontractors will not need to be verified if they have worked for the contractor in the past two years.

One word of warning here – to avoid verification, subcontractors must have been paid by the contractor in the past two years and held a gross payment certificate or temporary CIS4 card that expired after 6 April 2007.

Identity fraud

Identity fraud is considered by many to be the fastest-growing crime in the UK. Has this new scheme opened up an opportunity for dodgy dealers to create CIS identities from stolen tax documentation?

A scenario

Dan Jones is a CIS6 holder who lives next door to Chris Smith, an out-of-work carpenter who hasn’t registered for the scheme. Facing a 30% deduction when working as an unregistered subcontractor in the industry, Chris is on the lookout for the opportunity to improve his cashflow.

Dan is not particularly efficient when dealing with paperwork and, when he is clearing out his desk at home, he deposits old bank statements, utility bills and tax demands in the rubbish bin.

The refuse collectors are not too fussy about leaving half the rubbish on the driveway, including Dan’s documents. Chris seizes the opportunity, recovers the old paperwork and creates himself a new tax identity with Dan’s National Insurance Number (NINO) and his Unique Taxpayers Reference Number (UTR).

Chris turns up on site, provides his new details to the unsuspecting contractor who telephones the HMRC call-centre, which confirms gross status.

Chris is then, effectively, paid cash in hand. Chris also shares this information with a number of others in the same unregistered position and, very soon, Dan is unaware that he has earned a cool £1m on sites located throughout the UK.

Fraud detection

HMRC has confirmed that it will be undertaking compliance checks to detect this type of fraud, but there is a concern that the number of compliance inspectors will not be able to cope with the number of suspect cases.

Compliance obligations from April 2006

Effectively, the compliance test for the new scheme is already in operation. The test scheme works on a rolling 12-month basis, so all construction businesses must adhere to the new compliance rules in the 12 months leading up to the new scheme.

HMRC is currently monitoring compliance with the operation of CIS, including the submission of vouchers, and the dates on which PAYE/NIC and CIS deductions are made to establish the number of businesses that are likely to be stripped of gross payment status in April 2007.

Gross payment status

Unlike the existing regime, under new CIS, HMRC will have the ability to withdraw gross payment status almost immediately it perceives that the compliance test has not been met – it will not have to wait three years for a certificate to expire and then refuse to renew.

Construction businesses must act now to ensure that they are meeting all compliance obligations required under the new scheme and not wait until April 2007, which may be too late.

KPMG in the UK has produced a DVD for the construction sector entitled The Scheme, portraying the pitfalls that can be encountered during an HMRC construction industry compliance team inspection.

Alan Nolan can be contacted at KPMG on 0207 694 4841 or 07979 541405. He can also be contacted via email at: alan.nolan@kpmg.co.uk.

[Contract Journal, 4 October 2006, pp 6-7]