Construction Industry Scheme - what you really need to know

(09 March 2007 17:00)

The new Construction Industry Scheme came into effect on 7 April 2007. This page provides an overview of the new CIS, and the key issues you need to know about.

Latest news about the new CIS

Non-compliance with the new CIS

Non-compliance will have severe implications, including strict financial penalties, and in some circumstances, prosecution. Businesses have to plan for this change, and need to consider:

Agreeing a budget for new systems and the appointment of a project manager and project team;
Evaluating tax compliance, including a review of subcontractor status;
Planning and designing the new payment statement for net subcontractors;
Reviewing contract processes and checking expiry dates of existing CIS card holders;
Revising written processes;
Evaluating roles and responsibilities for key staff;
Issuing communication material to subcontractors;
Undertaking systems testing; and
Reviewing verification data received from HMRC against existing data held on the system.

Verification process

Under old CIS, once subcontractors have registered, they receive registration cards (CIS4) or a gross payment certificate (CIS5 or CIS6). However, this system will be replaced with a verification process by telephone or using online services.

According to HRMC, this has been designed to make the process easier. Businesses must ensure they can identify subcontractors they use to verify their status with HMRC. In practice, this requires obtaining sufficient information from the subcontractor so that HMRC can identify them on its records. Under new CIS, this must be carried out at the beginning of the contractual relationship, whether under written or verbal contracts, and before the first payment under the contract.

Contacting HMRC

The verification process with HMRC will now be either by telephone to a contact centre, over the internet, or in writing. You will not need to verify a subcontractor if you previously included the particular subcontractor on a return in the current or two previous tax years.

In the transitional phase you may look back two years from 6 April 2007. Where a subcontractor was paid gross at that time, gross status will be the correct status to apply. If the subcontractor was paid under deduction within that time this will be the correct status to apply.

Vouchers abolished

Under the new scheme, the vouchers CIS23, CIS24 and CIS25 will be abolished. However, you are obliged to provide the subcontractor with a statement showing details of the payment or indeed the amount of tax deducted where net status was applied.

Monthly returns

Under old CIS you are required to send off vouchers monthly and also an end-of-year return (CIS36). From 6 April 2007, under the new CIS this will be replaced with statutory monthly reporting. These monthly returns will detail all payments made to all subcontractors paid during the income tax month, regardless of whether they were paid gross, net of the standard deduction or net of the higher deduction. Nil returns must be made when there are no payments in any given month. These returns can be submitted on paper, electronically, or over the internet. The monthly return must reach HMRC within 14 days of the month end, otherwise a financial penalty will apply. For smaller businesses, if the average total monthly payment is below a certain limit, the return can be filed quarterly.

Paying subcontractors who are not registered

Under old CIS an organisation or individual subcontractor not registered with HMRC could not be paid. Under the new scheme, it is possible to work in the construction industry without registering with HMRC and to be paid.

Tax deduction rates

Under old CIS a single tax deduction rate of 18% for the labour element was applied to those with net status (CIS4 holders). The rate of 18% will increase to 20% under the new scheme, and a higher taxation rate of 30% will be introduced that will apply to subcontractors who have not registered, or where insufficient information is provided to HMRC to identify the subcontractor and to verify them as gross status or net with 20% deduction.

Self-employed or not?

Currently, it is your responsibility to decide on the available evidence whether the subcontractor can be considered self-employed or not. The new CIS monthly return requires a declaration where the contractor has considered the status of the subcontractor and can verify their self-employment status. HMRC provides an ‘employment status indicator’ to assist with the decisions necessary in the declarations. This is an electronic tool that can be found on its website, or verification can be done over the phone.

Deemed contractors

Under old CIS, buildings primarily constructed for your own trade or repairs to your own buildings, again primarily used for your own trade, are considered to be construction operations within CIS. New CIS introduces a business premises exemption for a deemed contractor, where building primarily for your own use would not have to be reported as a construction operation. A deemed contractor is a business whose main trade is not construction related but the amount of spend on contracts containing construction operations exceeds certain prescribed limits (£1m on average over a three-year period).

Scope of new CIS

The scope of the new CIS has not altered – it is still as wide as it was previously. There are difficulties in determining what comes within the scope of CIS, and while HMRC acknowledges the difficulties, it has dodged the opportunity to clarify the scope and tackle uncertainties. Take the case of plant provided with an operative – this will come within construction operations, whereas the hire of plant by itself may not.In the absence of clearer guidance from HMRC, the best advice is to treat grey contracts as being within CIS or to seek guidance from your professional adviser.

It is important to note that those who hold CIS4 permanent cards, CIS4 temporary cards that expire after 6 April 2007, or those that hold CIS 5 or CIS 6s that expire after 6 April 2007 will be automatically transferred onto the new scheme. There is still time to ensure systems can cope with the introduction of new CIS. Even if you have started, plans should be constantly evaluated to ensure they are robust and will allow compliance with CIS.

Information supplied by Alan Nolan, director of KPMG's Employment Tax Group.