So are you ready for the Construction Industry Scheme (CIS)?

Come next Friday, vouchers and annual returns will be a thing of the past for the Construction Industry Scheme (CIS). It’s all part of a government drive to make things easier for the industry.

But perhaps more truthfully, it’s also to help it gain more tax from the construction industry – Treasury figures suggest it believes the industry should be paying an additional £130m a year into its coffers through a higher proportion of its workers being reclassified as employed rather than self-employed.

Whatever the reasons behind the change, it is going to take place. While many in construction hope that HM Revenue and Customs (HMRC) will suddenly delay the scheme for yet another year, that’s just wishful thinking.

And that means having to get to grips with the new scheme now, says Anil Patel, a specialist with accountant Grant Thornton. "A lot of people have buried their heads in the sand, but this is happening on 6 April."

What is new CIS?

Government wants to reduce the regulatory burden on businesses, improve the industry’s tax compliance, and ensure firms get the employment status of their workers right. It says that new CIS will achieve this through new returns, new penalties and a new status declaration.

And that means that come 6 April, you’ll no longer use registration cards for CIS4, 5 or 6, gross payment certificates, tax and gross payment vouchers, or have to inspect cards or certificates, and you won’t be doing an annual return for the new tax year – or any that follow.

So what happens with payment categories?

Under new CIS, there are three types of subcontractor; those registered for gross payment, those registered for payment under deduction (which is increasing to 20% rather than the current 18%), and those that are not registered, who are paid with a deduction rate of 30%.

Under the current system, anyone receiving a payment has to be registered for CIS, but that doesn’t apply to the new scheme, says Patel. "Now you can pay anyone if they are not registered, but the deduction rate is 30%."

How is verification going to work?

Verification isn’t always necessary. There are three cases when you can assume a subcontractor’s payment status;

• If you have used a subcontractor who has appeared on the current year return;
• If you have paid that subcontractor since April 2005 and they held either a valid CIS4(P) card or CIS4(T) card or gross payment certificate that expired in April 2007 or beyond;
• In a group, if the subcontractor has already been verified in one of the ways above by another group company.

All contractors should have received a list from HMRC in November – and a further list in March – which lists all the subcontractors they have paid since April 2005.

But Patel is worried that many people may have simply put the list to one side, or have even binned it. "HMRC has compiled it using vouchers rather than the annual return, and vouchers can get lost in the post, not be submitted and so on, so it is vital that you check it. Where HMRC’s list matches yours exactly, that’s fine.

"But where there isn’t an exact match, you should red flag them and check your records. It may be that you have inadvertently transposed some figures, or used a different name, but you need to check it, so that you are able to obtain additional information from the subcontractor.

"If the additional information provided still does not agree with HMRC’s list, the subcontractor will need to contact HMRC to sort it out, otherwise you will need to carry out the verification process before you can make payment to them.

"If the subcontractor does not appear on HMRC’s list, then again you will need to check your records to see if verification is necessary before you make a payment."

One of the key issues is likely to be company name – businesses often have a number of trading names, but HMRC will recognise only one, so you will need to know the official name of any subcontractor you use, rather than its trading name.

Where subcontractors need to be verified, there are two main points to bear in mind, Patel adds: "One, a contractor cannot verify a subcontractor’s payment status before there is a contract or formally accepted tender for work.

"Two, a contractor must verify payment status before any payment is made."

What happens during the verification process?

Verifying payment status can be done online via www.hmrc.gov.uk/new-cis, using Electronic Data Interchange (EDI), via third party software, or by phone (0845 366 7899).

When you verify a subcontractor you need to supply your firm’s details, too: name, unique taxpayer reference (UTR), employer’s reference and accounts office reference, and you also have to confirm that a contract has been agreed or a formal tender has been accepted. Subcontractor details you’ll need are:

• For a sole trader: the name, UTR and National Insurance number (NI no) – which are all found on the current CIS4 card;
• For a company: name, UTR, company registration number;
• For a partnership: partnership name and UTR, partner’s name and in the case of a partner being an individual, his or her UTR or NI no, and in the case of the partnership being a company, its UTR or registration number.

When a subcontractor is verified, HMRC will give you a Verification Reference Number (VRN).

So what happens if there’s a dispute over payment status?

In all cases, the status held by HMRC for a subcontractor is what must be used by contractors, says Patel. "Where there is a dispute, it is probably better to agree that you will not pay that subcontractor until it is sorted out, as the subcontractor will not take too kindly to a 30% deduction being applied and you cannot alter deductions once they are made.

"Where you have an agreement to withhold payment until any dispute has been sorted, make sure you both sign to agree as stopping payment could be a contractual issue."

If a subcontractor’s status changes, HMRC will notify all contractors who have verified or used that firm in the current or previous two tax years. It will give 30 days notice if there is a change from gross to payment under deduction, but if the change is to gross, it should be applied as soon as possible.

How will payments work under new CIS?

There are different approaches for different payment status.

Subcontractors registered for gross payment don’t need to receive any sort of voucher, receipt or documentation – the payment is simply included on the monthly return.

Where deductions occur, the deduction should be done at either 20% or 30% from all amounts other than on VAT, CITB levy and the direct cost of materials, and the subcontractor given a payment statement. And where the deduction is at 30%, the payment statement must include the VRN.

Payment statements must be given to subcontractors no later than 14 days after the end of the tax month – ie, by the 19th. "There are penalties for not providing statements or wrong statements," warns Patel.

What about filing the new returns?

Monthly returns replace the annual return. However, this year, that means contractors will end up submitting two returns in May – the old annual return for the 06/07 tax year and the new monthly return.

Returns can be either paper or electronic, but where it’s on paper, this must be sent to HMRC unfolded in the envelope provided. "If you plan to file electronically, I would advise you to keep the first paper return," says Patel. "Once you have filed electronically once, you won’t be sent further paper returns, but the spare could be very useful when for some reason you can’t submit a return electronically – at least you will have the option of filling in the paper return."

What’s the status declaration in new CIS?

This is where accountants believe the key issue could lie in new CIS. Contractors need to confirm that they have "considered the employment status" of each individual in a monthly return. "By signing such a declaration, you are saying that you have actually undertaken a process to properly review the arrangements you have in place to ensure that the subcontractors are properly engaged on a self-employed basis," says Patel.

HMRC believes many workers are wrongly categorised as self-employed, and is determined to stamp on this. But it is a hugely complex area, and one of the pillars of new CIS.

What if I’ve made mistakes on the return?

If you catch the mistake before sending the return in, on paper you can strike through the error and make a new entry. Once it’s reached HMRC, and if you can’t correct the mistake by making a balancing entry in the following month’s return (returns can’t include negative figures), the CIS telephone helpline is the only option.

What happens if it all goes wrong?

Penalties under new CIS can be tough, so it pays to get it right. You can be fined up to £3,000 per incident for failing to sign verification and status declarations, or making incorrect declarations, and when you make late returns, penalties come in at £100 per 50 subcontractors (or part thereof) per month that the return is late.

"It’s unlikely that HMRC will tell you when you have made one mistake – they’re much more likely to pitch up after six months of errors and tell you that you are liable for £15,000 for failing to sign or tick the confirmation box in a return, so it is essential to get it right."

Could we find our gross payment status being removed altogether?

Yes – if you fail to comply with the new regulations or act fraudulently. Continued failure to meet deadlines will result in companies losing their gross payment status.

Top Tips for Dealing with New CIS

Make one person responsible for new CIS verification
Nominate one person within your organisation to look after the verification process and to ensure that it is done properly. Don’t allow everyone to do it, or you will lose track and control.

Provide HMRC with one contact name on returns in case of queries. "This must be a responsible person who understands CIS. If HMRC phones with a query, you need to ensure someone with an understanding of it takes the call, or knows enough to take a message and get someone to call back," says Grant Thornton’s Anil Patel.

Keep records
When you are dealing with HMRC over the phone, it could be difficult to prove things at a later date. Keep good records of every phone call, says Patel.

"Note the date, time, who you spoke to – their full name, and what was discussed. Write down what information you gave during the call, and what information came back. Then ensure you – or whoever dealt with it – signs the log to say they’ve done it. The onus is on you to prove things. Keeping a log is essential, and means you can face HMRC on the front foot if they come asking questions, rather than on the back foot."

Make sure you get returns in on time and make payments on time
Under new CIS, monthly returns must reach HMRC by the 19th of the following tax month. "Do not send it on the 19th – it must be with HMRC by then, or the previous business day if the 19th is a non-business day, for instance a Saturday. Any late returns will receive an automatic penalty," says Patel.

Beware of non-business days, he warns. "Where the 19th is a Saturday, Sunday or bank holiday, the payment needs to be received by HMRC before that date, or it will be regarded as a late payment."

CIS book offer

Grant Thornton's experts have written The New Construction Industry Scheme, a new book providing detailed guidance and expert advice on the new regime. It will ensure you are fully versed on how the new scheme will work, what you will need to do and what you should do to guarantee minimum risk of penalty.

Contract Journal readers can obtain £10 off the £75 published price. For more information and to order your copy, call the publisher's customer service team on 0870 777 2609, fax 020 8247 1184, or visit here.