Weighing up the cost of the new CIS

The new Construction Industry Scheme (CIS) was launched in April 2007, with HMRC claiming how much better and less time-consuming it would be compared to the old scheme.

But do contractors realise how much the scheme – which is not imposed on any other industry – actually costs?

Initial set-up

In the lead-up to April 2007, HMRC claimed that gearing up for a new scheme would cost up to £60m. That’s one of their better estimates, but probably short of the mark.

Starting with software, there are currently around 50,000 monthly returns sent in on-line, of which 30% use bought-in software. If you say £1,000 each, that’s £15m, and the HMRC estimate thought the software would only be 5% of the total spend. I know of one blue-chip company that spent over £1m in getting their systems right because of what would happen to a listed company’s share price if they lost gross payment status.

There are about 180,000 active contractors in construction, who needed their admin people to get up to speed on the new scheme before it was launched, as well as changing the nature of the systems from payroll to accounts payable. That’s a lot of time spent on training. Each contractor has had to come up with their own design of subcontractor deduction statements.

Costing all that out, a low estimate would be: £100m

Ongoing costs

The Treasury grossly underestimated the cost of the old scheme. It reckoned it cost industry £52m per year to administer. An independent report by KPMG – commissioned by the government – put the figure at £321m. Compared with the total cost to all industry of just over £1bn for VAT, construction carries a heavy burden.

As for the new scheme, Treasury economists reckoned it would cost industry £30m per year. They must be a few beads short of an abacus, because if you take the 180,000 contractors, that translates to half an hour per week of someone paid at minimum wage to run CIS. That would cover the cost of 12 monthly nil returns, but any use of subcontractors pushes the cost above that.

A more realistic estimate was between £250m and £280m per year. Credit where it’s due, this new system has not failed in the same way that PAYE and tax credits have, and the call centre is working efficiently. That’s because HMRC listened to reason and deferred the scheme twice before it was ready.

Taking the lower figure, the 15 months so far could have cost industry: £310m

Penalties

HMRC had enough sense to build a lead-in period of six months into the new scheme to allow construction businesses to get used to the returns, verifications and deduction rates.

Since October 2007, penalty notices have been flying out – 806,000 so far. At least 32,000 have been successfully appealed against, leaving 774,000 payable. Some of those may yet be appealed or cancelled, perhaps issued for contractors no longer in business. Those penalties are £100 each, minimum – and more for larger businesses.

HMRC cannot come up with a sensible figure that has been have banked so far, but if most of the penalties are due, a fair estimate of the cost to industry seems to be: £70m

Cost of appeals

HMRC’s clampdown on tax compliance is hitting the gross paid contractors hardest.

The scheme started in April 2007 with 107,000 such businesses. Under the new scheme, each should be reviewed once a year.

So far, 43,000 have been checked for compliance – forms submitted and tax paid on time – and 12,000 have failed the very stringent tests and have lost their gross payment status.

More than 6,000 have appealed the findings of the review team, 4,500 successfully. As well as the stress caused, that’s a lot of time spent checking through records. The greatest cost – which cannot be denied – will be the accountants’ fees for getting involved and presenting the appeal case to HMRC.

If you add in the costs of appealing 32,000 penalty notices, you are probably looking at costs of: £20m

Total possible cost to the industry so far: £500m

The Treasury quotes an annual tax yield from deductions at source from the industry of about £2.5bn, which they need to “protect”. This is the principal justification for keeping the scheme.

Perhaps the general view within the industry is that CIS is not that much of a problem or a burden, and that there’s nothing to worry about if you do things properly. Which is fine, until the big payment you were expecting is delayed, or you find out that the person you trusted to do the admin work exaggerated their ability.

If, however, the response to the above figures is one of alarm, maybe it’s time for Treasury to make a good case for retaining CIS. With some sensible figures.

Howard Royse ACA is the construction industry representative for the Institute of Chartered Accountants in England and Wales