What is the CIS?
The CIS is a scheme which applies to those involved in “construction operations” and requires “contractors” to follow certain procedures when making payments to “subcontractors”.
What is a “contractor”?
The CIS does not only apply to businesses in the mainstream construction industry. In addition to such businesses, the following are also “contractors”:
A property developer – note that this would include someone who buys a property, refurbishes it, and then sells it on for profit, as well as someone who builds a property from scratch with a view to selling it. It does not, however, include a business involving buy-to-let properties (because such a business involves investment properties and makes its profit from the rental income rather than from turning the properties over as trading stock).
Any business (including a buy-to-let business) if its average expenditure on “construction operations” is greater than £1,000,000 per year. Under the new scheme, there is a slight relaxation of the rules here – expenditure by a trader on his own trading premises does not count towards the £1m test.
The main changes from April 2007
The current CIS scheme revolves around paperwork. When paying a “subcontractor”, a “contractor” has to inspect the subbie’s CIS certificate and depending on what type of certificate is produced, he must either deduct tax (at 18%) from the payment and give the subbie a voucher recording the deduction, or pay him without deducting tax in exchange for being given a “payment voucher” by the subbie.
The tax deducted and copies of all the vouchers are sent to HMRC within 14 days of the end of the “Tax Month” in which the payment is made. A “Tax Month” ends on the fifth day of the following month, so the January 2007 Tax Month ends on 5 February and the tax and vouchers must be sent in by 19 February.
The contractor then has to make an annual return summarising all the payments made.
Under the new CIS, all this will change.
No vouchers or certificates
These will be scrapped. Instead, when taking on a new subcontractor, the contractor must contact HMRC in order to be told which category the subcontractor falls into:
Registered for Gross payment – no tax need be deducted
Registered for Net payment – tax deducted at 20%
Not registered – tax deducted at 30%
In order to get this information from HMRC (by phone or online) the contractor will need to tell HMRC the subcontractor’s “Unique Tax Reference Number” (“UTR”) and (in the case of a company) the company registration number, or (in the case of an individual) his National Insurance Number. This process will be known as the “verification procedure”.
At the end of each month the contractor will need to supply each subcontractor with details of the amounts paid and the tax deducted, and his /her (the contractor’s) “verification number”.
Monthly, not annual, returns
There will be no annual return under the new CIS. Instead, every contractor will be required to make a monthly return of the payments he has made under the scheme. The deadline for these returns will be the same as for sending in the vouchers under the old scheme – the 19th of the month following the end of the tax month – so the first new CIS return will be due on 19 May 2007.
These monthly returns will include a declaration signed by the contractor that:
He has operated the “verification procedures” correctly for each subcontractor
He has considered the tax status of each subcontractor and satisfied himself that they are self-employed
There are potential problems with both of these.
Verification procedure
Because there will no longer be any registration certificates, “verifying” each subcontractor depends on being able to give HMRC the UTR and NI number of the subcontractor. As well as the possibilities for simple error (leading to a requirement to pay under deduction of 30%, because the subcontractor will not be “verified” when the contractor contacts HMRC) several commentators have raised the issue of identity fraud.
The original CIS scheme (introduced in 1972) was bedevilled by fraud. In particular, payment vouchers were routinely sold by their rightful owners to unregistered subcontractors – when I was a tax inspector, I knew of at least three pubs in my area where there was a thriving market in these documents. The “new” certificates introduced in 1999 were an attempt to deal with this problem.
Under the 2007 CIS, a registered subcontractor who finds himself a little short of cash could sell the details of his UTR and NI Number to an unregistered subcontractor. As this information is all that is needed to get through the verification procedure, it is difficult to see how this could be detected by the contractor. Worse still, HMRC have been sending contractors huge lists of registered subcontractors, showing their NI numbers and UTRs – if one of those got into the wrong hands it could be the basis of a lucrative (if illegal) cottage industry of selling CIS identities.
The accountancy profession has tried to raise this issue with HMRC, but they report that HMRC do not seem to be concerned about it.
Employment status
This is not a new issue, but the fact that the monthly return now includes a specific statement by the contractor that he has satisfied himself that the subcontractor is self-employed and not an employee must mean we can expect a renewed zeal from HMRC in checking the employment status of subcontractors.
The point is that the CIS only applies to self-employed workers. Before operating the CIS the contractor must first consider whether the subcontractor is his employee or not. This is not the place to go into the distinctions between employment and self-employment (see last month’s Tax Insider for an article on this tricky subject), but contractors need to be doubly careful that they are not operating the CIS when in reality they should be operating PAYE because the individual they are paying is an employee of theirs.
Penalties
Making an incorrect monthly return can lead to a penalty of up to £3,000 for the contractor. These penalties will no doubt be enforced in the case of mistakes about employment status, but it remains to be seen what the attitude will be where the contractor has “verified” a subcontractor who is using a stolen identity, as described above.
Hanging on the telephone…
Finally, for me the most worrying aspect of the new CIS is the fact that it all revolves around the “verification” procedure and this involves contacting HMRC about every new subcontractor, by phone or on-line.
Call me a pessimist, but if you are a contractor I have two predictions for you:
If you use the online procedure, the system will crash ( HMRC’s record on IT is less than illustrious – ask any accountant about the teething troubles with online filing of self-assessment tax returns).
If you use the phone, I hope you like ‘muzak’ because you are going to be listening to a lot of it while you wait for an answer – at least the line is an 0845 number so you’ll only be paying local call rates!
