 Getting ready for the new CIS.December brought final formal confirmation that the new Construction Industry Tax deduction scheme will commence in April as expected. Some readers may have hoped for yet another delay to the start of the scheme, but the commencement order has now been approved so it’s all systems go for Good Friday start. (We may have wished for a better beginning!)
What do contractors and subcontractors need to do now to be as prepared as possible for the new scheme? How will it differ? Contractors The brunt of the new scheme will fall on contractors, who will have to make changes to their procedures to comply with the new arrangements. In essence the new scheme works in the same way – registered contractors must deduct tax from payments to subcontractors for work on construction operations. However, this really is the limit of the similarities for contractors. Firstly, there are three categories of subcontractor, rather than two, and checking their payment status will no longer be done by asking to see their documentation. So let’s start from the beginning.
There is no doubt that the first step for contractors is to look at their engagement procedures with employment status in mind. The new scheme will place an increasing emphasis on this aspect. Subcontractors are not employees, and the contractor must put procedures in place to consider the employment status of all subcontractors when they are engaged. Some contractors may wish to introduce standard engagement contracts, and to be fair, some should probably recategorise some of their subcontractors and include them within PAYE. This aspect must be given adequate thought before the scheme commences, both in terms of existing subcontractors, who must all be reviewed, and engagement procedures for future subcontractors. The review of employment status could be carried out using the HMRC online Employment Status Indicator Tool. Although some commentators are not impressed with this tool, I would strongly urge anyone who has not yet tried it to give it a go. HMRC’s internal instruction is that compliance staff must not “second guess” the results of the tool provided it has been used properly, sop at worst it gives the inexperienced user confidence. Do take the “Enquiry Details” option on the final screen, and print it out. This will list every question and every response given, and is an excellent record of what was done. Once contractors have the status issue under control, they are ready to check the payment status (or registered status) of their self employed subcontractors. There are three possible outcomes :
- Subcontractors are registered for gross payment, and therefore no tax is deducted form their payments
- Subcontractors are registered for net payment, and they suffer 20% tax on their labour charges
- Subcontractors are not registered under the scheme, and suffer the higher rate of deduction of 30%
The registered payment status of subcontractors is checked with HMRC either by telephone or online. Once verified, repeat verifications will not normally be necessary unless the same subcontractor is engaged very infrequently – there must be a gap of at least two years for this to arise. No verifications can be carried out before the scheme start date, but contractors can start preparing their subcontractor records in any event. All registered subcontractors should by now have received a form CIS 333, and some larger contractors will also have received a CD-ROM with the letter. The title of the form is self explanatory – “Subcontractors you do not need to verify from April 2007”. The document (or disk) provides initial details of subcontractors and their status (either gross or net) for the new scheme. None of the listed subcontractors needs to be verified for the whole of the 2007-08 tax year. All those listed as “net” will be subject to the standard rate of deduction – 20%. Contractors can now start work preparing their records for the new scheme, using the details on the CIS 333. The form and disc show the name of the subcontractor as recognised by HMRC. Unfortunately, the system only permits one trading name per subcontractor, so this aspect will need some checking, if you are using a different trading name. The National Insurance Number and UTR are also shown for individual subcontractors, and the Company number and UTR for corporate subcontractors. Contractors can start checking the details on the form and then if they intend using new or revised software can commence uploading data in preparation for the launch of the scheme. Both reference numbers (NI NO / Company number and UTR) will be needed for returns under the new scheme. Subcontractors Subcontractors do not really have any new procedures to comply with, but there are some obvious preparations that can be made. All registered subcontractors who are currently registered for the scheme will be carried across into the new scheme with the same status as they hold at the termination of the old scheme. So subcontractors with renewals due between now and 5 April must ensure that they apply for their renewal in good time, as delay could affect their payments once the new scheme commences. Subcontractors should also be aware that they will not be renewing any certificates or registration cards which expire after 5 April 2007. They will instead come within the new “rolling compliance review process”, which will affect all subcontractors registered for gross payment from 6 April 2007. Essentially, the key difference for subcontractors is the reduction of the compliance period (during which the subcontractor must meet all of his tax and other formal obligations to remain registered for gross payment) from three years to twelve months, but the introduction of a compliance review process which could result in exempt status being withdrawn as soon as the compliance rules are breached. This means that the impact of compliance failures are likely to be much more immediate than under the old scheme, with the system of three year renewals. To mitigate the absolute effect of the new rules, there is some “slippage” built into the compliance requirements, which essentially means that the following breaches are ignored : during the same 12 month period, any or all of the following :
- Three late submissions of the monthly return – up to 28 days late.
- Three late payments of CIS/PAYE deductions – up to 14 days late.
- One late payment of Self Assessment tax – up to 28 days late.
- Any employer's end of year return made late.
- Any late payments of Corporation Tax – up to 28 days late, including where any
- shortfall in the payment has incurred an interest charge but no penalty.
- Any Self Assessment return made late.
- Any failures classed as 'minor and technical' in relation to your obligations under the old Scheme, where these fall within the preceding 12-month period.
The new review procedures mean that subcontractors who are registered for gross payment must think carefully about meeting their compliance requirements both now in the lead up to the new scheme, and after April 2007. The next article in this series will examine the steps you will need to take to prepare for monthly returns, and the online process for those who want to use it.
By Rebecca Benneyworth. AccountingWEB 8-Jan-2007 |
