For constructors who evade paying tax, the time has come to wise up. HM Revenue & Customs is clamping down with a new scheme, which comes into force next year. Sally Nash reports
The CIS, which was introduced to reduce tax leakage in the construction industry has been revised a number of times since its introduction in 1971. The latest CIS, which was due to be implemented in April 2006, is designed to reduce the regulatory burden of the scheme on construction businesses, to improve the level of obligatory tax compliance and to ensure construction businesses use the correct status (employed or self-employed) for their workers.
Those most affected are contractors and subcontractors in the construction industry. But these terms go much wider than the interpretation they normally have.
Contractors do not just cover construction companies and building firms - this catergorisation also includes government departments and local authorities, as well as many businesses normally known in the industry as deemed contractors. The
main changes will centre on the payment process for subcontractors.
From next April, registration cards and tax certificates will no longer be valid, and will be replaced with a verification service. Each month, contractors will have to file a monthly return of all the payments they have made to subcontractors working for them.
Contractors will have to declare that the details are correct and none of the payments were made under a contract of employment.
A spokesman for HM Revenue & Customs told WET News: "The main thing this is trying to address is companies that employ people who work off record and receive cash payments. Sometimes all work is not declared. One of the aims of these changes is to help create a level playing field for all.
HMRC also stresses that the CIS scheme does not apply to workers that are directly employed. So, getting their employment status right is important because if contractors get it wrong it could have severe consequences, says the HMRC.
It may mean you having to pay the tax and national insurance contributions you should have deducted, incurring a penalty, and losing your own gross status entitlement if you are registered for gross payment under new CIS," adds a spokesman.
There are also penalties for failure to submit the returns. However, there will
be warnings before the automatic penalties kick in, he adds.
Meanwhile, tax experts have been lining up to warn contractors of the dangers of non-compliance.
Mhairi Charlton, corporate tax partner at Armstrong Watson, says: "Ignore the changes and you could find yourself in financial ruin.
"The financial penalties could be horrendous. If gross payment is withdrawn, a full 12 months must elapse before it can be regained so causing the subcontractor protracted cashflow difficulties. And this is without the automatic and discretionary penalties which can be levied for not complying with the new CIS requirements."
Charlton points out that the HMRC will only be looking at the compliance record for the previous 12 months so if contractors are up to date now they stand a better chance of avoiding Revenue scrutiny and the consequential adverse effects of this.
"Be warned: HMRC is going to get tough on CIS," says Charlton. "Poor compliance only has one ending - and it certainly won't be a happy one."
Some contractors are keeping tight-lipped about their feelings, while others have cautiously welcomed the planned changes.
Chris Squires, Costain's procurement director, says: "Costain formed a small
team several months ago to look at the new scheme, to understand the changes and to implement the necessary system and processes for a smooth transition.
"The team has attended seminars and has spent a considerable amount of time going through the information provided by HMRC.
"If, and I stress if, HMRC does what it promises, and we can get our systems to align, the new scheme will make subcontractor administration a lot easier for Costain."
Mark Cutler, managing director at Morgan Est, says: "Morgan Est welcomes the new Construction Industry Scheme because it will create a level playing field for contractors and subcontractors. We are currently reviewing our processes and procedures, from vendor registration through to payment stage, to ensure full compliance with the new legislation."