Important news for the construction industry

In TT85 we gave advance warning of the changes scheduled for the Construction Industry Scheme (CIS) effective 6th April 2007. Here we provide more details about these imminent changes.

Changes – for the contractor

Sub-contractors should note:

• they must have applied for renewal with HMRC in good time before April 2007.
• there is a reduction in the compliance period from 3 years to 12 months (this is the period in which sub-contractors must meet all of their tax and other obligations to remain registered for gross payment, e.g. CIS/PAYE up to date, corporation tax up to date etc).

Changes – for the contractor

The new CIS will operate very differently from the current one.

The existing system with its exemption certificates, registration cards and annual returns will be replaced by a system heavily reliant on online facilities and a monthly return.

The key to the new scheme is the correct classification of workers to ensure the person being engaged is a subcontractor and not an employee. The contractor must put procedures in place to validate the status of all subcontractors.

If the sub-contractor is correctly classified as self-employed, then under the new scheme, on engagement, the contractor must:

• check with HM Revenue & Customs (HMRC) by phone or online to verify whether a sub-contractor is registered and whether to pay the sub-contractor gross or to deduct tax;
• make no deduction for tax if the sub-contractor is registered for gross payment;
• must deduct CIS tax at the new rate of 20% (instead of the current rate 18%) on payment for labour if registered for net payment;
• must deduct CIS tax at the higher rate of 30% if a sub-contractor is not registered.

Once verified, repeat verifications are not normally necessary – HMRC will advise of any change in status.

Contractors should by now have received form CIS333 and can start preparing their records using the details it contains about sub-contractors and their current status.

Existing sub-contractors shown on this form do not need to be verified with HMRC.

Note that vouchers will no longer be issued and instead a monthly return and pay statement must be issued by the contractor. This is best done on-line. Beware the monthly return includes a declaration from the contractor stating they have considered the status of sub-contractors and consider none of them to be employees.

Barnes Roffe Topical Tips:

• It is important to ensure all documentation for subcontractors is up to date, including the monthly contractor return and vouchers.
• Make sure you are satisfied that all sub-contractors are proper sub-contractors and not employees. This is not a new requirement but HMRC is continually increasing the focus here.