The new scheme on the block

Construction businesses that are not registered under the Construction Industry Scheme (CIS) could have a 30% deduction from the labour element of their payments when the new CIS is introduced on 6 April 2007. This higher rate of deduction for non-registered businesses is one of the many changes in the new CIS.

In an attempt to drag us into the 21st Century, HM Revenues and Customs (HMRC) has provided for electronic communication. Returns may be made on the Internet, using third party software, and by electronic data intelligence (EDI), but snail mail and the telephone will remain available.

The scheme will dispense with the use of cards, vouchers and certificates; these will be replaced by a verification process and a monthly return.

Verification process

To determine the tax status of a new subcontractor, contractors must contact HMRC. It will inform them whether the subcontractor should be paid gross, at the standard rate of deduction (18%) or under the higher rate (30%). This passes the responsibility to decide the tax status of subcontractors from the contractor to HMRC.

When the scheme is launched, contractors need only verify subcontractors that are ‘new' to them after 6 April 2007. There will be no need to verify subcontractors that have been paid since 6 April 2005; their details will already have been transferred to the new scheme by HMRC. Payments will be made on the same tax status basis as the last payment under the ‘old' scheme.

The contractor will require from the subcontractor their precise name, unique taxpayer's reference number (UTR) and National Insurance number or company registration number. Armed with this information the contractor can identify and verify the correct subcontractor in HMRC's records.

Care must be taken when presented with a trading name. The subcontractor must provide also the legal name as this will be the name registered with HMRC and will enable verification to take place. However, HMRC will allow businesses to provide them with one trading name in addition to their legal name.

Monthly return

Contractors will inform HMRC of all payments made to subcontractors on a monthly basis. This important part of the process may be made on the Internet, electronically or by post. Returns must be made within 14 days of the end of the tax month they refer to in order to avoid a £100 penalty.

A further £100 is payable if the missing return should have listed over 50 subcontractors. Further £100 penalties are made for each extra 50 subcontractors or part thereof. There will be no annual return under the CIS.

The monthly return form will be partially completed by HMRC before submission to the contractor. The names and UTRs of all subcontractors that the contractor has previously paid or verified will be pre-printed on the form. The contractor must then insert the current payments made to the subcontractors and update the details of new subcontractors.

In the event that a contractor has not paid any subcontractors in a particular month, they must make a ‘nil' return. Nil returns may be made by telephone or in the same manner as the monthly returns. If non-payment of subcontractors is likely to be long-term, monthly returns may be suspended for six months by prior agreement with HMRC. Longer suspension periods will also be considered on individual application. Financial penalties will also apply in respect of failure to submit a nil return.

When a contractor pays a subcontractor under deduction they must issue a written statement to the subcontractor detailing: the amount paid, the period when the payment was made, tax deducted and details of both parties including UTRs. (Deductions relate to the labour element of payments only.) The statement may be on paper or electronic and is a contractor's document; there is not a HMRC form for this purpose.

On completing a monthly return, the contractor is making a number of momentous declarations; they are repeated every month that a return is submitted. They declare that they have verified the subcontractors or that they have been included on earlier returns.

The second declaration is more weighty. The contractor confirms that they have considered the employment status of all individuals entered on the return and are satisfied that they are bona fide self-employed and cannot be defined as employees. Hence the responsibility for determining self-employment rests firmly with the contractor. The penalties for getting it wrong include financial penalties and prosecution.