There has been a Construction Industry Scheme (CIS) in place since 1972 when it was introduced to deal with the perceived problems in the Industry of engaging "cash in hand" workers who typically would have a poor record of complying with tax obligations.

The previous scheme, which was introduced in 1999, retained the basic structure of the original Scheme, relying on paper vouchers to evidence payments between contractors and subcontractors.  However, this Scheme suffered from early problems and concerns remained within the Industry about its process and the costs to businesses of complying with the rules and requirements.  Some of the key changes which are likely to have significant impact in the forthcoming months are noted below.

The New CIS

A new CIS was introduced with effect from 6 April 2007.  The changes affect all contractors and subcontractors within the scheme and it is important to understand the different requirements and the full impact of the changes.  There are a number of these.

Registration

Subcontractors continue to register with HMRC but, in addition to calling into a local office, they are able to do this electronically or by phone.  They are informed whether they should receive payments gross or net of tax and the rate of such tax deduction.  They are no longer issued with a card or certificate by HMRC as they have been under the previous regime.

Verification and payment

On engaging a subcontractor who has not worked for them for a set period of time, the contractor no longer has a registration card or certificate to review.  Instead they must contact HMRC to ascertain whether the subcontractor should be paid net or gross.  The contractor makes payment to the subcontractor, in accordance with the net or gross instructions given by HMRC.

Net payments, ie those with tax withheld on the labour element of the invoice, may be at the standard rate (currently 20%) or higher rate (currently 30%) of deduction.

Recording and Reporting

The contractor must submit a monthly return to HMRC showing, for all subcontractors to whom payments have been made, the amount paid and the amount of materials and deductions accounted for.  The monthly return is a new requirement and there are penalties for failing to submit accurate and timely returns.  The contractor is also required on the monthly return to confirm that he has considered the employment status of the subcontractors he has engaged.  This is an important point as the contractor is being asked to confirm on a monthly basis that the sub-contractors he engages are not employees and that PAYE deductions are not appropriate.

If you would like to discuss any aspects of the new regime or seek guidance on the application of the new rules please do give Dave a call or email him at dgrimley@adtax.co.uk.