7 September 2007

New Penalties for the Construction Industry Scheme

With effect from 6 April 2007 HM Revenue & Customs (HMRC) introduced the new Construction Industry Scheme (CIS). So what has changed? Broadly the main changes are:

• there are no longer any CIS cards, vouchers or certificates;
• sub-contractors' payment status is verified by contacting HMRC;
• a new higher rate of deduction of 30% has been introduced where sub-contractors cannot be verified by HMRC;
• contractors have to verify each month that none of their subcontractors are employees;
• all payments to sub-contractors are now reported on monthly returns which have to be filed with HMRC within the same timescale as PAYE returns, being the 19th of each month. Even where no payments are made, a nil return still needs to be filed with HMRC; and
• a statement has to be sent to each sub-contractor by the same date detailing the payments made.
  

HMRC have recognised that the introduction of the new CIS may cause some difficulties. With this in mind, by concession, HMRC have waived penalties for any returns filed late until 19 October 2007. Any return that is outstanding after this date will receive a £100 penalty per 50 subcontractors for each month the return is late starting from October, with a further £3,000 penalty for any return outstanding for more than a year.

In addition, the new CIS has an increased emphasis on administrative compliance. As well as the financial penalties for filing returns late or paying tax late, where there are consistent compliance failures within a rolling twelve month period a sub-contractor may lose their gross payment status. It should be noted that the compliance history is not restricted to CIS but looks at all of the sub-contractors' tax affairs, with the exception of VAT.

HMRC commented in June 2007 that a review of the compliance history of sub-contractors currently registered for gross payment status showed that approximately 40% would fail the compliance test. Administrative compliance is an area HMRC are looking to tighten up on.

In summary the key points to remember under new CIS are that keeping tax affairs up to date is crucial so:

• ensure your sub-contractor registration details with HMRC are up to date;
• if there is any doubt over the payment status of a sub-contractor, check with HMRC; and
• ensure that the individual signing your contractor's monthly return has considered the employment status of each subcontractor.

For further information or guidance on new CIS, please contact Nick Haines on 01242 237661 or by e-mail nmh@hazlewoods.co.uk