Important information for building contractors and subcontractors
13 July 2006
A new Construction Industry Scheme (CIS) from 6 April 2007
If you are currently involved in the Construction Industry Scheme, you will probably be aware that the scheme is scheduled to change dramatically from 6th April 2007. To clarify what this means to you, read on…….
No cards, certificates or vouchers under new CIS
Under new CIS, from 6 April 2007, you will no longer use
• registration cards – CIS4(P) and CIS4(T)
• tax certificates – CIS5, CIS5(Partner) and CIS6
• vouchers – CIS23, CIS24 and CIS25.
Subcontractors need to register for new CIS with HMRC
Subcontractors new to CIS need to register with HMRC (HM Revenue & Customs). They can apply to be paid gross by the contractors they work for (like those who had tax certificates CIS5 or CIS6 under the old scheme) or they can register to be paid under deduction (like those who had CIS4 registration cards under the old scheme). To qualify to be paid gross, subcontractors must pass the Business, Turnover and Compliance Tests, as in the current CIS.
You must be carrying on UK construction work, through a business bank account, with the business having appropriate assets such as tools, machinery and vehicles where appropriate.
You must have “net construction turnover” (basically turnover excluding VAT less cost of materials) of £30,000 per annum, or for partnerships/limited companies, £30,000 per partner or director/shareholder. Where this test is not met, there are alternative tests that can be carried out in order to qualify for gross payment.
The business/partners/directors as appropriate must all have a “clean” compliance record during the 12 months leading up to application. This means all returns must have been made on time,all taxes paid on time (personal, corporate, PAYE etc) Unless any failures are “minor and technical”, a poor compliance record may prevent your business obtaining gross payment status. Therefore it is critical that your tax affairs are kept up to date at all times!
If you have a valid gross payment certificate or CIS4 registration card as at April 2007, current guidance indicates that you will not need to re-apply for the new scheme.
Contractors must check or 'verify' subcontractors with HMRC
Subcontractors must give contractors their name, unique taxpayer reference and National Insurance number (if known) when they enter into a contract. HMRC should give subcontractors this information when they register. Where subcontractors are not limited companies, contractors must be satisfied that any contracts they have with them are contracts of self-employment as opposed to employment. HMRC Factsheet CIS349, "Are your workers employed or self-employed? – advice for contractors" tells you more about this. If you are concerned about your workers, please speak to your usual contact here at CRM. Subcontractors particularly likely to be classified as employees are those paid an hourly rate with little or no financial risk to themselves.
Contractors then contact HMRC to check subcontractors' payment status (gross payment or payment under deduction). This is called 'verifying'. Exceptions to this are instances where you have already included a subcontractor in a monthly return (see below) in that tax year, or where you have seen a CIS4, 5 or 6 for that subcontractor after 6th April 2005 and the expiry date shown was April 2007 or later. Subcontractors can be verified by calling HMRC on 0845 3667899 or online at www.hmrc.gov.uk/new-cis.
If the subcontractor is registered with HMRC, the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction to all payments made to the subcontractor. If the subcontractor is not registered with HMRC, or has not given accurate details to the contractor and they cannot be matched, a deduction at the higher rate must be made from the subcontractor's payments. (The subcontractor must make sure the contractor gets the correct details.) Contractors should read factsheet CIS345 for more information on verifying subcontractors. Subcontractors should read factsheet CIS344, "Getting paid by a contractor – advice for subcontractors" for more information about how contractors will verify you with HMRC.
HMRC will give contractors a 'verification' number for the subcontractors that can be matched with the HMRC computer system. This number will be the same for each subcontractor verified at any one time and is for the contractor's reference only. If the subcontractor cannot be matched, perhaps because they are not registered with HMRC, the contractor will be given a special verification number unique to each 'unmatched' subcontractor. These numbers are important and the contractor must record them on the subcontractor's payment statement(s) – see below.
Paying subcontractors and making deductions
Contractors must pay subcontractors in the way HMRC have told them to. That is, gross payment to any subcontractors who have agreed this with HMRC and payment under deduction at the standard rate for any other registered subcontractors. Subcontractors that were not 'matched' during the verification process must have deductions made from their payments at the higher rate.
Subcontractor's payment statement
Contractors must give a statement to each subcontractor from whom they have made a deduction, whether at the standard rate or the higher rate. The contractor can either issue a statement to cover all payments in a tax month or, if preferred, issue a statement with each payment if this is more frequent. Statements must be issued within 14 days of the end of the tax month in which payment was made (i.e. for payments in the month to 5th May 2007, statements must be issued to subcontractors by 19th May 2007).
If HMRC gave an 'unmatched' verification reference number during the verification process, contractors must enter this on the statement. 'Unmatched' subcontractors will need these verification reference numbers to get refunds later.
Statements can be in any style the contractor chooses but they must contain certain information and be in writing, including by fax. The statement can also be issued electronically, where both parties agree to this method.
Statements do not have to be issued to subcontractors who are paid gross.
Contractor's monthly return
Contractors must make a return to HMRC every tax month showing the payments made to all subcontractors, whether paid gross or under deduction. It must show the subcontractors' names, reference numbers, the payments made to them and any deductions made, as appropriate.
HMRC should send contractors the monthly return in plenty of time, with subcontractors' names and reference numbers already on it for those subcontractors previously used by the contractor. Contractors must send back these returns to reach HMRC within 14 days of the end of the tax month to which they relate. Nil returns must be made if no subcontractors have been paid in the month.
There will be penalties if HMRC receive returns late and, if the contractor has gross status as a subcontractor, this status may be at risk due to the “compliance test” outlined above. Monthly returns can also be sent electronically or over the Internet.
It is important to make sure you have systems in place for producing this information in advance of the start date of 6th April 2007.
There are no annual returns under new CIS.