CIS investigation

The Inland Revenue recently sent out follow-up letters to tens of thousands of construction industry contractors and subcontractors advising them to check the terms of engagement. These letters should be taken seriously.

They form part of the Revenue’s clampdown on improving compliance within the Construction Industry Scheme (CIS), having already doubled the annual number of monitoring visits it carries out to identify subcontractors that it believes should be classified as employees.

Contractors should take immediate action to ensure that their house is in order. There is a real threat that the Revenue could enforce penalties and the reimbursement of paye and Class 1 National Insurance contributions (NIC) for the engagement of any subcontractors who are deemed to be employees.

Contractors should be aware that the Revenue can review their records for the past six years where they feel there have been errors in the identification of subcontractors as employees. They could therefore face significant bills for tax and NIC on the payments, plus penalties.

If contractors are forced to take on subcontractors as employees, they will face additional costs such as holiday entitlements, employers’ NIC, sick pay and the issues of employment rights.

Employee status?

For a long time there has been a popular misconception within the industry that holders of CIS 4 cards are automatically self-employed – this is not the case. The status of each engagement of a subcontractor must be determined by the activities being undertaken and the control imposed.

Contractors should ask themselves a number of questions each time they engage a subcontractor that should help to determine their status:

• do you tell the subcontractor what to do, where to work and how to do it?
• do you supply all tools to complete the job, other than a few hand tools?
• do you supply the bulk of materials, plant and equipment needed on site?
• do you pay a subcontractor a set rate for their work or by the hour, week or month?

If you answer yes to one or more of these questions and currently engage subcontractors on a self-employed basis, it is likely that their employment status is incorrect. The Revenue will argue that they should be employees. Any contractor affected is advised to contact their accountant or read the Revenue’s leaflet IR56 – employed or self-employed? This provides basic information about employment status, tax and NIC.

Future plans

From April 2006, the CIS will undergo a massive overhaul. Many trade associations, professional bodies and industry representatives are currently working with the Inland Revenue to develop the new scheme.

From this date the sector will see a completely different structure to the way in which the CIS will operate. There are fears that it will place significant burdens on the contractor in identifying whether work being undertaken on each contract, regardless of size, is that of self-employment or employment.

The current registration documents, vouchers and annual return will be replaced by a verification system over the internet or via a call centre. This will require the contractor to input details of the subcontractor to confirm registration within CIS and determine whether payments can be made gross or net of tax. If a contractor has paid a subcontractor in the current or previous two tax years, providing the current registration document does not expire until after April 2006 they should pay on the same basis as previously.

Contractors will then be required to submit a monthly return based on the tax month to the Revenue, showing payments to subcontractors and the amount of any deductions. The contractor will also have to certify on the return that they have verified the subcontractors listed and has considered their employment status.

An incorrect declaration or error on this return could result in a penalty up to a maximum of £3000 per return. Failure to verify the status of each subcontractor will result in difficulties in making a payment for the work undertaken and completing the monthly return.

While many consider an overhaul of the CIS overdue, there are concerns regarding the move from self-employment to employment. This could have a serious effect on the construction sector in having an experienced pool of labour.

The Revenue is finalising its publicity plan. However, it is believed the detail required by contractors will not be available until the autumn, which some fear does not allow sufficient time to amend clerical and IT systems at the same time as training staff.