Take advantage of the fact that the Construction Industry Scheme has been postponed 12 months because, make no mistake, HM Revenue means business
HM Revenue & Customs has delayed the introduction of the Construction Industry Scheme until 6 April 2007, but developers and contractors would be foolish to put off implementing a system of best practice.
The Revenue appears determined to force as many subcontractors as possible to be treated as employees. The tax status of a worker is a complex and technical area, so when inspectors undertake random PAYE visits to premises there are some useful points for firms to bear in mind to ensure matters run smoothly.
The visiting inspector’s line of questioning will usually focus on factors that indicate the worker is employed. Many of the points raised by the inspector will refer to rates of pay, the provision of materials and the payment of travel expenses. These can be used as indicators of the status of a worker, but they have not been referred to as important factors in any court decisions where firms have challenged the Revenue.
If the Revenue is successful, it will insist that the workers be treated as employees and will seek to collect employers’ National Insurance on any payments previously made by the contractor. The inspector can apply this to any payment made in the previous six years, although in practice this will usually be restricted to two or three years. This will have an immediate cost to the contractor of 12.8% of all payments made to the self-employed worker.
Aside from the financial consequences there will also be long-term legal implications, as the worker will have increased rights as an employee.
An effective tool to counteract any inquiry into the status of a worker is a written contract. A separate contract should be issued for each engagement, but if this is impracticable it is possible to issue a rolling contract. If this contract is correctly prepared and adhered to most subcontractors should be able to continue to operate as self-employed individuals.
A written contract drawn up now will continue to be effective after April 2007 because the status rules do not change. After that date contractors will be required to complete a status declaration each month. It is essential that a contractor treat all subcontractors correctly, as the Revenue can charge a penalty of up to £3000 for each incorrect statement. If the same subcontractor has been incorrectly treated as self–employed on a number of statements then there could be a £3000 penalty for each error.
The construction scheme compliance test does not allow for minor errors, but will ensure that the Revenue receives all payments on time
Other changes will be that the CIS cards and certificates will no longer be used, and there will be no annual return to complete. These will be replaced by monthly payslips, monthly payment summaries and the monthly status declaration.
A verification system will be introduced in which a contractor will be required to confirm the payment status of a subcontractor with the Revenue to determine how much tax is deducted. This is yet another attempt by the Revenue to ensure that it is able to monitor all individuals working within the industry.
Any subcontractor that cannot be verified will have tax deducted by the contractor at an increased rate. The rate is yet to be announced but it is believed it will be 30-40%. The Revenue thinks this will reduce the amount of unpaid tax from unregistered subcontractors.
It is important that contractors understand the payment status verified by the Revenue is just an indicator of the amount of tax they must deduct on payments made to a specific subcontractor and is different to the tax status; the tax status of a subcontractor must be determined prior to obtaining the payment status.
Finally and perhaps most importantly there is the compliance test. This requires all PAYE/NIC to be paid within 14 days of the due date. If the contractor or subcontractor fails to pay on time they lose the right to receive their income gross. This penalty will hit businesses hard because being taxed at source will affect their cash flow. The test, which will be over a 12-month period, does allow for minor errors, but will ensure that the Revenue receives all payments on time.
As with all Revenue initiatives there will be penalties for non-compliance and these will depend on the nature of the offence, but will range from £300 to 100% of any unpaid tax.
Simon Massey is a tax partner at Menzies Chartered Accountants. Email: firstname.lastname@example.org