Essentially, the reforms recognise that the registration card and certificate-and-voucher systems are cumbersome and should be replaced with a verification system and periodic returns.
Periodically, the contractor will need to make a return to the Inland Revenue detailing payments to each subcontractor. The Inland Revenue will then send the appropriate part of the return to each subcontractor who will need to check the detail with the receipts he has received from the contractor. Unfortunately, this system will offer many more opportunities for error than when everyone got a copy of the same voucher.
As part of the verification process, the contractor will be expected to make a declaration as to whether the subcontractor is employed or self-employed. The Inland Revenue has said that the concept is not new, as it merely reinforces current procedure with a formal system (with associated penalties for incorrect reporting).
This proposal puts a totally unacceptable burden on the contractor. Employment status is a grey area, as testified by many court cases. Numerous factors are relevant in determining who is employed and who is self-employed, and status may change mid-contract.
Large contractors and subcontractors have their own problems that have not been addressed by the proposals. Contractors often form new companies – special purpose vehicles – for different projects. Those companies may all qualify as contractors, and be required to do their own sets of vouchers and returns, often for the same subcontractors.
The situation can be even more unfair for subcontractor SPVs without a track record. They cannot get a CIS6 or CIS5 card unless they pass the turnover limits, and this is impossible for new companies. The limits are waived for subsidiaries of registered companies but SPVs are usually fellow subsidiaries or joint ventures. The rules should be changed to allow for a business case to be made for CIS6 registration in the case of new companies.
Helen Demuth is a director at independent professional and financial services group Smith & Williamson.