Unanswered questions

The Construction Industry Scheme (CIS) is changing, and amid the cries of “not again!” there are warnings that, this time, HM Revenue & Customs (HMRC) really does mean business and will crack down on those who do not comply.

Aside from a change in forms and methods, the single most significant change is that, from April 2006, contractors are going to have to decide: are my individual subbies (currently CIS4 holders) genuinely self-employed (and thus payable under the CIS Regime) or are they employees who should have deductions made under PAYE, with bids being priced accordingly?

Contractors will be required to declare each month on their HMRC return that they are satisfied that their subbies are genuinely self-employed. Failure to correctly identify the status of the individuals will mean the return is wrong – which is illegal and could attract significant penalties.

How is the new regime going to work?

In theory, when a new subbie is engaged, they will simply need to provide their name, their “unique taxpayer reference” and their National Insurance number to the contractor. They will not need to physically turn up to register or show any documents. Although large subcontractors are welcoming this, it has prompted fears that individuals will be able to use each other’s ID to register with a contractor for work.

The contractor will then contact HMRC who will tell them how to pay the individual – either gross (usually for those who would have held CIS6 cards) or with deductions (CIS4 holders) assuming, of course, that the contractor and HMRC are satisfied the individual is not an employee. There are provisions where subbies are not registered, including making higher-rate emergency deductions.

Additional guidance on employment status is going to be available from the HMRC. However, this has not appeased many critics of the new system. HMRC and the government have been accused of simply looking for a way to increase takings. Also, there is concern that the employment status produced by some sort of tick-box exercise will not provide the correct outcome in an extremely complicated area of employment and tax law.

Anyone who has ever been on hold at the end of an HMRC helpline will be wondering how well it will cope

Concerns have also been raised about what will happen to contractors who genuinely believe the status is correct (say, having completed the tick-box exercise) but where HMRC later finds that the individual is in fact an employee. Will there be any kind of amnesty? Or will the contractor be faced with the tax bill and the associated penalties despite taking the step of checking with HMRC first? The potential difficulties in this area are obvious.

All change?

As with any new system, there are bound to be teething problems. HMRC has already delayed the implementation of the new regime by a year, in no small part to get itself ready for the change and has firmly stated that the start date is April 2006 and will not be delayed further.

However, there are major concerns that HMRC is not itself going to be ready. With rumours that the internet registration facility is not going to be available on time, HMRC will have to expect calls from contractors trying to register new subbies at the start of any major project. Also, for smaller firms that do not have access to the internet, registration via the phone will be the only way to register new starters. Anyone who has ever been on hold at the end of an HMRC helpline will be wondering how well it is going to cope.

Most significantly perhaps is that early indications are that many subbies will be reclassified as employees, requiring a huge mind-shift within the industry. Subbies themselves, who, apparently want to be treated as self-employed, may need grudgingly to accept their new status including increased deductions from payments. The reassurance from construction union UCATT of the employment benefits that await them appears to be cold comfort.

Contractors, who would be looking at increased labour costs, may have to bid on the basis that many workers will be employees and hope that competing bidders do the same to create the level playing field that campaigners have been hoping for.