UK: Construction & Tax Law e-Update

As from April 2006 the new Construction Industry Scheme (‘CIS’) will come into operation and HM Revenue & Customs (‘HMRC’) have published new guidance and information sheets to provide businesses with an introduction to the new system in advance of its implementation.

The new guidance and Fact sheets can be accessed at: http://www.hmrc.gov.uk/new-cis/new_guidance.htm

Under the new CIS, subcontractors will no longer need certificates or CIS 4 registration cards. Instead, contractors will need to "verify" the status of subcontractors with the Inland Revenue to establish whether to pay gross or under deduction of tax.

Subcontractors not registered with HMRC will have to be paid under deduction of tax at a higher rate (replacing the requirement not to pay a subcontractor without a CIS 4 registration card).

Vouchers will also be phased out, and replaced by a written statement of the amount paid and tax deducted which must be issued by contractors.

Contractors will have to submit to the Inland Revenue a detailed monthly return, containing all the information currently contained in the contractor’s annual return.

As part of the monthly return, contractors will have to make a declaration that the employment status of subcontractors has been considered, and that none of them are employees.

In advance of the introduction of the new CIS scheme, HMRC have been investigating the employment status of many subcontractors, with a view to recategorising them as employees and claiming back taxes from contractors. Contractors who have concerns about the employment status of their workers should take advice about this as soon as possible.

Failure to comply with the new CIS scheme requirements brings the risk of substantial penalties, including £3,000 for failure to supply a written statement to subcontractors, as well as penalties for late or incorrect monthly returns, at the rate of £100 for each 50 subcontractors, for each month, and errors in returns include errors in the employment status declaration.

The new suite of building contracts published by the Joint Contracts Tribunal Limited (‘JCT’) provides simply that where the Employer is a contractor that the Employer’s payment obligation is subject to the provisions of the CIS. This is compatible with current CIS and the new CIS and relies on the Employer and the Contractor knowing what their duties are under the CIS.

Certain of the standard form project agreements published for use in Scotland and England (e.g. the NHS standard form) contain a provision dealing with compliance with current CIS and these will need to be adjusted as necessary to provide compatibility with the "new CIS."

The material contained in this e-update is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

© MacRoberts 2005