Introduction

The Construction Industry Scheme ("CIS") which is, as the name suggests, a special tax deduction scheme for the construction industry, was introduced in 1972, partly in response to the issue of engaging workers on a cash-payment basis. Parliament sought to ensure that National Insurance and PAYE tax was paid where appropriate.

The current CIS has been in place since 1999 and is administered by HM Revenue & Customs ("HMRC"). The scheme relies on paper vouchers, cards and certificates to evidence payments between contractors and subcontractors. It is widely regarded as unwieldy and overly compliance oriented. Indeed, many consider that the implementation of the existing CIS has been riddled with problems from the outset, particularly in relation to the supply of vouchers and the costs of compliance.

Reform of the CIS

A new CIS is to come into force on 6 April 2007. The Government has set three broad aims for the revised CIS:

  1. To reduce the regulatory burden of the Scheme on construction businesses;

  2. To improve the level of compliance by construction businesses with their tax obligations; and

  3. To help construction businesses to get the employment status of their workers correct.

The new CIS will dispense with cards, certificates and vouchers. These will be replaced by:

  1. A registration process, which can now be done electronically and subcontractors will also now be informed whether they should receive payments in gross or net);

  2. A verification process, whereby a contractor must contact HMRC to confirm that the contract is one of self-employment (rather than as employer-employee) and ascertain whether the subcontractor should be paid in gross or net; and

  3. Payment by contractor to subcontractor direct – in accordance with the instructions given by HMRC.

In addition, the HMRC advises (and for full details see the government website to be found at www.hmrc.gov.uk/new-cis) that there will be the following changes:

  1. There will be a higher rate tax deduction if a subcontractor cannot be 'matched' on the HMRC system. This rate will apply until the subcontractor contacts HMRC and registers or sorts out any matching problem;

  2. There will no longer be CIS annual returns;

  3. Significantly, contractors must record and report payments made to subcontractor on a monthly basis to HMRC, showing the amount paid and, where payment has been made on a net basis, the amount of materials and deductions. Contractors must declare on the return that none of the workers listed on the return are employees. This will be called a "Status Declaration";

  4. Nil returns must be made when there are no payments in any month. These can be made over the telephone as well as via the internet or on paper, but they must be made - there will be financial penalties for failure to submit a return;

  5. The vast majority of subcontractors registered under the existing CIS rules will be transferred over to the new system and will not have to re-register; and

  6. New subcontractors, and those that formerly held only temporary registration cards that expired before new CIS starts, will be required to register with HMRC;

Significantly, under the new CIS, the onus will be on the hirer to satisfy itself that a subcontractor is genuinely self-employed. The hirer will be liable for underpaid PAYE tax and national insurance when a worker has incorrectly been paid as self-employed.

Employed or Self-Employed?

According to the HMRC website, in order to answer the question of whether a particular worker is employed or self-employed:

"…it is necessary to determine whether the person works under a contract of service (employees) or under a contract for services (self-employed, independent contractor). For tax and NICs purposes, there is no statutory definition of a contract of service or of a contract for services. What the parties call their relationship, or what they consider it to be, is not conclusive. It is the reality of the relationship that matters."

The employment status of a subcontractor in the current or previous two tax years will determine future status. It is therefore important that status is determined sooner rather than later. Bear in mind too that HMRC is not the sole arbiter of employment status; it is a legal issue and HMRC’s viewpoint can be contested.

Conclusion

Whilst the CIS appears to have been simplified, it has yet to be put into practice. Whether the government’s aims in relation to the new CIS (namely: reducing the regulatory burden, improving levels of compliance and ensuring correct subcontractor classification) will be achieved is far from clear.

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