UK: Construction Industry Tax Scheme

Last Updated: 22 March 1999
Construction Industry Tax Scheme

The Treasury has made an Appointed Day Order which will give effect to the new Construction Industry Tax Scheme (the "New Scheme") from 1 August 1999. This gives taxpayers time to put in place the administrative changes resulting from the New Scheme.

The New Scheme will replace the existing tax scheme which was introduced in the 1970s and provides for deduction of tax at source from payments made to certain subcontractors in the construction industry or to their nominees. The underlying purpose of the scheme is to counteract what was perceived to be increasing evasion of tax by labour only subcontractors. The scheme operates by requiring deductions on account of tax to be made when paying a subcontractor for the provision of labour unless the subcontractor holds a certificate denoting that he is entitled to gross payment.

The New Scheme will differ in a number of respects from the current regime to which many people within the construction industry have become accustomed and will reduce the number of subcontractors eligible to receive gross payments for the provision of labour. The New Scheme provides for a new turnover test for subcontractors applying for gross payment certificates and introduces mandatory registration cards for those subcontractors without certificates (to whom payments must be made subject to deduction of tax).

The Regulations underpinning the New Scheme were laid before Parliament in October last year. The main features of the Regulations effect the following:

  • Introduce new style certificates, forms, vouchers and returns to replace the old style documents;
  • Set out the arrangements for registration cards;
  • Put on a statutory footing the exemption from the New Scheme of small payments made by deemed contractors and raise the limit from £250 to £1,000;
  • Set the thresholds for the new turnover tests - £30,000 in the case of individuals and an alternative threshold for partnerships and companies at £200,000 (with partnerships and companies also being able to qualify for certificates on the basis of multiples of the individual threshold);
  • Provide for the turnover tests to be passed on the basis of either three years' or six months' income and prescribe the evidence which may be required to support the declared figures of turnover; and
  • Provide for certain documents introduced under the New Scheme to be transmitted electronically to the Inland Revenue.

In addition, the Inland Revenue have published two extra statutory concessions which they will apply in interpreting the new turnover tests. The first of these will allow all construction income (net of cost of materials) to form the basis of the turnover which may be counted for the purposes of these tests. The second concession will apply where the turnover thresholds are arrived at on the basis on multiples of the individual threshold. Under the new legislation, the turnover thresholds are reached by multiplying the maximum number of partners or directors (and shareholders in the case of close companies) in each of the three years by the individual turnover threshold of £30,000. The concession allows the thresholds for all three years to be based upon the maximum number of partners or directors and shareholders at any point in the last six months of the three year period where that results in lower thresholds.

Finally, the New Scheme will provide for two different types of gross payment certificate, known as a CIS5 and CIS6. The Inland Revenue have revised the guidelines which will determine whether subcontractors entitled to a gross payment certificate will qualify for a CIS5 or a CIS6. Both certificates allow gross payment to be made to the subcontractor but the CIS5 will be easier to use as it will not have to be personally presented to the contractor. The Inland Revenue take the view that this will mean that there will be a greater security risk associated with the CIS5, which means that they should only be given to companies with a good tax history and which can demonstrate a genuine need to hold them. The Inland Revenue have consulted with representative bodies in arriving at the new guidelines which will be applied to all company applications for certificates under the New Scheme. The guidelines provide that in order to qualify for a CIS5 certificate, a company must fulfil one of three conditions, namely it must:

  • be a PLC or a subsidiary of a PLC;
  • have a turnover of at least £5m; or
  • show that operating with a CIS6 would cause substantial difficulties.

Reliance on the last of these will require submission of a detailed business case setting out either an administrative or a commercial need for a CIS5 certificate. The Inland Revenue have stated that they would view an administrative need as arising where using a CIS6 would involve handling a high volume of vouchers each year (they give an example of 300), or an excessive amount of travelling specifically to present a CIS6 certificate (the example given is at least 200 hours over a three year period, or 100 hours in any one of those years). They state that a commercial need would normally arise where the applicant's trade is largely based on work for contractors who will give work only to holders of CIS5 certificates.

For further information please contact Fiona Sutherland, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the Spring 1999 Hammond Suddards Tax Newsletter Update

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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