UK: Construction Industry Scheme - Zero Tolerance

Last Updated: 22 October 1999

The new Construction Industry Scheme (CIS) rules are in force NOW. For businesses in the building industry, CIS requires major changes to the way they manage their projects; CIS compliance will be central to their profitability.

However, CIS also presents significant risks for many large organisations outside the building sector who are ‘deemed contractors’ - risks of which many are still quite unaware.

The problem

The penalty for not complying with CIS is up to £3,000 per breach. This can really add up. Under CIS, if you have not followed the correct procedures you risk penalties if you pay a subcontractor as an independent contractor, even if you deduct and pay over the correct tax.

The Revenue has granted concessions to ease the transition, but these expire on Bonfire Night. The Revenue’s website states bluntly: ‘From 6 November 1999 we will expect full compliance from every business.’

The risks for deemed contractors

For tax purposes, any entity incurring ‘construction’ costs averaging more than £1 million a year over a three-year period ending with the last accounting date is a ‘deemed contractor’ within CIS. ‘Construction’ can include unexpected items, such as the installation and repair of industrial plant. Organisations may not realise they are within CIS until it’s too late and the taxman is knocking at the door.

Arrears of CIS tax, interest and penalties could seriously affect the financial health of a deemed contractor (for example, an NHS trust or major retail company).

Since construction expenditure is not routine for deemed contractors, their bought ledger departments may not notice that a particular invoice is within CIS.

The risks for businesses in the building industry

  • If the contractor pays the subcontractor gross in error (for example, if the subcontractor produces an old-style 714 certificate), the contractor will be liable for the 23% tax deduction, and incur penalties and interest charges.
  • Even if the contractor deducts and pays over the right amount of tax, the Revenue may charge penalties if the contractor does not carry out the requisite CIS procedures. At up to £3,000 per failure, penalties could be significant if security procedures are not in place. More importantly, the contractor risks losing his own CIS certificate through persistent failure to comply with CIS.
  • If the subcontractor does not hold the appropriate CIS documentation, the contractor will have difficulty applying CIS without impairing relations with the subcontractor. The contractor may face an awkward dilemma: ‘Do I break the tax rules, and incur penalties, or do I lose my subcontractor, and fail to deliver on the contract?’

For further information, speak to your usual KPMG tax contact.

This article is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or determining investment strategy in specific circumstances. In such instances separate advice should be taken.

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