I have recently attended two further construction industry training board courses. One of these was on the new construction industry tax rules and the second on status inquiries for workers in the construction industry i.e. whether they are employed or self-employed.
New Tax Rules
The Inland Revenue has agreed to postpone the introduction of the new rules from 6th April 2006 to 6th April 2007. This has given the industry a small breathing space to sort matters out. In brief the scheme from that date will be as follows:-
1. Payment classifications will be changed.
2. There will be no gross payment certificates or registration cards. Matters will be dealt with by telephone inquiry.
3. There would no longer be any CIS vouchers but a statutory declaration will be introduced. Monthly returns will be submitted to the Construction Industry Processing Centre and there will be a very strict penalty regime if these are not submitted on time.
Non-compliance with the scheme in any way will put the holding of a gross payment status into jeopardy and could seriously affect the running of companies.
Holders of existing CIS5 and CIS6s that expire after 6th April 2007 will automatically receive gross payment status. This will not be revoked unless there is non-compliance or non-payment. Similarly, those with CIS4 cards will be transferred to the new scheme upon deduction of 18%. There is also a new category for those with no cards who are not registered. They are entitled to be paid under deduction of 30%.
Before payment is made to a sub-contractor, a contractor must verify with HM Revenue Customs whether the person to whom is proposing to make a payment is registered for gross payment or under-deduction of tax. After that verification has been received, he will not need to seek further authority. It is the responsibility of the Inland Revenue to inform the main contractor if there is any change in status.
As stated above, monthly returns will have to be submitted to HM Revenue and Customs of all payments showing the contractors name, their unique taxpayer reference and the tax month to which the payment relates. The returns must be submitted even if they are nil returns. There will be automatic penalties for non-submission of returns. A written statement of payments must be made to all sub-contractors paid under the deduction of tax. This must be supplied to the sub-contractor within 14 days after the end of the income tax month.
For non-submission of monthly returns, there is an automatic penalty of £100 for any number of sub-contractors up to 50 and then £100 for each additional 30 sub-contractors. Penalties are due each month if the return is late and may also be pursued for incorrect or incomplete returns. Failure to comply can also lead to a cancellation of gross payment status.
We believe it is absolutely essential that all contractors and sub-contractors understand their obligations under the scheme and seriously advise that anybody who has any queries or doubts about the scheme should contact us immediately.
As stated above, the second course I attended was on employment/self-employment status. This is a potentially even bigger minefield than the regulations regarding the new certificates.
The Inland Revenue have, for some years, been trying to get as many workers in the construction industry taxed under PAYE Regulations. They are currently carrying out status inquiries throughout the industry. If this occurs and workers who should have been employed have been treated as self-employed, they are assessing for tax and national Insurance contributions that should have been paid, together with interest and penalties on those. They are also going for backdating for the statutory six year period. As such, therefore, if the status is wrongly dealt with, companies tax liquidity positions can be seriously affected and in many cases may result in liquidation or bankruptcy.
However, on a brighter note, our lecturer pointed out that if contracts with sub-contractors are drawn up correctly, the self-employed status should be relatively easily maintained.
It is essential that all contractors have written contracts with their sub-contractors, preferably for each individual assignment. We should point out, at this stage, the fact that if the Inland Revenue have issued a CIS certificate to a sub-contractor does not mean that they have accepted that they are in business on their own account. This is a matter of the fact.
In brief, drawing up a contract for self-employed sub-contractors should be kept fairly simple. The contract should be based around what are known as four key pillars. These are as follows:-
1. Mutuality of obligations.
2. Substitution.
3. Control.
4. Financial risk.
Mutuality of Obligations
If a sub-contractor is genuinely in business on his own account, he is under no obligation to accept work given to him by the main contractor. Clearly, an employee would have no choice in this matter. He can also, at any stage, carry out other work for other customers without notifying the main contractor. Clearly, also the main contractor has no obligation to find the sub-contractor any further work other than the task he is already on.
Substitution
One of the major points of self-employment is the ability to send a substitute along to carry out the work in place of the named sub-contractor. This cannot be refused by the main contractor provided that the substitute is fully qualified. This substitute may be used in cases of the sub-contractor having work to carry out for other customers, holiday or indeed for any other matter.
Control
There should be no control over the work of the sub-contractor clearly beyond control that is essential to plan a project. The main contractor cannot in any way instruct the sub-contractor in how he does his work, when he does it or at what speed he does it. In addition, he cannot offer him payment for holidays, illness etc.
Financial Risk
It is essential that the sub-contractor, if in business on his own behalf, takes financial risk of the project. Any work should be remedied at the cost of the sub-contractor who should also be required to provide his own plant, materials etc. It is also helpful if the sub-contractor has his own public liability insurance. There should also be retention clauses for faulty work.
The Inland Revenue are currently going on “fishing expeditions” in respect of employment status. They are issuing leverage letters to both contractors and sub-contractors. It is essential that all sub-contractors should inform their main contractor if they receive these letters before agreeing to attend any interviews. If any clients have received these leverage letters, would they please contact us immediately.
If you wish to pursue these matters further, would you please contact us at either of our offices and we will endeavour to help. We are considering running a seminar of these subjects if there is sufficient interest.
We must stress that to do nothing is not an alternative at the present time.
Montague Lynds - Clifford Towers, Chartered Accountants
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