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The changes to the Construction Industry Scheme that take effect from 6 April 2007 are intended to address industry complaints that
- the scheme is costly and cumbersome to administer
- holders of tax cards and certificates have to travel to present their documents to the contractor, with associated business costs
- many contractors treat subcontractors as being self-employed simply because they hold a certificate or registration card, thereby putting employers who do the tests properly at a disadvantage
- the procedures for completing vouchers depend on the type of card or certificate and are complex and expensive to administer
- most CIS vouchers and year-end returns cannot be filed electronically.
The Finance Act 2004 (ss. 57 to 77) provides the framework legislation for the new scheme. After extensive consultation with all interested parties, the Income Tax (Construction Industry Scheme) Regulations 2005 were approved in July 2005, replacing entirely the Regulations for the existing scheme.
The significant changes to the CIS are as follows.
- The use of Tax Certificates to authorise payment without deduction of tax and Registration Cards to authorise payment with deduction of tax on account is discontinued. In their place, subcontractors, individuals or companies, apply to be registered to have payments made to them gross, without any deduction of tax on account.
- If they meet the statutory tests for gross payments, HMRC's computer list will show them as being registered for gross payment.
- If they do not meet the statutory tests for gross payments, HMRC's computer list will show them as being registered for payment under deduction.
- There are three sets of statutory tests, as in the old scheme - the business test, the compliance test and the turnover test. The business test is unchanged but compliance test rules are relaxed somewhat and the turnover tests are simplified.
- The use of Tax Certificates and Registration Cards is discontinued under the new scheme. In their place, the contractor must verify with HMRC whether a subcontractor is
- registered for gross payment,
- registered for payment under deduction, or
- not registered at all.
- HMRC will verify or not verify a subcontractor, as the case may be, and provide a verification reference number that the contractor must retain for use when completing the monthly returns.
- Depending on the results of the verification, there are two percentage rates for calculating the deduction of tax:
- a standard "matched" rate of 20%, where the person for whose labour the payment is made is registered for payment under deduction
- a higher "unmatched" rate of 30%, where the person is not so registered.
- The use of vouchers to record all payments made to subcontractors is also discontinued under the new scheme. In their place, there are new requirements for contractors to
- file a CIS300 monthly return that provides, among other information,
- details of the persons to whom payments have been made under construction contract,
- details of the payments made to those persons,
- a declaration that none of the contracts to which the return relates is a contract of employment, and
- a declaration that the procedures for the verification of registration status have been complied with.
- give each subcontractor who is not paid gross a monthly Payment and Deduction Statement, giving details of the payments and deductions made during the month.
- Each month's CIS300 return will be partially completed in advance by HMRC and may be filed manually, using paper forms, or by HMRC's online service, or by Internet or EDI.
- There will be no year-end reporting and the last annual CIS return to be completed will be for the 2006/07 tax year.
- There are also transitional arrangements that will make it unnecessary
- for subcontractors to register at the start of the scheme if they have a current Tax Certificate or Registration Card
- for contractors to use the verification procedure for a subcontractor who has been paid within the previous two years.
An interactive tool that will be of help to contractors in deciding on the employment status of subcontractors is available on HMRC's website, at www.hmrc.gov.uk/calcs/esi.htm.
The current guidance published by HMRC for the new scheme comprises a detailed guide and a set of factsheets. They are available to download at www.hmrc.gov.uk/new-cis/new_guidance.htm.
The CIS Helpline number for both contractors and subcontractors is 08453 667899 and the service operates 8am to 8pm, Monday to Sunday.
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