Technical Briefings
10 February 2010
Construction Industry Scheme – what are your obligations?
With HMRC continuing to withdraw subcontractors’ gross payment status at an alarming rate, this article provides a timely reminder of the obligations under the current Construction Industry Scheme (CIS), compliance with which is essential in order to retain gross status.
For subcontractors working within the CIS, the ability to receive payments gross rather than suffer a 20% tax deduction at source is often of fundamental importance to the health of their business, especially in the current economic climate. Since the introduction of the current CIS in April 2007, HMRC have imposed tough compliance obligations which are applied inflexibly and without discretion.
A failure to meet these obligations results in the swift withdrawal of gross payment status, which can often have a potentially disastrous affect on a subcontractor’s ability to carry on in business.
The subcontractor can find himself at an immediate cashflow disadvantage, with the ability to pay wages and suppliers severely reduced. In addition, possible sources of future work may start to dry-up as contractors refuse to provide further work.
Of those subcontractors considered for review by HMRC each month, between 30-40% are having their gross payment status withdrawn for “compliance failures”.
It is essential therefore, that the following compliance obligations are adhered to. These are of particular importance to the subcontractor also acting as a contractor and engaging further subcontractors in his own right.
A return is required from contractors by the 19th of each month, regardless of whether or not any payments have been made to subcontractors in the period.
- Payment of tax deducted under both CIS and PAYE (where applicable),
- must be made to HMRC by the 19th of each month (22nd if paid electronically).
- A written statement must be provided to every subcontractor from whom tax has been deducted by 19th of the following month
- Contractors should not underestimate the importance of the status declaration contained on each monthly CIS return. The contractor is declaring that the status of their workers has been reviewed, and they are satisfied that all are self-employed. Advice should always be taken where the status of an individual is in doubt.
- Contractors and subcontractors should ensure that their year-end CIS and PAYE returns are received by HMRC on time.
- Matters relating to contractor’s and subcontractor’s own personal tax affairs should be maintained in an equally exemplary manner. All personal returns and liabilities should be filed and paid in a timely manner, including payments on account under self assessment.
Where HMRC identify that a compliance failure has taken place, the contractor/subcontractor will receive a letter advising that payment status will be revised from gross to 20% deduction within 90 days. Where there are grounds for appeal, this should be made within 30 days.
Where HMRC can be assured that any compliance failure was a one-off, it is likely they will agree that the gross payment status can be retained. However, in such cases HMRC will also state that future appeals against compliance failures will be unsuccessful.
It is worth noting that although the CIS obligations are strict for contractors/subcontractors, there are also strict requirements for HMRC which they often fail to meet. As a result of these HMRC failures many decisions are invalid, and therefore advice should always be sought where withdrawal of gross payment status is concerned, even in a situation where a previous successful appeal has been made against withdrawal.