How the Construction Industry Scheme is about to change
The government is currently in the final stages of its consultation process on proposed changes to the operation of the Construction Industry Scheme (CIS).
As around one quarter of my clients are directly or indirectly involved with the scheme, I thought I would look more closely at the proposals.
The consultation paper headed “Improving the operation of the construction industry scheme (CIS)”, should be compulsory reading for anyone connected with the building sector as the proposals will affect everyone.
As usual, the paper’s opening rhetoric of “we’re making these proposals to reduce the administrative burden on contractors and subcontractors” cannot mask the real motivation behind the proposals, which is to reduce HMRC’s costs. Many of the proposals do not necessarily “reduce” but may have the unintended beneficial consequence of simplifying the regime for those of you in the front line.
How the CIS is likely to change
- Changes to the gross payment rules
- Changes to the compliance test
- Requiring online submissions
- Online Appeals
- Nil Returns
- Changing the Verification Process
Gross Payment Status.
Put simply, gross status is where a subcontractor is paid in full without the main contractor automatically deducting 20% notional tax from the payment.
HMRC is concerned that a number of the smaller multi-partner/director businesses are having cash flow problems because their turnover is too low for them to qualify for gross status within the scheme.
The test for gross status is calculated by multiplying the £30,000 minimum threshold by the number of directors/partners. Should this figure be greater than the net construction income in the previous 12 months, then the ‘alternative’ test applies. To pass this test, the business must either be a company or partnership (not sole trader) whose total net construction turnover exceeded £200,000 in the previous 12 months.
The proposal is for this upper limit to be reduced possibly to as low as £100,000 per partnership/company; the £30,000 minimum test will remain and I welcome such a proposal.
As well as the turnover test, gross status is dependent upon compliance. All it takes is one late payment and gross status can and usually is withdrawn. Late tax payments (not least of PAYE) may not be the fault of the partner in a multi partner business but gross status is still cancelled. Therefore the compliance test is to be made less restrictive by withdrawing the requirement for tax payments to be made on time, but timely submission of returns remains.
CIS Online Submissions.
The paper also proposes the mandatory online filing of CIS returns. VAT and RTI returns are already be submitted online and HMRC wants to set the same requirement for CIS returns from October 2016.
Many employers submitting PAYE RTI returns also submit CIS returns so joint submissions make sense, and would have the added bonus of automatic offset. HMRC said it is working towards a system that will also enable electronic amendments rather than having to ring the CIS Helpline as currently applies.
Online Appeals Service.
Any penalties incurred are automatically and instantly generated, but any appeal must be written with replies being received weeks later. While this is going on, however, HMRC’s debt management hit squad (DMB) will be on its way to collect supposedly underpaid tax. So with mandatory submission of CIS returns, to be amalgamated with RTI submissions, the penalty process should operate in a similar fashion. The reduced paperwork will save HMRC considerable sums while contractors will worry less if they can see online that an appeal has at least been recognised and that they can forget about the dreaded “knock on the door”..
The statutory requirement for Nil returns is to be repealed meaning that submission is no longer legally required, which means that a late Nil return will no longer attract penalties. The problem here is that if such returns are not submitted how will HMRC know that no payments have been made rather than no returns submitted? As such the Nil return remains apparently on a “voluntary basis”.
In my experience the current verification process works, you submit an online request and the verification number appears immediately. However, the process of searching through the webpages to establish whether a subcontractor has been verified previously could be made easier. HMRC intends to make the system “more robust”, at least with the addition of a search button. But the department would also benefit here from a reduction in the number of calls to the CIS Helpline as will every accountant in the country.
As with return submissions the verification process is to be made mandatory online. But the proposal goes further by making verification possible via a smartphone app in a similar way that DMB officials are now supposedly enabled.
An important proposal is the suggestion that the verification process be “scaled down” and only used for those subcontractors who have gross status
A Tax Accountant’s View
The current treatment of CIS deductions by HMRC is a scandal; they like to act as your bankers but they don’t want to send you a statement of what they owe you. They have the records and should be providing the company with a copy as a matter of course, not asking you what you think they owe you.
>HMRC wants to give both contractors and subcontractors access to a new online account where they can view payments received and paid. What HMRC does not make clear, however, is whether this information will be available to Accountants which is important for some of our last academically gifted builder clients, many of whom whilst being good at their trade wouldn’t know a debit from a credit if it smacked them in the face!
One proposal that I very much welcome is to allow sole-traders and partnerships to transfer their CIS reference number when they become limited companies. The VAT reference is automatically transferred but currently not the CIS.
Whatever the practicalities, I sincerely hope that the new digital account (whatever form it takes) will banish the kinds of delaying tactics all too common with CIS refunds. But given HMRC’s track record on other digital strategy initiatives, I have my doubts as to how long it will take the new CIS system to get set up and run smoothly.