The New Construction Industry Scheme
The New Construction Industry Scheme - April 2007
The new Construction Industry Scheme (CIS) of HMRC starts in April 2007. The system will work online and contractors will make returns online on a monthly basis. This note is not about the niceties of registration and making deductions in accordance with the requirements of HMRC. Minor contract changes will be required. This note concerns a new element of the monthly reporting requirements, namely a declaration that the contractor has considered the “employment status” of all sub-contractors.
HMRC has produced a short guide on the subject (CIS 349 HMRC 10/06) which sets out the issues on status. These issues are not new and are the same whatever the industry and do not relate solely to the new CIS nor the construction industry itself.
A copy of this guide is attached for ease of reference. By way of further assistance there is an Employment Status Indicator (ESI) which is referred to at the top of page 3 of the guide which I think is worth using. Put in the appropriate replies to the questions raised. Print out the answer and file it. That is assuming that the ESI shows the individual is a sub-contractor. If not you will need to think again.
The new CSI makes the obligation of the contractor to consider the worker’s status much more explicit than previously.
Some suggestions
Without a contract between the contractor and the worker it will be difficult for the contractor or indeed the worker to identify the elements of self-employed status required in the relationship. It is our view that a standard contract must be prepared by a contractor who must obtain the signature of a sub-contractor to be able to demonstrate at contract level that employment status is not applicable. The reality of the relationship will need to match the terms of such a contract - see the ESI.
Clearly now is a time to review where there may be grey issues affecting some existing sub-contractors and to consider whether they ought to be reallocated as employees.
Long service, particularly if a worker spends the majority of his/her time working for the same contractor, does not of itself demonstrate employment status but is something of an indicator. This would be the case if the other indicators of sub-contractor status were not present and could not be evidenced by a written contract. The fact that such workers are in the old CIS scheme with certificates or registration cards will not stop HMRC forming a view that employment status applies.
The consequences of getting it wrong
Incorrect declarations will be offences. There are fixed penalties for certain errors by contractors operating the CIS and if HMRC takes the view incorrect declarations are intentional then the position can be serious. Frequently contractors who use sub-contractors are also sub-contractors themselves and HMRC does have the power to cancel the contractors own gross payment status if the contractor also operates as a sub-contractor. HMRC may determine that payments made to a sub-contractor who is deemed to be an employee are net payments, gross them up and charge penalties and interest to the contractor and this can be an expensive exercise. A tax case last year indicated that HMRC will not give the contractor credit for any tax that the sub-contractor has already paid.
Aside from the new CIS issues employee status will give additional employment protection to such person.
Appropriate steps
Whilst preparing for the changeover to the online system we recommend that contracts between contractors and sub-contractors are reviewed . We refer to the grey issues on status and these should be reviewed now with a reminder to keep these situations under review in the future. Those who are negotiating the contracts with sub-contractors need to be aware of the danger areas and consider whether this new CIS is appropriate in particular cases.
We can assist in this process, provide guidance on contracts and training for those running sub-contractor hiring.