The New Construction Industry Scheme (CIS)
Changes from April 2006?
HM Revenue and Customs have announced changes to the administration of the CIS scheme. Originally intended to take effect from 6th April 2006 this has now been put back to April 2007. Entirely separately they have been carrying out one of their frequent purges on “who is an employee and who is a subcontractor”. This has led to people adding or mixing the two together and thinking that both the administration of the scheme and the rules for who is, and is not, an employee/self-employed sub- contractor are changing. The rules regarding who is, and is not, an employee are not changing – the administration system is.
Administration System
As a result of the changes the new scheme will be referred to as – wait for it – yes – the “new Construction Industry Scheme (new CIS)”! It is intended to remove some of the administrative burdens of the current scheme and, in this electronic day and age, provide alternatives to the paper based process of CIS should that be preferred.
The main changes are:
| • | there will no longer be any need for CIS cards, certificates or vouchers; |
| • | contractors must check or ‘verify’ new subcontractors with HM Revenue & Customs; |
| • | subcontractors will still be paid either net or gross, depending on their own circumstances, but it will be HM Revenue and Customs who tell the contractor which treatment to use during verification, not a piece of plastic; |
| • | there will also be a higher rate tax deduction if a subcontractor cannot be ‘matched’ on our (i.e. the Revenue’s) system. This rate will apply until the subcontractor contacts HMRC and registers or sorts out any matching problems; |
| • | there will no longer be CIS annual returns; |
| • | contractors must make a return every month to HM Revenue and Customs, showing payments made to all subcontractors. This will be sent to them in good time, and pre-populated from existing records. Contractors must declare on their return that none of the workers listed on the return are employees. This is called a Status Clarification; |
| • | nil returns must be made when there are no payments in any month. These can be made over the telephone as well as via the Internet or on paper, but they must be made – there will be financial penalties for failure to submit a return; |
| • | the vast majority of subcontractors registered under the existing CIS rules will be transferred over to the new system and will not have to re-register; and |
| • | new subcontractors, and those that formerly held only temporary registration cards that expired before new CIS starts, will be required to register with HM Revenue and Customs. |
The Revenue produce a number of helpful factsheets:
| • | A quick guide to the new Construction Industry Scheme; |
| • | Registering the new CIS - advice for subcontractors; |
| • | Applying to be paid gross – advice for subcontractors; |
| • | Getting paid by a contractor – advice for subcontractors; |
| • | The monthly return – advice for contractors; |
| • | A contractor’s obligations – advice for contractors; |
| • | The scope of the Scheme – a quick guide; and |
| • | Are your workers employed or self-employed? – advice for contractors. |
Employees/Workers/Self-Employed
In our experience the two most difficult problems we have to deal with are one, where both parties want the relationship to be “contractor to self-employed” but the facts of the relationship are that it is really “employer-employee” and two, a genuinely grey area with the factors indicating one relationship or the other, too finely balanced to call. In either case it will not be Peninsula’s decision that is final – it will be the Revenue’s and the Tribunal’s!
In both such instances the main thrust of our advice is to protect the interests of our client as far as is possible.
In the case of the first problem we will explain to you why we believe that the relationship is that of “employer-employee”. It is very easy when dealing with this issue to get lost in the morass of questions the Revenue (and we!) suggest you consider regarding matters like payment systems, control, Accountants, VAT etc.
To reach our opinion on what the relationship is we have to ask quite a few questions. We are seeking, amongst others, but of primary importance, answers to:
| • | how much control is there by you; |
| • | does mutuality of obligation exist; and |
| • | does it involve the individual personally having to undertake the duties? |
Loads of questions, too complicated – isn’t there a simpler way to determine the issue? Unfortunately not, but perhaps there is one question you can ask yourself that might at least start you in the right direction.
Whilst (unfortunately!) the following question is not infallible a “Yes” answer does pretty well point to an employment relationship and a “No” one to a “contractor/self-employed” one. If the answer contradicts your interpretation of your operating relationship you need to take advice urgently. That question is:
“Does this person only work for you and have they done so for quite a while?”
In some, rare circumstances, even the most obvious relationships are not what they seem in law - it is quite possible for you to employ someone (an employee) during the day who, as the proprietor of his/her own cleaning company has a commercial contract (self-employed) to clean your building at nights and who undertakes casual, but undertakes personally, to carry out security duties at weekends as a worker! There might even be an exceeding the 48 hour maximum working week limit there somewhere!
The problems you face getting it wrong are:
| • | you terminate the relationship; |
| • | the “self-employed” person makes a claim to Tribunal for unfair dismissal, redundancy pay etc. as an employee; |
| • | the Tribunal conducts a preliminary hearing to consider the actual relationship and decides it was in fact an employment one; |
| • | you face a full merits hearing and lose - it’s almost a foregone conclusion since, because you did not believe they were an employee, you did not issue a Statement of Main Terms and Conditions of Employment. (costs = 2 or 4 weeks’ pay); |
| • | because he/she was not an employee you did not follow a fair procedure complying in all respects with the requirement of statutory disputes. (cost = automatically unfair dismissal = basic award + compensatory award = up to 50% “on top”); |
| • | and now for the really bad news – the Revenue are informed, by the Tribunal, that this individual has been deemed to be an employee. Consequently the Revenue now want all the back taxes, PAYE, NI, etc. that they should have had from both the employee and employer. The employee is rarely in a position to pay so the Revenue then seek those missing payments from the employer. And by the way then they can impose interest and penalties (up to 100% without having to go to court) on top! |
| • | and now for the really, really bad news the Revenue wants their dues for all your other ‘subcontractors’ as well because they have an Employment Tribunal decision to support them! |
You can see therefore why it might be a good idea to take our advice and follow it!
Ironically with the second problem, i.e. it is very evenly balanced as to what the relationship is, the above question, “Does this person only work for you and have they done so for quite a while?”, may prove to be the deciding factor but the eventual problem is still the same one – if it goes to Tribunal what will they decide?
It matters not one jot to them that both parties genuinely believed it to be a contractor – self-employed relationship (or that Peninsula did as well) they will decide – and they might just not get it right!
It must be in your interest to take very careful stock of your current contractual relationships – even those temps from the agency might, if they have been with you a while, have become your employees without you realising it. Control can evolve to you over quite a short period.
It is vital you have issued the correct contractual documentation – indeed if you are unable to produce a proper contract for services for each of your contractors, when asked to do so by the Revenue, it is almost automatic that they will decide the relationship is an employer/employee one.
And remember if you have taken advice and followed it you, will have the comfort of knowing the indemnity scheme will be there to support your costs in resisting the Tribunal claims(s).
Since the changes in the administration scheme have gone back to April 2007 you have therefore some breathing space in this regard. However the “purges” are not likely to stop in the interim - indeed since every such purge increases income for the Chancellor their frequency is likely to increase. Please act now by re-examining your contractual relationships and ensure you protect your bottom line.