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The common pitfalls of the Construction Industry Scheme
11 November 13 | By: Jas Jhooty
This week we look at the common pitfalls surrounding the Construction Industry scheme (CIS). A series of questions are presented that have proven to highlight particular problem areas of CIS.
Have you spent more than £1 million per year on construction work over the last three years?
This question is applicable to all businesses, not just those involved in the construction industry. If the answer to this question is yes, then you will be considered to be a “deemed contractor” and you will have to be part of CIS.
Do you operate CIS?
If you are in the construction business or if you are a “deemed contractor” then you will be part of CIS and you should have advised HMRC to set up a CIS scheme for you. Strict monthly penalties can be imposed even for failing to let HMRC know that you have no subcontractors (providing you have previously registered for CIS).
Do you check that all of your construction workers are allowed to work in the UK?
The contractor must ensure that all sub-contractors working for them are entitled to work in the UK. Workers from European Economic Area countries are entitled to work in the UK. Problems may arise with other workers who are on a short-term visa which may become out of date during the course of a building project.
Is the status of self-employed workers checked?
Many contractors wrongly assume that as the subcontractor has registered with HMRC for CIS purposes, they are automatically classified as being self-employed. This can be a very costly mistake to make. Being registered as a sub-contractor under CIS does not negate the requirement to correctly identify the employment status of a worker. The following is a list of some of the questions that must be answered to correctly determine an individual’s employment status: -
- Is the service of a personal nature?
- Is there a mutuality of obligation?
- What degree of control does the engager have?
- Has the worker the right to substitute their work to someone else?
- Does the worker provide their own equipment?
- What is the degree of financial risk/ opportunity to profit enjoyed by the worker?
- Does the engager provide Benefits-in-Kind to the worker?
- Is the worker part and parcel of the organisation?
It is also important to remember that one of the questions on the monthly CIS declaration is whether or not the contractor has checked the employment status of all workers. If it transpires that sub-contractors paid as being self-employed should actually have been classified as employees then each month’s CIS declaration will be deemed to be incorrect and could attract a penalty of up to £3,000, (£36,000 on an annualised basis).
Have you verified all the subcontractors who have been paid this month?
Each month contractors have to ensure that they have verified each sub-contractor who they have paid. Tax of either 0%, 20% or 30% needs to be deducted from their labour costs. HMRC determine the amount of tax to deduct depending on the sub-contractors recent compliance history.
There can be scenarios where a particular sub-contractor has sent their tax returns to HMRC late, so HMRC have changed the rate from 0% to 20%. This change should be notified to the contractor. The contractor in turn must keep a record of any changes of tax rates.
Similarly where new sub contractors are used they have to be verified with the CIS helpline. The contractor will be given a reference for the telephone call which will be the evidence that the call was made and the tax deduction they were advised to use. This evidence must be retained.
Have you made a monthly CIS summary for each subcontractor where you have made a deduction?
Each month the contractor must provide a summary of the gross pay (net of VAT where applicable) and deductions made for each subcontractor. Even if the subcontractor is paid weekly, the only requirement is for the subcontractor to receive a monthly summary.
One of the reasons for a compliance visit could be that there is a discrepancy between the contractor’s monthly summaries and the subcontractor’s monthly summary schedule. Another reason is that HMRC have seen a large number of subcontractors work for the same contractor and earn the same income each month. This could be an indication that the subcontractors should really have been classified as employees.
Our Managing Director, Jas Jhooty has been invited to attend the next HMRC Benefits & Expenses sub-group meeting in Whitehall on 23/01/2014. This forum allows HMRC to advise the panel of any new changes in benefits and expenses practices they intend to implement. Attendees can then air their views on the expected effect of these new policies, the results of which may influence HMRC’s implementation strategy.
It is also an opportunity to raise any concerns on current benefits and expenses legislation as agenda items at the meeting. If you have any such concerns please email us at firstname.lastname@example.org with details before 14/12/2013.