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Andrew Gotch, tax consultant and Managing Director of Professional Tax Practice outlines some of the most common pitfalls to avoid a CIS compliance failure.

New Construction Industry Scheme - a high risk area

New legislation for the Construction Industry Scheme that went live on April 6th 2007 has far reaching implications for everyone in the building trades and many sub-contractors are still not ready to deal with this massively high risk area. 

Here are some of the easy pitfalls that would give rise to a compliance failure – and any compliance failure could cost a sub-contractor his gross or 20% deduction payment status. 

1. Remember that unless you don’t have to verify someone because (say) they’ve worked for you at some point in the previous two tax years, you have to verify each and every sub-contractor.  No verification, no payment. 

2. Remember that ticking the employment status box is a monthly statement to the Revenue that no sub-contractor on the CIS 300 is an employee.  It is essential that the contractor keeps his contractual relationships under rolling review and takes professional advice when required to avoid problems when the Revenue asks the inevitable question. 

3. Don’t just put all your sub-contractors on the cards wef 6 April 2007 unless the contractual arrangements between you really do change in a practical and legal way.  The Revenue might ask the question about previous years and contractors would risk potentially enormous financial settlements.  Tread very carefully and take professional advice before re-classifying sub-contractors under the new CIS.

4. Remember that if a contractor makes no payments to sub-contractors one month a nil return still has to be made. If the nil return is ignored and is more than 28 days late that is an unmitigable compliance failure, as well as attracting penalties at a rate of £100 per month late.

5. Remember that contractors have to provide sub-contractor payment statements within 14 days of the end of the tax month.  The statement is a statutory return even though the contractor does not have to copy it to the Revenue and a failure to observe that time limit would be a compliance failure.

Record keeping

Contractors who are planning to continue using paper based systems or spreadsheets to operate the CIS scheme will be particularly vulnerable, because anyone involved in the CIS will have to have a metronomically accurate approach to record keeping if they do not want to risk a compliance failure.  Contractors who turn over high numbers of sub contractors will have no realistic alternative to computerisation if they don’t want to fall foul of the new CIS rules.  But even for smaller building trade businesses, computerisation will undoubtedly help contractors to get things right in such a compliance-focused system. 

The developers of the Exchequer Accounting System, which is used extensively within the Construction Industry, have been working closely with customers to ensure their readiness for the ‘go live’ date. A new version of the software was shipped in February along with detailed instructions for CIS transition that cover closing the final 2006/7 period, starting the first period for 2007/8, operating and filing electronically under the new CIS 2007 regulations and how to update the new CIS tax rate. To visually aid the process, users of the system can also access an online video to walk them through the changes.