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Alison Hawkes of Chiltern Tax Support for Professionals Ltd highlights some potential pitfalls and problem areas in the CIS Scheme.

Introduction 

The new CIS scheme has now been running for a full year. One or two problem areas have come to light, and in particular the new compliance regime can have very serious consequences for construction businesses.

Status of subcontractors

One aspect of the new scheme that could be costly if not taken seriously is that the monthly contractors’ returns require the contractor to confirm that he has considered the employment status of each individual to whom payments have been made, and that payments have not been made under contracts of employment.

The fact that HMRC may have verified a subcontractor’s CIS registration status does not necessarily mean that all work carried out by that subcontractor for that contractor will have been performed on a self-employed basis. The correct treatment does depend on the facts and circumstances in each case, and contractors should take care to document the factors that indicate self-employed status. The main factors are:

• Whether the contractor is obliged to provide work and the subcontractor is obliged to carry out that work. (If that is the case, it points to a contract of
  employment.)
• Whether the subcontractor controls how the work is carried out. (If he does, it points to self-employment.)
• Whether the subcontractor provides a personal service or has the right to provide a substitute worker. (If he can provide a substitute, it points to self-employment.)

HMRC can collect PAYE and NIC from a contractor where a worker is deemed to be an employee. Although new regulations came into effect on 6 April 2008 that enable HMRC to recover part or all of such a PAYE liability from the individual, HMRC is not obliged to do so, and contractors cannot rely on that and ignore their responsibilities. The methodical documenting of a review of each worker’s status will go a long way towards dealing with questions that might arise during an inspection, and will help to nip a status dispute in the bud.

Tax Treatment Qualification Test (‘TTQT’)

The new CIS scheme came into effect on 6 April 2007, but the related new annual compliance test was only launched in October 2007, and caught many subcontractors unawares. All subcontractors who hold gross payment status will be subject to the TTQT, which will be automated and carried out without advance notice.

In order to pass the test and retain gross payment status, contractors must have:

• Submitted all required tax returns on time.
• Paid all tax and national insurance liabilities by the due dates.
• Supplied any information requested by HMRC.

The rules do allow a little leeway, but this is very precisely defined, and subcontractors must be extremely careful not to exceed the permitted number of compliance failures. For example, the submission of up to three monthly contractor returns (including nil returns) up to 28 days late will not result in a failure to
pass the test. However, what is happening in the real world is that returns are being submitted slightly late on more than three occasions, leading to a potentially disastrous loss of gross payment status for the sake of a  comparatively minor administrative failure. HMRC has reported that some returns have been delivered to them late because of no postage or insufficient postage having been paid, and businesses really must ensure that their administrative
procedures are tightened to avoid this type of failure.

HMRC has recently gone some way towards addressing the problem of minor administrative failures by introducing new regulations with effect from 3 June 2008. The regulations now provide that late payment or non-payment of a liability of less than £100 will not be treated as a failure for the purposes of the TTQT.

This is very welcome, and eliminates what had been a rapidly growing number of cases where subcontractors faced a loss of gross payment status due to late payment of very minor amounts.

Alison Hawkes is a senior tax consultant with Chiltern Tax Support for Professionals Ltd – alison.hawkes@chilterntsp.co.uk