CIS - are you penalty proof?

For most construction related businesses the realities of the new Construction Industry Scheme (CIS) should be very familiar by now. However, due to H M Revenue & Customs (HMRC) ‘soft landing’ approach to the new scheme, no penalties for failure to submit monthly CIS returns have yet been charged.  But this is now all set to change.

This policy ends on 19 October 2007 so penalties for late returns will be charged for all returns still outstanding at that date.  In addition penalties will automatically be levied for any returns received late in the future.  The penalty is charged on a sliding scale - £100 for firms that use from 1 to 49 subcontractors in the month, rising by £100 for each additional 50 subcontractors.  £100 penalties are also charged for nil returns. 

HMRC’s own records indicate that there are some 142,000 returns still outstanding for the first six months of the Scheme, so the industry as a whole is facing penalties of at least £14.2 million. 

The monthly return is also important for another reason – failure to submit the returns on time could mean that your business loses its gross payment status.  In fact gross payment status can be revoked should you breach any of the following conditions in a 12 month period:-

a. More than 3 late (28 days or more) monthly CIS returns; or
b. More than 3 late (14 days or more) monthly CIS deduction payments; or
c. More than 1 late (28 days or more) payment of any of the directors’ own personal self assessment tax; or
d. Any late payment (28 days or more) payment of corporation tax liabilities

So what are the key steps that you should take to ensure that your business is compliant with the new Scheme?

1. Have you ensured that all of your subcontractors are being correctly treated as self-employed?  Labour-only subcontractors are very likely to be classified as employees by the Revenue, and it is your responsibility as contractor to apply the correct status to your workers.

2. Your gross payment status will be at risk if you do not comply with your obligations for paying tax on time and filing returns before their due date.

3. If you are a contractor have you verified the deduction status of all new sub-contractors and kept documentary evidence of this verification?

4. As a contractor have you checked the accuracy of the materials contents of sub-contractors invoices to you?  The materials deduction can only include the direct cost of materials.  For example, the cost of providing plant can only be deducted if the subcontractor hires it in specifically for your job – they cannot deduct depreciation on plant which they already own. 

HM Revenue & Customs have looked at the compliance records of CIS5 and CIS6 holders in the period up to 1 March 2007 and found that around 40% had one or more breaches that could have led to the removal of gross payment status.

As a result it is vital for all construction businesses to ensure they not only know the new CIS rules but apply them in practice because the Revenue will be stepping up their monitoring of the system once the penalty regime goes live.  They believe that they have given the changes sufficient publicity so that there is no excuse for getting it wrong.

Finally, you should also be aware that failure by your business directors or partners to deal efficiently with their own personal tax affairs could lead to the removal of gross payment status from your business.

Ensors has provided high quality, cost effective services to the construction industry for over 50 years.  We pride ourselves in being experts in the operation of the CIS rules and would be happy to discuss any matters with you.  Please call your usual Ensors contact if you would like to discuss this further.

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