New construction industry tax rules

Preparations for the new tax arrangements in the construction industry are well under way after the start date was postponed to April 2007. Certificates, cards, vouchers and annual returns will all go. Instead, HM Revenue & Customs (HMRC) will run a verification service for contractors to confirm whether a subcontractor should be paid gross or net. Contractors will make monthly returns of payments to subcontractors, which will include a declaration that none of the workers are employees.

Automatic transfer
Most subcontractors will automatically transfer to the new scheme with their gross or net payment status intact. Businesses will be able to apply for gross payment status when they satisfy the turnover, business and compliance tests. HMRC will monitor gross payment businesses to ensure that they continue to meet the criteria.

Verifying workers
In the run-up to April 2007, HMRC will give contractors details of subcontractors who do not have to be verified, based on the CIS vouchers they have previously sent in. Contractors should therefore submit all vouchers as soon as they are ready. HMRC aims to send out a provisional list of subcontractors in November and an updated list just before the new scheme starts. If contractors take on workers who are not on the list, they will have to contact HMRC before paying them.

If you need to verify subcontractors, you will need their company registration number, or in the case of individuals, their name and tax reference, as well as their national insurance number. HMRC will then tell you whether to pay gross, net of the standard deduction or net of a higher deduction for unregistered subcontractors. HMRC will also give you a verification number, which you must keep.

Employment status
Separate from the verification process is the determination of employment status. Contractors will be responsible for deciding whether a worker is genuinely self-employed and there will be penalties for getting it wrong. HMRC provides a fact sheet, help line and the online Employment Status Indicator to help contractors and others reach the right answer, but this issue still gives rise to difficulties.

If you are uncertain whether a worker should be treated as employed or self-employed, please ask us to help now or at any future time. Remember that the same person may be employed or self-employed at different times – depending on the terms on which you engage them.

It will be possible to carry out many of the new processes online. If you choose to file returns online, you need to consider now what kind of software you will use. HMRC’s free software is only suitable for contractors with fewer than 50 subcontractors a month and will not interact with your internal systems.

We can help you to decide on appropriate software and to prepare for the implementation of the new procedures.