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A taxing time for contractors

The introduction of the new CIS tax scheme is looming.

But is the industry or the Revenue ready for the switch? David Rogers reports

ONE THING is for certain this time: the new CIS tax scheme is going to be introduced next year.

The bean-counters at the Treasury do not want a repeat of the palaver which culminated last October when it was forced to sanction the Revenue's call - driven along by a welter of industry criticism - for the scheme to be delayed by 12 months.

Under the original plans, the scheme was due to have come into force this April but much of last year was taken up by talks with unions, tax experts and construction trade bodies all desperately trying to get the scheme put back.

The Revenue is determined that things will be different this time. The Treasury reckons that it will rake in an extra £180 million a year. Last month Doug Tweddle, a director with the Revenue and the man who answers to the Treasury, said the scheme would be introduced in less than five months' time. He said: 'Make no mistake, this is going to happen next year.'

He acknowledges there will be teething problems with the scheme but said his boss at the Treasury, John Healey, will not countenance a further delay. He added: 'Mr Healey has made it very clear he wants the industry to be ready for this.'

The big question of course is: will it be ready? Alastair Kendrick, a partner at accountant Wilder Coe, said some in the industry had gone to sleep since the news that the scheme was being delayed - suddenly today's problem had become tomorrow's concern.

But he added that the Revenue had been partly culpable for not putting enough pressure on contractors.

He said: 'The Revenue hasn't been bombarding businesses with loads and loads of literature.

'What they have been doing is simply putting stuff on their website so a lot of people are unlikely to have seen anything come through whatsoever. The Revenue hasn't come back to the industry and whipped it up and told it to be prepared for the changes.'

But things seem to be changing. Mr Tweddle points out that the Revenue has begun a range of support seminars and events between now and next spring's launch.

It has also drafted in a host of support staff, although how effective they will be can only be gauged when the problems come in.

Yet for some there is one fly in the ointment that could still preclude a launch next year. It is a scenario that Mr Kendrick and others believe could blow a hole in the Revenue's ambitions to make sure the scheme goes live on April 6.

It is the issue of verification of the lists being drawn up this month and next month. These lists are compiled by the Revenue and show the tax status of thousands of subcontractors employed by main contractors.

But Mr Kendrick is worried just how complete these lists will be. He said: 'My concern is that the lists will be rubbish. There will be a whole load of missing names. If the November list has names missing, main contractors are likely to sit on it until March and then it will result in a mad panic.

'If the March list has missing names, the question will have to be asked whether they can run the scheme from April or will it be a dog's dinner?

'If the lists are hopeless, then it will be impossible to run and we will have to defer it two, three, however many months it takes for the Revenue to put it right.'

It is something the Revenue is aware of and it knows it has to get this part of the scheme right if it is to win the confidence of the industry.

Mr Tweddle and his colleagues know the Revenue's track record on introducing new tax schemes is not great. And he knows just how nervous firms and accountants currently are about the matter.

He said: 'We are doing everything we reasonably can but it's going to have to be the industry which responds to that.'

Inevitably, there are other concerns that continue to vex the industry. Some are worried that mistakes made by contractors could see subcontractors taxed at the higher rate of tax. This rate is yet to be decided but it has been confirmed by the Revenue that it will be in the region of 30 per cent.

Mr Kendrick said: 'If they get the details wrong, subcontractors could be put onto the higher rate.

'This would create huge friction between them and the subbies would blame the contractors for the wrong deductions being made.'

Relations between main contractors and the trade can be strained enough without setting firms at each other's throats because of tax problems.

Dennis Keeling, the chief executive of the software developers' association, Basda, said the issue of multiple trading names was also a cause for concern.

Basda is alarmed by the prospect of tax returns for companies known by several different names being rejected because the Revenue's software is not set up to handle multiple trading names. This will of course lead to penalties for contractors.

Mr Keeling added: 'This is a travesty which we have taken to the highest level in the Revenue - it is our biggest concern.'

Monthly returns, Mr Kendrick added, have to be filled in correctly. If not, contractors could lose their tax status and will be liable for penalties, although Mr Tweddle said the Revenue would not impose automatic fixed penalties for companies making incorrect declarations about employment status or verification within the first six months of the scheme being introduced.

But he has already warned firms not to go easy on the issue. He added: 'We will be making compliance checks in the first six months and gross status may be at risk.'

Clearly, what will be crucial is just how complete the first list of verified firms will be. It is the first major test of whether the new scheme will work and the Revenue - resolute in its determination not to have a repeat of last year's shambles- cannot afford to fluff its lines.

The CIS helpline can be contacted on 0845 366 7899 or visit: www. hm rc. gov. uk /new-cis.

10 key facts about the new CIS

Cards and certificates will be replaced by a simple verification process.

There will be no annual retu rns.

Vouchers will be replaced by monthly returns.

Contractors will need to verify with HMRC that the subcontractor is registered for CIS and how they should be paid. Most existing subcontractors will not need to be verified as nearly all subcontractors, who are already registered with HM Revenue and Customs, will move over to the new scheme.

Verification can be done over the telephone.

During verification, HMRC will tell the contractor whether to pay a subcontractor gross, net of the standard deduction or net of the higher rate of deduction.

Where a subcontractor is not known to HM Revenue & Customs, deductions will be made at a higher rate.

Subcontractors starting work in the construction industry on a self-employed basis after 5 April, 2007, (or whose temporary registration cards have expired and were not renewed by April 5) will need to register for New CIS.

If HM Revenue & Customs has no previous record of the subcontractor, the subcontractor may be asked to come in to a local office with two forms of identification to register for new CIS.

This is a one-off process.

In the first year, contractors won't need to verify any subcontractors that they have paid since April 6, 2005, as long as the contractor has seen the subcontractor's registration card or tax certificate that was valid until at least April 2007.


November 2006: First subcontractor list

March 2007: Second subcontractor list

March-May: Close down old CIS

April 6: Start of new CIS

April onwards: Register for new CIS

May 19: First monthly return and last CIS36 to reach HMRC