New CIS – how to stay registered for gross payment.
HMRC has mailed subcontractors in the last few weeks to advise them about the compliance review process in place under the new CIS scheme, and reminding them to “keep up to date” with returns and payments.
There is real concern that many subcontractors presently registered for gross payment will fall foul of the new continuous review process, and find themselves reclassified for net payment as a result. This could be very damaging for subcontractors who are self employed or operate through a partnership as the cash flow impact with regard to payments to subcontractors they engage (and their employees) is potentially significant, as the tax suffered cannot be offset in-year. For those operating through companies the impact is not as serious, because the tax suffered can be set off against the tax deducted from subcontractors and employees reducing monthly payments to HMRC.
The review process is to be carried out annually – according to the letter recently sent to subcontractors. It is to be expected that subcontractors will move to a cyclical review pattern, spread throughout the year; this would seem to make sense from HMRC’s workload perspective. At the review point, the subcontractor’s compliance history in the previous 12 months will be assessed. Strictly, all tax obligations must be complied with to retain gross payment status, but the Regulations permit a certain level of non compliance by those permitted to retain gross payment status. These rules replace the old “minor and technical breach” basis of appeal under the old rules, when a breach of compliance was overlooked on the basis that the breach was minor or technical.
HMRC’s fact sheet CIS 343 lists the following breaches as acceptable – within a twelve month review period, all of these failures will not normally affect gross payment status :
·Three late submissions of the monthly CIS return – up to 28 days late.
·Three late payments of CIS/PAYE deductions – up to 14 days late.
·One late payment of Self Assessment tax – up to 28 days late.
·Any employer's end of year return made late.
·Any late payments of Corporation Tax – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
·Any Self Assessment return made late.
·Any failures classed as 'minor and technical' in relation to obligations under the old Scheme, where these fall within the 12-month period up to commencement of the new Scheme.
This means, for example, that a subcontractor who makes four late payments of PAYE this year will be removed from gross payment status on his first compliance review. Paying tax due on 31 July under self assessment in September would also cause a subcontractor to be reclassified as registered for net payment once his review date comes around.
It is also worth noting that for partnerships, retaining gross payment status depends on all partners and the firm as a whole remaining compliant, and for companies the rules also include a requirement to observe company law filing procedures on time, such as filing accounts and annual return on time. For individual subcontractors, the compliance requirement also applies to any companies controlled by the subcontractor.
Where a subcontractor receives notice that he has been reclassified as a net recipient under the scheme, he may appeal. The normal grounds for appeal will be that the failure has a reasonable excuse. The reclassification will not take effect until after the appeal process has been exhausted in this case, and in all cases the subcontractor can re-apply for gross payment registration once a twelve month period has elapsed.
HMRC’s recent letter to subcontractors indicates that a “pilot” run of the compliance check was run early in March 2007, and that around 40% of subcontractors at that time holding CIS 5 or 6 – that is those who were registered for gross payment – failed the compliance check.
It is clear that if this number of subcontractors fail the compliance review when it is carried out for real, then HMRC will have a real challenge on their hands to reclassify so many subcontractors to be paid under deduction of 20% tax. This will likely cause significant upheaval for both the tax authority and those in the building trade, whether subcontractors suffering cash flow difficulties, or contractors paying them who have to keep up to speed with subcontractors changing status under CIS. The purpose of the letter would seem therefore to be to warn subcontractors about the new regime and remind them to keep up to date.
Advisers would do well to consider the following:
·Reminders about irregular payments such as Schedule D tax, corporation tax and similar liabilities
·Holidayand sickness arrangements with regard to regular tasks such as monthly CIS returns, payment of PAYE etc
·Considering the compliance history of partners in the firm and companies controlled by subcontractors
·An early warning system to indicate that all “chances” have been used up so absolute 100% compliance is necessary for a period.
You should also note that at present VAT returns and liabilities do not fall within the compliance check for subcontractors. This is probably because the primary legislation was approved well before the merger of the Inland Revenue and Customs and Excise. As it would require primary legislation to amend this situation, it is unlikely that this will change in the short term.
With acknowledgements to Accounting Web 26/06/2007