An Introduction to the new CIS Scheme

We are writing briefly to clients who may be affected by the changes to the CIS laws.  Please note this letter is just a brief résumé of the scheme.  If you have further queries please don’t hesitate to contact the Inland Revenue Helpline, Tony Tivnan or myself.

A.    Closing Down of Old CIS Scheme

·       The existing CIS Scheme ceases on 5 April 2007.

·       All CIS-23 and CIS-25 vouchers relating to sub-contractors paid up to and including 5 April 2007, have to be submitted to HMRC (formerly called the Inland Revenue) by 19 April 2007.

·       Any payments due up to 5 April 2007 have to be paid by 19 April 2007.  Failure to do so will lead to interest charges.

·       An End of Year Return, CIS36, must be submitted to HMRC by 19 May 2007.

·       All the CIS figures must be reflected on the Form P35 and to be sent to HMRC by 19 May 2007.

·       CIS24 Vouchers must be submitted to HMRC by 19 May 2007.

B.     List of Subcontractors

·       In November 2006 Contractors should have received a list from HMRC of Subcontractors they used in the previous two years.

·       In March/April 2007 a further list of subcontractors will be sent out by HMRC.

·       There will be no need for contractors to “verify” the subcontractors on the March 2007/April 2007 list.  For an explanation of  “verification” see point b) below.

C.     New CIS Scheme from 6 April 2007

The new CIS Scheme has certain important points that contractors have to address:-

a)      Check employment status.

b)      Verification.

c)      Monthly returns.

d)     Statement of Deduction.

e)      Paying subcontractors.

f)       Penalties.

g)      On-line Services.

h)      Tax Treatment Qualification Test (TTQT).

i)        End of year Return to 5 April 2008.

j)        Dates.

a)      Check employment status.

In the first instance with every worker it is important to check their employment status – are they an employee or self-employed?

It is possible to do that by the following methods:-

i.        Phone the CIS Helpline on 0845 366 7899.

ii.      See Fact Sheet CIS 349 produced by H M Revenue & Customs.

iii.    Use the Employment Status Indicator (ESI) tool at www.hmrc.gov.uk/calcs/esi.htm.

iv.    Telephone our office.

·       The ESI tool asks 18 questions following which there is an opinion given as to whether a worker is employed or self-employed.  A reference number is also given.

·       The Engager (Contractor) is not obliged to accept the opinion given; but if the Engager is happy with the opinion then he should keep the reference number granted on the ESI tool website as that would be a binding decision providing the questions have all been answered correctly.  HMRC will correspond with businesses using the ESI tool to check whether or not their use of the tool affects decisions on Status.

·       For queries in the Manchester Area you could phone Christina Wood at the Tax Office on 0161 288 6507 who is the specialist on Employment status.

b)      Verification

·       It is not necessary to have to verify a subcontractor who appears on March/April 2007 list sent by the Tax Office.

·       For those subcontractors not on that list it is necessary to check that the subcontractor is registered for CIS and find out whether he should be paid gross or under deduction of tax.

·       To verify a subcontractor the Engager can telephone the CIS helpline on 0845 366 7899 (open 8:00 am – 8:00 pm 7 days a week); go on-line at www.hmrc.gov.uk/new/cis; or use specific software that links in to the Inland Revenue system.

·       To verify the subcontractor it is necessary to have his full name, his Unique Taxpayer Reference (UTR); his National Insurance Number (NINO) if known; and the Engager’s name, UTR, Accounts Office Reference and Employer Reference.

·       The CIS Helpline will check that the subcontractor is registered for CIS; and instruct what rate of deduction is to apply; and give a verification number e.g. V0007318997.

·       If the subcontractor can’t be verified the Engager will be told to make deductions at the higher rate and will be provided with an unmatched verification number e.g. V0007318997/A.

·       The rate of deduction is increased from 18% to 20% from 6 April 2007.  Subcontractors will get credit for the tax deducted, in their Tax Return.

·       If there is no verification then the higher rate of 30% deduction would apply, until further notice.

·       Once the deduction is made in one month, that deduction cannot be amended in future months – and any tax deducted would have to be claimed back by the subcontractor when he completes his April Tax Return.  A subcontractor who isn’t verified and wants to have tax deducted at a lower rate can present himself at the Tax Office and register with proof of identity (e.g. passport and utility bill). 

·       Subcontractors who have deductions made at standard rate (20%) or higher rate (30%) must be provided with a statement of deduction each month.

c)      Monthly Returns

·       Monthly Returns can be made on paper and sent by post; using HMRC’s free on-line service at www.hmrc.gov.uk/new/cis; or using third party software.

·       A monthly return should include:-

i.        Details of all the payments made to all subcontractors.

ii.      Verification number if higher rate (30%) applied.

iii.    Confirmation of employment status of all subcontractors.

iv.    Confirmation that the verification process has been applied.

v.      Signature (if on paper return).

·       Monthly returns must reach HMRC by the 19^th of every month.  If no subcontractors have been paid then it is imperative that a nil return is submitted.

·       If an error is made on a monthly return the contractor should phone HMRC on the CIS Helpline number 0845 366 7899 with full details; keep a record of the amendments made; keep a record of the date the call was made.

d)     Statement of Deduction

·       The monthly Return should show the name of each self-employed subcontractor, the total payments made the cost of materials within that payment and the amount of tax deducted (including those against which nil tax had been deducted where subcontractors are entitled to gross pay). 

e)      Paying subcontractors

·       Subcontractors with deductions made at standard rate (20%) or higher rate (30%) must be provided with a Statement of Deduction.

f)       Penalties

·       There will be a £100 minimum penalty per each 50 employees for late, incomplete or incorrect Returns.  Returns have to be submitted by the 19^th of the month.

·       No penalties imposed for the late incomplete or incorrect Returns up to and including 19 September 2007 during the “teething period”.

·       The first Return liable for penalty would therefore be for the month of 5 October 2007 to be submitted by 19 October 2007.

·       Failure to submit Nil Returns will also give rise to a minimum penalty of £100.

·       Contractors’ and Subcontractors’ “gross” status may be at risk if penalties are imposed – the probability is that three defaults would probably give rise to a loss of gross status.

g)      On-Line Services

·       Register to file on-line www.hmrc.gov.uk

·       To file on-line gives quality and accuracy, speed and for many would be more convenient.

h)      Tax Treatment Qualification Test (TTQT)

·       TTQT is applied when gross payment treatment is requested by the contractor either at registration or on subsequent application.  There will be an automated test of a subcontractor’s compliance over the previous twelve months.

·       Failure to pass TTQT will result in non-allocation/removal of gross status.

·       The test includes a check not only on CIS Returns, but also on Employer/Self-Assessment/Company Obligations.

·       There is an appeal procedure against any penalty or decision against gross payment made by HMRC.  The appeal must be made in writing.

i)        End of year Return to 5 April 2008

·       Regardless of whether or not you engaged subcontractors during the year no end of year action is required. 

·       If you are an Engager/Employer – it is necessary to add up all twelve month Returns (including any amendments made) and enter the total figure onto P35.

j)        Dates

·       November 2006 – the first subcontractor list should have been sent to employers.

·       March 2007/April 2007 – the second subcontractor list should be received by employers.

·       5 April 2007 - the old CIS scheme ceases.

·       6 April 2007 - the New CIS Scheme commences.

·       6 April 2007 onwards – possible to register for CIS on-line.

·       19 May 2007 – the first monthly return under new CIS and the last CIS 36 for old CIS, to reach HMRC.

Please note that if the Engager/Employer had more than 125 subcontractors within the previous two years then the details will be supplied to that employer by C D Rom rather than in a list.

I hope this letter proves useful to you in having an overview of the new scheme where we have tried to point out to you some of the more salient points.  This letter is by no means to be taken as being comprehensive.

We will shortly have the software to operate the scheme on behalf of our clients at a small cost reflecting the number of subcontractors on each scheme.

It is intended this will enable us to cover verification of new subcontractors as well as existing ones; and will allow us to file the monthly returns on-line.

If you have any queries at all with this letter or about the CIS Scheme then please don’t hesitate to contact us.

info@shacter-cohen-bor.com

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