Vantis plc - General - Construction Companies Still Unprepared for HMRC Crackdown

Date: 27 Apr 2006

Companies within and associated with the construction industry, which provides one tenth of the UK's GDP, are still unprepared for the HMRC's (Her Majesty's Revenue and Customs) CIS regulations, designed to prevent tax evasion within the industry.

According to Peter Davies from Vantis, the AIM listed accountancy, tax and business advisory firm, "Concerns over tax evasion within the industry have prompted HMRC to increase reporting procedures for the industry and to tighten monitoring of sub-contractors who fail to declare income. These new regulations, referred to as the Construction Industry Scheme (CIS), will come into force in April 2007, but given HMRC's desire to address tax evasion in this sector, we urge companies to use this breathing space to plan and organise for the event well in advance."

"These rules will also have a financial impact on companies that may not even consider themselves to be part of the construction industry, such as painters and decorators. The onus will now be the responsibility of each business to determine the correct employment status of individuals it employs and to pay HMRC accordingly. Those that don't, or classify employees incorrectly, will face financial penalties and possible investigation."

With HMRC demanding more real time information, more compliance and more subcontractors paying PAYE, the process is becoming complicated. Peter Davies outlines the new rules for companies within the construction industry:

Identify if a worker employed or self-employed
Verify workers' status with HMRC
Identify how sub-contractors should be paid
Ensure the submission of monthly returns to HMRC
Produce payment and deduction statements for subcontractors.

The original CIS scheme was due to come into force in April 2006 but was delayed until 2007 to allow time for the industry to prepare for the changes.

Peter Davies continues: "HMRC is tightening its grip on many industry sectors which are perceived to have a problem with tax evasion. Tens of thousands of contractors and subcontractors have already been asked to confirm their status within the sector and the message that HMRC is sending out is that companies which do not conform to compliance demands in the future will be treated with little sympathy."

"Many companies assume that the CIS doesn't apply to them and that they will not be affected by the initiative. However, all businesses in the construction industry that pay subcontractors for construction operations are classified as contractors. Even companies that do not generally operate in the construction industry are brought within the CIS as "deemed" contractors, where their annual average expenditure on "construction operations" exceeds £1 million per year over the last three years, ending with their last accounting date."

As of April 2007, employers of subcontractors will be obliged to determine that individual's employment status correctly. If the individual is an employee, he should be paid through the payroll to account for PAYE and Class 1 NIC and the provisions of the CIS will not be relevant. Where an individual who is a subcontractor is genuinely self-employed, the CIS will apply.

The Inland Revenue has recently announced that it is to increase the number of Employer Compliance Reviews of construction firms to almost twice the current number. It is clear that during the reviews, the level of adherence to the obligations of the CIS scheme and correct classification of employment status will be scrutinised more closely than businesses may have experienced in the past.

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