AAT RESPONSE TO HM TREASURY CONSULTATION DOCUMENT ON “IMPROVING THE OPERATION OF THE CONSTRUCTION INDUSTRY SCHEME”

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OVERVIEW 1.1

The Association of Accounting Technicians (AAT) welcomes the opportunity to respond to this consultation on the key issue of “Improving the operation of the Construction Industry Scheme (CIS)”. Our members are engaged in advising and assisting their clients on matters relating to CIS.

1.2

Many 1 AAT Members in practice (MIPs) have clients who are affected by the CIS regime.

1.3

As part of this consultation activity AAT had four representatives participate at the recent CIS workshops held on 2 and 8 September 2014.

EXECUTIVE SUMMARY 2.1

AAT supports decreasing the upper limit of the turnover test (3.2, below) and would welcome an index linked lower threshold (3.3, below).

2.2

We recommend that the existing £30,000 minimum turnover threshold for gross-payment-status is left to stand for construction activities per sole trader, partner or director (excluding materials) (3.4, below).

2.3

We consider that the current annual compliance tests encourage a disciplined approach to business administration and would recommend that they remain unchanged (3.7, below).

2.4

We recommend that a similar easement to that previously granted p at the time of the introduction of RTI is replicated in the case of CIS annual compliance, as an incentive to comply (3.8, below).

2.5

AAT advocates that HMRC should engage upon a gross payment status awareness raising campaign (3.9, below).

2.6

We do not foresee any major issues arising from the removal of the ability to file monthly CIS hardcopy returns. However, we note, that provision will need to be made to cater for the digitally excluded (3.13, below).

2.7

AAT recommends businesses experiencing unreliable broadband speed should have the option of providing a printed report that confirms their broadband speed, as evidence for HMRC (3.14, below).

2.8

AAT supports the introduction of an integrated online account (3.22, below).

AAT has 4,000 MIPs who have 300,000 clients and whilst we do not have an analysis of CIS clients we would estimate that a significant number of clients will be affected by the CIS regime.

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2.9

AAT endorse the proposals to enhance the current online verification facility in order to enable more than one subcontractor to be verified at a time, to enable the searching for previous verifications and the ability to match subcontractors who have a UTR but a misspelt name or other missing data (3.26, 3.27 and 3.28, below).

2.10

We do not foresee any major problems arising from any removal of the ability for contractors to verify subcontractors by telephone, provided that the current phone-verification system is retained and maintained until after the successful implementation of a new online verification system (3.31, below). However, in responding to this point we emphasise that it is incumbent upon HMRC to provide support for digitally-excluded (3.32, below).

2.11

The development of a verification ‘app’ is fully supported by AAT (3.34, below).

2.12

We recommend HMRC’s early engagement with interested parties in order to identify the required key features for the proposed app and in also in respect of the enhanced online verification facilities.

2.13

AAT strongly recommends that HMRC consider amending regulations to permit contractors to verify subcontractors before a payment is issued rather than after agreeing a contract (3.36 and 3.37, below).

2.14

AAT is concerned that any scaling down of requirements for verification to encompass only those subcontractors who claim to have gross payment status may compromise HMRC’s ability to match deductions to individual subcontractors’ records (3.7, below).

2.15

AAT recommends that HMRC consider a single rate of deduction of 20% for all subcontractors (3.42, below).

RESPONSE TO CONSULTATION QUESTIONS

Question 1 Will decreasing the upper limit of the turnover test enable your business to apply for gross payment status. Do you have any other comments on the turnover test.

3.1

AAT concurs with the view expressed at 2.8 (condoc) that well established tax-compliant companies, partnerships, or family businesses are deterred from applying for gross payment status because the £200,000 capped threshold for multiple partner businesses and multi-director companies is too high.

3.2

Mindful of the above observation AAT supports the proposal to lower the upper limit of the turnover test to help more established businesses with multiple partners or directors qualify for gross payment status (2.9, condoc).

3.3

In addition to the above we would welcome an index-linked lower threshold and would suggest that the threshold could coincide with the VAT registration threshold that is generally increased by £2,000 per annum.

3.4

We support the view expressed at 2.10 (condoc) that for sole traders, small partnerships and multi-director companies the minimum turnover threshold of £30,000, for construction activities, per partner or director (excluding materials) remains appropriate to maintain the integrity of the scheme and ensure compliance with tax obligations.

3.5

AAT wishes it to be noted that smaller businesses often welcome CIS deductions as a means of ensuring tax compliance. Accepting this to be a fact we strongly urge HMRC to ensure that any proposed changes arising from this particular consultation take this important fact into account.

Question 2 Will simpler annual compliance tests encourage you to apply for gross payment status if you haven’t already or have been refused in the past.

3.6

AAT acknowledges and agrees with HMRC’s view at 2.16 (condoc) that losing gross payment status can have a serious impact on a subcontractor’s business. Any appeal to have the gross payment status reinstated gives rise to a significant administrative burden, both, for HMRC and the CIS subcontract as well as generating business uncertainty during the process.

3.7

It is AAT’s view that the current annual compliance test encourages a disciplined approach to business administration. In acknowledgement, we recommend that the annual compliance tests remain unchanged.

3.8

AAT recommends that the two year easement for those employing less than 49 employees granted at the time of switching to Real Time Information (RTI), in order for employers to adapt their processes to ensure they are ready to report all payments in real time, should be replicated in the case of CIS annual compliance.

Question 3 What are some of the other barriers to the take up of gross payment status. Is there an advantage to net status in some situations. Why do some contractors never apply for gross payment status.

3.9

AAT is of the opinion that a small number of businesses may not be aware of the gross payment status option, and would recommend an awareness raising campaign be implemented.

3.10

It is likely that businesses which are aware of the gross payment status may prefer, for reasons of cash flow, to suffer CIS deduction on the basis that regular deduction of tax throughout the year is easier to cope with than paying a larger tax liability after the year end, see also 3.5 (above).

3.11

We recognise that such businesses are disadvantaged in that tax monies are collected by a withholding tax, in some instances, more than a year in advance of the time that it might otherwise collected tax under selfassessment.

3.12

We consider those most likely not to apply for gross payment status are the smaller sub-contractor who does not have much in the way of overheads. In such instances anecdotally members have informed us that such subcontractors are happy to suffer what is in effect a withholding tax, secure in the knowledge that at a later date they will either be due a repayment, have no outstanding liability or at the very least have a much reduced and more manageable tax liability.

Question 4 Will removing the option to make monthly CIS returns by paper present your particular business with any issues. How could HMRC help you overcome any difficulties.

3.13

We do not foresee significant issues developing in the wake of any removal of the option to file monthly hardcopy CIS. It should be noted that our support of any move to mandatory online filing is given on the basis that provision would be made for the digitally excluded (3.10, condoc).

3.14

In support of 3.13 (above) AAT recommends that businesses experiencing unreliable broadband speed should have the option of providing a digital report that confirms their broadband speed, as evidence for HMRC.

3.15

A survey 2 conducted by The Federation of Small Businesses in July 2014 found that as many as 14 per cent of small businesses consider lack of reliable and fast broadband connectivity to be their main barrier to growth.

3.16

Given the observations we have made at 3.14 and 3.15 (above) we recommend that HMRC actively promotes any move to mandatory online filing with the provision of educational material.

Question 5 Would you welcome an online appeals service.

3.17

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AAT would welcome a new CIS online appeals service of a type that is similar to the current RTI channel mechanism i.e. where HMRC issues notifications to contractors that provides a reference number for penalties levied on them to allow an online appeal. Following an online appeal, a penalty to be cancelled by the system if deemed appropriate; if the case can’t be resolved it would be sent for clerical review.

The Fourth Utility, FSB, July 2014

3.18

Under the current CIS compliance regime a substantial administration burden is carried by contractors, agents and HMRC in dealing with the current manual penalty appeal process. We believe that the introduction of an automated system of processing CIS penalty appeals could reduce the current administration burden resulting in savings for sub-contractors and HMRC alike.

3.19

AAT supports the proposal at 3.17 (condoc) that customers will still be able to request a review of an appeal decision and appeal to a tribunal at any stage of the process.

3.20

At 3.18 (condoc) notes that many of the penalties currently issued to contractors are for ‘nil’ returns where no payment to subcontractors have been made. AAT supports HMRC’s intention in 3.19 (condoc) to remove the statutory obligation to report a nil return. Such an action would be a positive commonsense step in reducing the onerous administration burden carried by all parties to the CIS process.

3.21

Furthermore, the facility to make a nil voluntary notification in 3.19 (condoc) to enable contractors to notify HMRC if they did not pay subcontractors, to suppress penalty notices, would be welcomed.

Question 6 Would an integrated online account help reduce costs and reduce the burden of operating the scheme.

3.22

AAT supports the introduction of an integrated online account (3.20 – 3.22, condoc). We consider that the facility for a sub-contractor and contractor to have access, in real time, to details of payments made and received will significantly reduce the need for correspondence with HMRC, especially if it was associated with an ability to reclaim online repayments that might be due.

3.23

AAT endorses HMRC’s vision, as set out at 3.23 (condoc), to build on the existing improvements by integrating CIS into its existing digital programme “My Tax” to enable customers to log on and have instant visibility of transactions.

3.24

The ability of “My Tax” to operate as a ‘one stop shop’ where Unique Tax References and Company Reference Numbers are integrated in one location and businesses can amend their details online if they change status from a sole trader to a limited company, could only benefit all parties to the CIS process and is an approach that would be fully supported by AAT.

3.25

We are of the opinion that all of the digital enhancements covered in our response to this question (6) will reduce the current onerous administration burden through a removal of much low-value contact between HMRC and either contractors or sub-contractors.

Question 7 Would a search facility and/or a facility to verify more than one subcontractor at a time make the online verification service more user-friendly. Is there anything else about the online service you would like to see improved.

3.26

AAT is in favour of the concept of an online search facility to verify more than one subcontractor at a time and the proposal to enable a contractor to search for previous verifications (4.8, condoc).

3.27

We also acknowledge that the current online verification process does not enable contractors to find previously issued verification numbers (4.6, condoc). The outcome of this inherent weakness is a high volume of unnecessary calls to the CIS helpline, creating long waiting times for contractors. This is a particular problem for onsite contractors who cannot wait or hold for long periods.

3.28

Taking into account the above (3.22 & 3.23, above) AAT is strongly supportive of the condoc’s proposal to develop an enhanced online verification service (4.8, condoc); particularly if it were to permit multiple verification and, also, the matching of subcontractors who have supplied a UTR and for whom a misspelt name is held or other key-data is missing.

3.29

We believe that an essential element leading to the successful implementation of an enhanced online verification tool or other software development would be HMRC’s early engagement with interested parties in order to identify the required key features.

3.30

AAT acknowledges that since the middle of the last decade HMRC has become more willing to engage with external stakeholders in respect of the design of their outward-facing online systems, as a result recently implemented systems are much more fit-for-purpose from an end user perspective than has previously been the position.

Question 8 HMRC would like to understand what impacts removing the option to verify subcontractors by telephone could have on your business. How could HMRC help you overcome any difficulties.

3.31

AAT does not foresee any major issues arising out of a removal of the option to verify subcontractors by telephone for the majority of businesses. However, we acknowledge that in the wake of the L.H. Bishop Electrical Co. Ltd. A F Sheldon t/a Aztec Distributors Tribunal joined appeal decision (TC 02910t), HMRC will need to ensure that it considers and meets the needs of the digitally-excluded (see also 3.13 and3.14 above).

3.32

We do not support any move to switched off the current telephone verification service should be until after the successful introduction of a robust online facility, of the nature set out in 4.8 (condoc).

3.33

AAT recommends that businesses experiencing unreliable broadband speed should have the option of providing a digital report that confirms their broadband speed, as evidence for HMRC.

Question 9 Would a Smartphone verification ‘app’ be a useful enhancement to the service and likely to be used by your business.

3.34

The development of a verification ‘app’ mentioned at 4.9 and 4.10 (condoc) is fully supported by AAT. This proposal would be of benefit to contractors who do not have site offices available for online verification.

3.35

We restate our comment, made at 3.29 (above), “we believe that an essential element leading to a successful implementation of an enhanced online verification tool or other software development would be HMRC’s early engagement with interested parties in order to identify the required key features."

Question 10 Would allowing extra time to verify workers be helpful if online verification was mandatory.

3.36

AAT welcomes as commonsense any change arising out of this consultation exercise to afford site-based contractors extra time to verify subcontractors if online verification was mandatory.

3.37

Any move to link the verification-window with the period between agreementof-contract and payment would, in effect, be a codifying of existing custom and practice.

Question 11 Do you have any views on how the existing verification process could be improved.

3.38

After taking into account the outline proposals contained at 4.5 to 4.8 (condoc) and our observations made at 3.6 to 3.8 (above) we restate our comment made at 3.29 (above) “we believe that an essential element leading to a successful implementation of an enhanced online verification tool or other software development would be HMRC’s early engagement with interested parties in order to identify the required key features.”

3.39

In addition to our above observation (3.38 we recommend that HMRC work with the digitally-excluded to ensure that an enhanced-digital solution is found to meets their needs.

Question 12 Would it be feasible to remove the obligation to verify from certain categories of subcontractor.

3.40

AAT is concerned that the suggested scaling down of requirements for verification to, only, those subcontractors who claim to have gross payment status at 4.14 (condoc) may compromise HMRC’s ability to match deductions to the records of individual subcontractors.

3.41

The proposed scaling down of requirements may cause some confusion and it needs to be clear that the obligation to verify is just being scaled down and not being removed.

3.42

As a way of simplifying the CIS scheme, AAT recommends that HMRC consider a single rate of deduction of 20% for all subcontractors.

Question 13 Do you have any comments on the assessment of equality and other impacts in the summary of impacts table on page 17.

Impact on Businesses 3.43

AAT recognises that the introduction of an integrated online account will lead to a significant reduction in the current administration borne by all parties (HMRC, contractors, sub-contractors and agents) under the current CIS verification process.

Exchequer impact (£m)

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3.44

The impact of this measure will not impact the Exchequer during the years included in the summary of impacts table, although it may have some impact on future years in respect of better compliance which would assist in reducing the tax gap.

3.45

Overall, AAT recognises the positive benefits afforded to most arising from a significant reduction the administrative burden for contractors, HMRC and agents. However, we urge HMRC to ensure that the needs of the digitally excluded are taken fully into account.

CONCLUSION

4.1

We support the Government’s goal of improving the operation of the CIS. AAT recognises that the current system is costly to clients, agents and HMRC.

4.2

We support the general principle of HMRC investing extensively in digital services to save businesses time and money, making transactions faster and to simplify end-to-end processes. We recognise that a better system will encourage online demand.

4.3

We strongly recommend that before HMRC designs a new on-line verification system that it engages with interested parties at the earliest possible instance to identify the required key features (3.25, and 3.28, above).

4.4

In addition to our above observation (3.34) we recommend that HMRC work with the digitally-excluded to ensure that an enhanced-digital solution is found to meets their needs.

ABOUT AAT 5.1

AAT has over 49,600 full and fellow members and 74,000 student and affiliate members worldwide. Of the full and fellow members, there are 4,000 Members in Practice (MIPs) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types. (Figures correct as at 30 June 2014)

5.2

AAT is a registered charity whose objects are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

5.3

In pursuance of those objectives AAT provides a membership body. We have drafted our response on behalf of our membership and from the wider public benefit perspective of achieving sound and effective administration of taxes.

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FURTHER ENGAGEMENT 6.1

If you have any questions or would like to consult further on this issue then please contact AAT at: email: [email protected] and [email protected] telephone: 020 7397 3088 FAO. Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY