factfile July 2008

CONSTRUCTION INDUSTRY SCHEME - Part 3 In this last of a series of Factfiles looking at the Construction Industry Scheme I will highlight some of the more common problems and situations that face clients in the industry. Loss of gross payment status HMRC are now well over half way through the first year of the rolling compliance review programme and it is estimated that approximately 35% of all gross receivers reviewed have failed the compliance test and been issued with notices that their entitlement to be paid without deduction is to be withdrawn. The new scheme introduced far more prescriptive guidelines as to what constitutes compliance and, more importantly, what compliance breaches are ignored in determining whether a subcontractor has been fully compliant. Under the old CIS scheme, i.e. prior to 6 April 2007, these breaches were referred to as Minor and technical. Unlike the new scheme, there was no clear definition of what constituted minor and technical breaches and often it would depend on which HMRC district was dealing with the matter as to what the outcome might be. The subcontractor has the right to appeal against the determination of withdrawal of gross payment status. The appeal is first made to the General Commissioners or if the subcontractor so elects may be to the Special Commissioner and must be made within 30 days of the determination stating the reasons for the appeal. It is not uncommon for such determinations to be dated several days before their actual receipt by the subcontractor. It is not clear if this is due to postal delays or delays in getting them in the post. As has been indicated above, the most common reason for withdrawal of gross payment status is non compliance. Any appeal must therefore challenge the basis of non compliance for factual correctness or alternatively plead reasonable excuse for the breach or breaches.

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In some cases the appeal is dealt with by the area Inspector, who may accept there are valid grounds for the appeal and withdraw the determination without the need to appear before the Commissioners. In all other cases the appeal will be listed to appear before the Commissioners at the earliest possible sitting. Given the very prescriptive nature of the compliance regime, the subcontractor must be confident in the grounds of the appeal before taking it to the Commissioners. Where possible this should be backed up by suitable evidence and relevant case law if applicable. Common areas of non compliance are: •

Late payment of monthly PAYE/CIS – any payment of monthly PAYE/CIS that is made late constitutes an incidence of non compliance however, Statutory Instrument 2045 sets out occasions when these will be ignored or disregarded. Firstly, that no such payment was more than 14 days late. By implication this means any payment made more than 14 days after the due date would constitute non compliance Secondly, no more than 3 late payments in a twelve month period provided none were paid more than 14 days after the due date. For the subcontractor there is little warning that these breaches are occurring; PAYE payments are sent, often via the post, and it is often assumed will have reached their destination in good time. As has been noted above when looking at determination notices issued by HMRC, the post cannot always be relied upon!

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Late payment of self assessment tax – for sole traders and partnerships this relates to the individuals and partners personal tax payments. For companies this extends to the directors personal tax. HMRC policy unit have stated that individual director’s personal tax affairs will not be considered as part of a compliance review but will be relevant for new applications. Anecdotal evidence suggests this is not necessarily the case in that late payment of a director’s personal tax has been cited as a contributory factor in non compliance leading to the withdrawal of gross payment status. SI2045 states that one such occurrence will be ignored provided the payment is made no more than 28 days beyond the due date for payment. Obviously if there are two or more partners then this increases the potential for more than one late payment. Additionally HMRC have indicated that, where payment due by 31 January is made late and that payment consists of both a balancing payment and a payment on account, this will count as two late payments and this will constitute a compliance failure.

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Late payment of corporation tax – Any late payment of corporation tax will be ignored provided the payment or payments are made no more than 28 days beyond the due date. It is worth noting that any arrangement a company may make with the Collector of Taxes for the delayed or staggered payment of its corporation tax liability may still amount to compliance failures.

Supplied by: Nick Pollington of Price Bailey LLP Member of the Property & Construction Group

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The writer has experience of just such a case where a company discussed payment of its corporation tax with the Collector and agreed payment over a number of weeks with the Collector accepting the company’s post dated cheques to cover the liability. In all other respects the company’s compliance record was exemplary. Nonetheless the company was duly issued with a notice of withdrawal of gross payment status citing the late payment of corporation tax as the sole reason. Needless to say an appeal was lodged and the determination withdrawn without the need to resort to the Commissioners. Where the subcontractor is also a contractor, the late submission of the monthly CIS returns can also trigger non compliance. SI2045 indicates that, provided no return is submitted more than 28 days after the due date, up to three late returns will be ignored when reviewing a business’ compliance record. The late submission of monthly returns does not appear to be a common cause for withdrawal of gross payment status. PAYE/CIS compliance review visits Previously known as PAYE audits, these reviews will cover the operation of PAYE and the usual issues regarding taxable benefits etc. However, for the contractor within CIS, the review will concentrate primarily on the operation of CIS and the employment status of subcontractors engaged by the contractor. Employment status is one of the key areas the new CIS was designed to tackle; in the view of HMRC there is still widespread abuse of the self employed working arrangement prevailing in the construction industry. As the working brief from the Government puts it, one of the aims of the new scheme is “to help construction businesses to get the employment status of their workers right” Since the introduction of the new CIS we have not seen a great deal of activity in this area; much of HMRC’s energies have been channelled into the compliance review programme. There is now evidence that these review visits are on the increase and this is an area where it is thought HMRC will be concentrating more resources. Contractors must be seen to be continuously considering the status of their workers and have evidence of such consideration. This may be in the form of a monthly review or checklist. It is essential that the terms under which workers are engaged under self employed contracts for services are properly negotiated and documented and that all parties to the agreement fully understand what they are agreeing to. This is particularly relevant to any worker whose first language is not English. Over the last two or three years there has been an influx of workers from all over Europe and particularly Eastern Europe many of whom have sought work in the construction industry. Where these workers are engaged on a self employed basis it is absolutely essential that they fully understand the terms under which they are engaged and contractors are strongly advised to engage the services of an interpreter to ensure full understanding and agreement to the terms.

Supplied by: Nick Pollington of Price Bailey LLP Member of the Property & Construction Group

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The consequence of not getting the status correct can be financially crippling for any business. It is worthwhile spending time ensuring that the status is correct. There follows a flowchart that can help determine the status of a worker, whilst it is not full proof, it can help. It is important that each question is answered on the basis of what actually happens rather than what should happen. Too often contractors rely on written contracts containing specific term designed to avoid the re-classification of self employed workers as employees. The subcontractor very often does not understand what he has signed and the written contract does not actually reflect the reality of their day to day working arrangements. If your client is selected for a PAYE/CIS review it is advisable to have the review conducted at a neutral venue, e.g. the accountant’s office. For most clients this is very often the most practical solution. All relevant details can be made available during the visit. And there is someone on hand during the day to answer questions and make notes of further information needed. During the visit you should offer copying facilities to HMRC staff and ensure you keep a second copy of everything that they ask to be copied. As part of the review, HMRC will want to interview a sample of subcontractors who provide services to the contractor. For the subcontractors this is purely voluntary and is intended to support the working relationship as outlined during the interview with the contractor or not as the case may be. This is not a review or enquiry into the subcontractor’s affairs and the subcontractor is not obliged to participate. The review meeting, particularly with regard to status, is merely an information gathering process. Officers that conduct the meeting will be experienced in status issues however they will rarely be Status Officers. The information gathered at the review meeting together with any further details obtained after the review will be passed to a status officer to give an opinion as to whether, in the view of HMRC, the worker or workers are correctly classified. There is a history of widespread self employment within the construction industry and this reflects the historic nature of the industry, i.e. short term projects and a migratory workforce. For growing, dynamic businesses that look to add value to the projects they take on, they may well question whether these practices are still relevant in today’s market.

UK200Group 3 Wesley Hall, Queens Road, Aldershot, Hampshire, GU11 3NP Tel: 01252 401050 Fax: 01252 350733 e-mail: [email protected] website: www.uk200group.co.uk

Supplied by: Nick Pollington of Price Bailey LLP Member of the Property & Construction Group

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Is there a contract (either express or implied) between the individual doing the work and the engager

No

Not an ‘employee’ not a ‘worker’

Employee, Worker or Self Employed? Yes

Is there a duty on the engager to offer work and an obligation on the individual to undertake the work?

No

Yes Does the individual provide the services personally?

No

Yes Is the nature and extent of the control sufficient to evidence an employment relationship?

No Individual is a ‘worker’

Yes Individual is an ‘employee’ 5 of 5