Mhairi Charlton, Corporate Tax Partner at Armstrong Watson, warns of the storm ahead over changes to the Construction Industry Scheme (CIS) that will take effect in April 2007
Contractors and subcontractors in the construction industry are facing an administrative minefield as they prepare for major reforms in the way the industry's tax scheme is run.
On 19 October 2005, the Financial Secretary announced that the Government would allow the construction industry a further twelve months, until April 2007, to prepare for the introduction of the new CIS. This announcement meant that the current scheme continues until 5 April 2007.
"First, I think it is important to clarify who exactly will be affected by these changes. Those most affected are 'contractors' and 'subcontractors' in the construction industry, but these terms go much wider than the interpretation they normally have. Contractors don't just cover construction companies and building firms, this catergorisation also includes Government Departments and local authorities, as well as many businesses normally known in the industry as 'deemed contractors'.
"Those that won't have to worry about the changes are private householders and businesses that are spending on average less than £1 million a year on construction.
"The stark reality is that these changes will be horrendous if proper measures are not implemented in time. But, there really are no excuses. We have, after all, known about these changes since 2004. If those within the industry act now, with seven months remaining, these changes will be relatively straight forward.
"Ignore them and you could find yourself in financial ruin. The financial penalties could be horrendous - if gross payment is withdrawn a full twelve months must elapse before it can be regained so causing the subcontractor protracted cashflow difficulties and this is without the automatic and discretionary penalties which can be levied for not complying with the new CIS requirements.
"As the main reason for withdrawal of gross payment status will be the subcontractor's tax compliance record, I really cannot stress how important it is to get this up to date now. Once in the new system the Revenue will only be looking at the compliance record for the previous twelve months so if you are up to date now you stand a better chance of avoiding Revenue scrutiny and the consequential adverse effects of this.
"Further, the fact that you may have a gross payment certificate which expires sometime in 2008 or 2009 will have no relevance after 6th April 2007, the Revenue will be able to cancel gross payment status at anytime. Be warned - HMRC are going to get tough on CIS.
"Poor compliance only has one ending - and it certainly won't be a happy one!"
