Death and taxes are said to be the only certainties in life, but the introduction of a new tax regime for the construction industry has been more a case of will it or won't is? Now, after being postponed on two successive occasions, the new construction industry scheme is finally coming - ready or not. Mark Cantrell investigates.

WOE betide any Johnny-come-lately to the new tax regime for the construction industry. After two years of extended preparation time there will be no excuses for not being able to meet the requirements of the new Construction Industry Scheme (CIS), especially as the reform came about as a result of industry lobbying.

The new tax regime was announced in the 2003 Budget, with its implementation scheduled for April 2005. Yet, the industry was concerned that this left insufficient time to prepare, so it was postponed until April 2006. The current CIS scheme subsequently gained a further stay of execution until April this year to ensure a smooth transition from the old CIS to the new.

Now, it finally goes live on 6 April and HM Revenue and Customs (HMRC) is confident that after so much extra time, few will be caught out by the transition.

Or so one hopes.

Is the industry CIS aware?

“I don’t think I can say with confidence that every last person out there is ready, but surveys we’ve done show there’s a high level of awareness,” says Ray Bourley, member of HMRC’s policy reform team. “The majority of people are well advanced in their plans to get the new CIS in place; we’ve been pushing the scheme for the last two years. That’s not to say there’s someone who is living in a hole and hasn’t heard it – but there isn’t a lot we can do about that.”

The Federation of Master Builders lobbied for a 12-month delay to the scheme to give smaller contractors a chance to prepare for the changes. Director of membership services Robin Hood-Leeder warns companies to get used to the changes. “The new CIS scheme is a definite improvement on the old scheme, but there are significant changes, which the industry must get to grips with,” he says. “We are doing all we can to help smaller firms prepare for the changeover, but we can’t stress enough that they must find out the changes now. Anyone who leaves it until the scheme is introduced in April will struggle.”

The fact that change is in the air has been hard to miss. For one thing, of course, the industry already operates in a relationship with the HMRC, given the PAYE requirements and the current CIS introduced in 1999, not to mention previous tax regimes that have been in force since the 1970s. So as a matter of course they have been receiving information regarding the changes. To this, HMRC has been working with third party software developers and also representative industry bodies such as the National Federationof Builders or Royal Institution of Chartered Surveyors, organisations that can “cascade” the information down through seminars and other means.

That information drive is far from over, with another volley of publicity due in February.

What will CIS involve?

The new CIS will affect around 250,000 construction firms, as well as allied contractors and “deemed contractors” such as Local Authorities. Organisations that have spent £1m or more on three successive years are also considered “deemed contractors” and will consequently need to conform to its requirements.

In theory, CIS v2 is intended to streamline the whole verification, payments and tax deduction processes to make life easier for all concerned and create a less burdensome system.

First of all, it has dispensed with the registration cards and the tax certificates that provided proof of a  subcontractor’s tax status with HMRC. Instead, these will be replaced by a “verification service” where sub-contractors register with HMRC to obtain a Unique Taxpayer Reference number to quote to contractors along with their NI number.

Online or with a telephone call, the contractor can then use these numbers to verify the subcontractor and find out their payment status – that is whether the are to be paid gross or net with deductions for tax and NI liability.
Under the forthcoming system, vouchers for payments have also been discarded, along with yearly returns to the HMRC. Instead, where a sub-contractor is paid net, the contractor must provide monthly written statements to the subcontractor and also communicate who has been paid and how much to the taxman every month.

Sub-contractors who are already registered with HMRC will be automatically transferred into the new CIS and won’t need to be verified by the contractor they work for. However, they will need to verify the status of any new sub-contractor they take on.

“From 6 April, contractors won’t have to inspect anyone’s cards or certificates and they won’t provide vouchers for the individual payments they make,” Bourley says. “Once they’ve made the payments, then they will put that payment onto a monthly return. For the first month, everybody will get a paper return so they just fill in the details of the payments they’ve made. If they are not paying anything, they just have to leave it blank. If there’s a new subcontractor, they should just write them in and put in the details of the payment.”

Returns to the HMRC will need to be made within 14 days of the end of each tax month. For the first six months of the system coming online, there will be a “honeymoon” period while contractors smooth over any ruffles from the transition. After that, then failure to meet the deadlines or otherwise comply with the new CIS requirements will bring stiff financial penalties.

Getting to grips with software

As the deadline approaches, the final stages of the compliance programme are moving on. As well as the publicity drives carried out by the HMRC, it is also sending contractors lists of  sub-contractors either on paper forms on CD ROM, so that the contractors can run through the lists and ensure that their own in-house data matches the records held by the taxman.

Data compliance is a key consideration of the new CIS, as is the ability to communicate this information to the Government Gateway system that the scheme will use. Indeed, the software and IT aspect residing at the heart of CIS v2 was a major factor behind the second delay.

“The new CIS is likely to require significant changes to existing payments process and systems,” according to a paper published in October by the Business Application Software Developers Association (BASDA), which represents third-party software developers working on CIS packages. “It is possible that existing systems do not have the capability to store the necessary information about sub-contractors... After the introduction of new CIS the data held by HMRC and the data held by contractors must match. If there are significant discrepancies that do not match the CIS Data Quality Standard, then the monthly returns will be rejected.”

BASDA, together with HMRC, has been working to develop the third party software that will store the sub-contractor payment information, as well as communicate it to the taxman in the format required. Despite the focus on electronic communication, either with third party software, or HMRC’s online reporting system, there will be an option to report with a paper-based system.

“We’ve been preparing this for quite a long time now,” Bourley says. “There’s been extensive assessing on the systems both internally and with external software providers, so people who are actually going to be providing packages for contractors to use have had an opportunity to discuss with people within HMRC what they need to do. They’ve had opportunities to test the software they’re developing with our systems, so we’re confident we’ve done as much testing as we can. Things should be okay on the day.”