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New Construction Industry Scheme [CIS] - are your sub-contractors really employees?

15 February 2006

HM Revenue & Customs (“HMRC”) have for some time expressed concerns about the construction industry’s “poor record of complying with tax obligations”. HM Revenue & Customs (“HMRC”) have for some time expressed concerns about the construction industry’s “poor record of complying with tax obligations”1 and the general perception that it was a ‘cash in hand’ industry. This general concern prompted special deduction schemes culminating in the current construction industry scheme which was introduced in 1999 (“CIS”).

Following proposals for, and consultation on, a reform of the CIS the Chancellor announced in the 2003 Budget that a new CIS scheme would be rolled out in April of this year. The statutory provisions came on to the statute book in the Finance Act 2004 and implementation was set for April 2006, however, following the threat of withdrawal of support from various industry ‘stakeholders’ implementation has recently been deferred until April 2007.

The stated aims for the reforms were (i) to reduce the regulatory burden of the scheme on businesses; (ii) to improve the level of compliance by construction businesses with their tax obligations; and (iii) to help construction businesses to get the employment status of their workers right.

Very briefly, under the proposed scheme (“New CIS”) a registration and verification process which can be completed electronically or by phone will replace the use of registration cards and the need to physically inspect these cards. Monthly returns will replace the use of vouchers. More importantly for the purposes of this note is that the monthly return will contain a declaration from the contractor that he is satisfied that the contracts under which payments are made are not contracts of employment (the status declaration).

New CIS will, as could be expected, be a punitive regime and any person who either knowingly or recklessly makes any statement or furnishes any document which is false in a material particular will be liable to a fine of up to £3,000.

Apart from anything else this provides the status declaration with quite a sting in its tail and some commentators have speculated that this could be the main driver for the reforms, or at the very least their most wide ranging consequence.

The position of labour-only sub-contractors currently holding CIS4 cards seems to be the main focus and HMRC have apparently already issued letters to some contractors urging them to review and reconsider the status of their workforce in the light of HMRC’s ‘six questions’ test. It is unlikely that all status declarations will be taken at face value so this correspondence is seen as HMRC preparing an investigation policy.

Given the resources available to HMRC and the perceived scale of the ‘problem’ it seems that HMRC will initially target for investigation contractors who have not taken genuine steps to review the status of their workforce. Investigations may well involve visits from officers and interviews with sub-contractors, so it is important that they understand and are able to explain the features of their duties that rule out employment status. The consequences of an adverse finding may well involve liability for payment of up to 6 years of PAYE and NIC’s together with a penalty of up to £3,000 for making a false declaration on each monthly return where the status declaration was false.

Whether a person is an employee or a self employed contractor will, as a matter of law, depend upon all of the facts of the relationship and not upon compliance with criteria set out by HMRC. Of course HMRC can refer to such criteria and factual compliance before the Commissioners and ultimately the courts in a given dispute. Non-compliance with the criteria by a taxpayer will merely make such a dispute more likely but ultimately the question falls to be decided on common law principles.

Status is often a complex issue and the principles are subject to frequent change in the light of decided cases.

For more information, contact Furley Page employment team. 

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