The Construction Industry Scheme (CIS) has been a feature of the UK Tax System for more than 30 years. Until now the scheme has relied heavily on the use of paper vouchers as evidence of payments between contractors and subcontractors. Due to this reliance on paper documentation there is often difficulty where such paperwork has been lost.
The HMRC announced the implementation of the new CIS Scheme with effect from 6th April 2006. This new scheme was intended to help those who work in the construction industry by reducing the administrative burden and aid HMRC in keeping track of what payments have been made and to whom.
Under the scheme those working in the construction industry will no longer use registration cards, tax certificates or vouchers. Instead new subcontractors register with HMRC and are allocated a reference number. When taking on a subcontractor the contractor must first verify their status with the HMRC to determine whether they are to be paid gross or net. The contractor will also be given a verification reference for their records to show that the verification process was completed.
There will of course be transitional rules to ease the changeover and as part of these rules contractors won’t be required to verify a subcontractor if they have used them within the last two years. Where a subcontractor has not registered with the HMRC the contractor will be told to pay the subcontractor net of tax at the higher deduction rate.
Another key feature of the new CIS Scheme is the requirement for contractors to declare the employment status of the subcontractor i.e. they must sign a declaration confirming that none of the subcontractors are employees. This shifts the onus onto the contractor to ensure that they have fully considered the employment status of their current and future workers.
Under the new scheme contractors must make a monthly return to the HMRC detailing all payments made to subcontractors during each month along with details of any deductions made and confirming the employment status and verification status of the subcontractors listed. These can be made on paper or electronically and any CIS tax deducted must be paid over to the HMRC by the 19th of the month after that to which the deduction relates. Unlike the old scheme there will no requirement for an annual return.
In addition, contractors must provide each subcontractor with a written statement detailing the payments made and amounts deducted for each month. These will be required by the subcontractor to assist in the completion of their Self Assessment Tax Return. This requirement only exists for those subcontractors from whom deductions have been made..
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