NEW CONSTRUCTION INDUSTRY SCHEME

Originally the start date for the New Construction Industry Scheme was the 5 April 2005. Postponements put it back, first to 5 April 2006 and then to 5 April 2007. Recently, H M Revenue & Customs appear to be gearing up as there have been frequent postings to the HMRC website about the mechanics for the new scheme, including guidance at the beginning of November to software providers to help them develop the necessary software. All indicators now point to the new CIS being in place by 5 April 2007. There is, however, still no definitive ruling on the ‘higher-rate’ of tax deduction for unregistered contractors. HMRC describe the new scheme as ‘a more straightforward system’ for dealing with the tax treatment of payment to subcontractors. The old cards, certificates and vouchers have been abolished. In their place is a system of monthly returns and checks with HMRC. This is best explained by looking at contractors and subcontractors in turn.

Contractors
The contractors are bearing the brunt of the new scheme. They will have new responsibilities to determine the employment status of workers they pay, verify with HMRC the rate of tax to be deducted from payments made to them and to make monthly returns to HMRC of payments to subcontractors including a certificate that none of them are employees. The returns need to be made by the 19th of each month. Failure to do so will lead to an automatic penalty of £100 for a return of up to 50 subcontractors and a further £100 for every 50 subcontractors thereafter. There could also be penalties of up to £3,000 for each incomplete or incorrect return. For the avoidance of doubt, nil returns must be made if no subcontractors have been paid that month. These too will incur the normal automatic penalties if made late. The main problem contractors will face is in deciding the status of subcontractors. First a contractor should consider whether a subcontractor is self-employed. If he is, the contractor then needs to verify with HMRC the rate of tax to deduct from payments to them. No payments should be made to a subcontractor unless HMRC have verified the subcontractor concerned. HMRC verification checks can be made online, using electronic data interchange, using third party software or over the telephone. There are transitional rules for existing subcontractors. Essentially subcontractors with the old-style CIS4, CIS5 or CIS6 cards and who have been paid since 5 April 2005 do not need to be verified. HMRC will advise as part of the verification process whether subcontractors are to be paid:-

• gross
• under standard-rate deduction – 18%, or
• under higher-rate deduction – probably 40% but not definite yet.

Contractors will then issue a ‘payslip’ to the subcontractors advising them of tax deducted by them each month. There will be no annual returns. Although these procedures seem tiresome, the main area of potential risk is with the certification process. As mentioned above contractors must certify each month that none of its subcontractors are employees and that they have been properly verified. This is in addition to listing the payments made to subcontractors and the tax deducted from them. The danger is that contractor clients used to an annual CIS return and relying on CIS cards, will face a steep rise in penalties from making ill-informed monthly returns which turn out to be incorrect.

Subcontractors
All the previous subcontractors’ cards will be abolished on 5 April 2007. From that date subcontractors will register for CIS with HMRC who will notify them of their status, namely subject to gross payments or standard-rate deductions. If they already hold a CIS4, CIS5 or CIS6, there will be no need to register under the new scheme unless a CIS4 expires before March 2007. New subcontractors will need to register with HMRC and this can be done online or by telephone. Failure by a subcontractor to register will mean that contractors will be unable to verify him and will need to deduct the higher-rate of tax from his payments. The existing turnover, business and tax compliance tests will continue to apply in order for subcontractors to qualify for gross payments.

Conclusion
Compliant subcontractors may not notice much difference under the new scheme. If they satisfy the criteria they can be paid gross or net of 18% tax as before. They do, however, risk higher-rate tax deductions if they fail to register timeously. Contractors, on the other hand, face the prospect of penalties for getting it wrong. Given that returns will be monthly, the penalties could easily spiral to damaging levels. If you want more information or would like to review how the new CIS will affect your business, please get in touch with your usual Campbell Dallas contact or any member of our Tax Consultancy Group.

Changes to Company Van Tax
From 6 April 2007, the tax costs attributable to company vans available for private use will increase by 600% to £3,000 equivalent to the charge made on a £20,000 company car. If private fuel is provided, workers could face a tax hike of 700%. Currently, if a company van is available for private use (unless that private use is insignificant) the tax charge is £500, which is an all encompassing charge, including fuel. HMRC will apply the new charge to all van drivers who are registered for the existing charge unless their companies write in before January, when new personal tax codes are issued. As a result, drivers could be charged the higher level in their April pay packets. This will have a major impact on the take home pay of employees who are given personal use of a company van. A worker who earns £15,000, for example, and has access to a company van and fuel could face a tax increase of around £660 per annum. To avoid the increases, businesses should change the terms and conditions on which they provide vans to reflect that they are not for personal use. Drivers will also need to keep log books of mileage as the tax will not arise if personal use is 'insignificant'. Insignificant means perhaps one or two occasions per year where the van is used on a personal basis. A claim for insignificant personal use will have to be proved to the Inspector. Taking a van home overnight and then going straight to a job, or customer will not count as private use. If there is no other, or insignificant private use then there should be no tax charge on the provision of a company van. HMRC's target isn't really the 'white van man'. In reality, they're after managers who are driving the new breed of double cab pick-ups which, for tax purposes, are classed as vans. But in closing that 'loop hole', the tax man is penalising drivers of ordinary vans for whom this is a major increase. If you want further information on this please get in touch with your usual Campbell Dallas contact, or any member of the Tax Consultancy Group.

A Timely Reminder for the Festive Season...
Seasonal Gifts
An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable.
For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned. If the gift extends beyond one of the items mentioned above, for example from a bottle or two to a case of wine, or from a turkey to a Christmas hamper, HM Revenue staff are instructed to consider the contents and cost before being able to determine whether the benefit is trivial. Like all good things, use it wisely or lose it.

Christmas Party
The office party season looms again and so ignoring the trail of scandal etc. that ensues, what are the tax rules? Basically, the taxman allows tax free, the cost of functions up to the value of £150 per head. To qualify the functions must be open to all employees but they can bring partners. The effect of this rule is that £300 per couple can be spent and not £150 between them. The limit includes VAT and all associated expenses such as taxis, accommodation etc. Where there is more than one function a year and the limit is exceeded the whole cost of one function can become taxable. As an example, lets say an employer spends £70 in May, £90 in December and £55 in March. The whole May cost will be taxable. The £150 limit is not a threshold, it is a limit and any disallowance relates to the whole cost of a function. In the example the total costs are £215 but you cannot subtract £150 and make the balance of £65 taxable. You can take any permutation of whole costs of functions to get as close to £150 as you can and in this case that becomes the December and March costs.

Don’t Forget to File on Time
Please don’t forget to submit your 2005-2006 Tax Return before 31 January 2007.