Charitable bodies throughout the UK are failing to comply
with the requirements of the new Construction Industry Scheme
(CIS) introduced over a year ago (6 April 2007) and are
at risk of being penalised.
Justine Riccomini, Construction Industry Scheme expert at
accountants Scott-Moncrieff, highlights two areas where
confusion seems to be greatest and warns charities that
failure to comply – even through ignorance –
will not be tolerated HMRC (Revenue & Customs), which
is becoming increasingly rigorous in its application of
the new CIS rules.
“First, it is necessary to understand what HMRC defines
as contractors and subcontractors. Basically, in terms of
CIS, a contractor is a business which is either engaged
in the mainstream construction industry generally (for example
a building company), or any organisation which spends more
than £1 Million per annum average over three years
of account on 'Construction Operations'.
"A subcontractor is any individual or business which
undertakes work for an engaging party and is paid by them,
within the definition of ‘Construction Operations’."
Within this context, the main difficulty that Riccomini
sees charities grappling with arises from the fact that,
when the scheme changed last year, HMRC wrote to all charities
previously registered under the old CIS scheme to indicate
they were exempt from the new scheme.
This was good news for those charities, but where a charity
has a trading subsidiary that undertakes ‘Construction
Operations’, under CIS, this means that, even though
the charity has been exempted, the trading subsidiary can
still fall within the scheme if it falls within the above
In such a case, even when the parent body – the charity
– has been given exemption, the subsidiary must operate
the CIS scheme regardless.
For example, if a Housing Association registered as a charity
has a subsidiary property company which undertakes “construction
operations” the subsidiary could be liable to the
rules of the CIS scheme - even if the parent charity has
exemption. Thus, the charity is impacted by CIS indirectly.
“If HMRC believes that a subsidiary of a charitable
body is failing to comply, and carries out an inspection,
then they may come down hard. If they find incorrect application
of the law has been going on for some time, they can impose
retrospective fines for up to six years.”
The penalties the Revenue can impose are:
1. Late/incorrect returns - £100 per monthly return
plus £100 per each 50 additional subcontractors
2. Failure to give statements to subcontractors - £3,000
3. Negligently or deliberately providing subcontractors
with incorrect information - £3,000
4. Failure to produce records when asked by HMRC - £3,000
5. Provision of false documents or information by subcontractor
when registering under the scheme - £3,000
The Revenue can also levy a charge of amounts it deems a
contractor should have deducted from its subcontractors,
if these are deemed to be incorrect.
Riccomini added: “A second area of concern is the
‘status’ declaration on each monthly return
a contractor has to make. This requires a contractor to
declare that he has checked, and is satisfied, that no-one
he is paying as a subcontractor should really be on his
own payroll as an employee instead.
“Determining whether someone is employed or self employed
is not a matter of opinion or choice. Whilst there is no
specific definition of status in the legislation, many tax
and employment law cases over the years have established
a set of principles on which status can be worked out.
“However for a layman this is not an easy task, and
yet HMRC has imposed a responsibility on all contractors
to get it right. My advice would be to proceed with caution
– if HMRC disagrees with you they could pursue PAYE
and NIC liabilities on the payments made by your organisation
to the subcontractor.
“Taken back for six years this can amount to a considerable
sum. If in any doubt I would suggest it is important to
consult with a professional adviser who is fully conversant
with the detail of the CIS scheme.”