Charities left confused over new CIS rules 08/07/08

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 definition.

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.”

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