For any construction company, it is critical to adhere to the rules of the Construction Industry Scheme; getting it wrong can be costly in terms of deductions and surcharges. This is even more important with the increased scrutiny from HMRC as part of their efforts to recoup the £130m they believe should be collected in extra taxes from the construction industry.
One of the first things that needs to be reviewed is the employment status of subcontractors. Can you tell the difference between one of your subcontractors and one of your employees? It is necessary to decide whether a person works under a contract of service (employees) or under a contract for services (self-employed, independent contractor). There is no statutory definition of these terms, it is the relationship between the parties that matters. You can find useful information on employment status by visiting the HMRC site at www.new-cis.com.
This is important, because under the new CIS system the contractor will be signing each monthly return to say that this has been done. If the information is incorrect this could potentially put the company at risk of penalty for each return submitted.
It is critical to get the CIS300 Monthly Return in on time because you will face penalties for a late return. Contractors who miss the deadline will be charged an automatic £100 penalty. If the return shows more than 50 subcontractors paid in a month, there will be an additional £100 penalty for every 50 subcontractors. These penalties will be changed for each month that the return is late. Even a late nil return will incur a £100 penalty.
In addition to the penalty for a late return, there will also be a £3000 penalty for an incomplete or incorrect monthly return where the omission or error was caused by negligence or intent. This can include subcontractors or payments being omitted from the return, or incorrectly entered. There is also a requirement to provide net paid subcontractors with a statement of the deduction for each payment or on a monthly basis. Failure to produce these documents will also incur a £3000 penalty.
If a contractor receives gross payment for any work carried out as a subcontractor, then failure to adhere to the new CIS rules can put this gross status at risk. This compliance test is similar to the current system, but the qualifying period is 12 months to the date of application for gross payment, not 36 months as at present. There are no renewals of this application, but HMRC can cancel a company’s registration for gross payment with only 90 days notice. The reason for cancellation might include making more than two late monthly submissions or two late payments of PAYE/NICs/CIS deductions: a costly oversight!
Some things that you should look at:
It is fair to say that a lot of these requirements form part of both the current and the new CIS system. The main difference is that you will now have to handle two rates of tax that can be deducted from your net paid subcontractors. You must collate the data together and ensure that the new monthly return is submitted on time, plus you must sign a declaration stating that you have verified the employment status of all subcontractors paid that month and you need to produce payment certificates to each of those subcontractors. Remember, that taking on any new subcontractors will require you to verify their tax status with HMRC, if they cannot be verified then HMRC will issue a unique Verification Number that must be included on the monthly returns.
Pegasus CIS ion comes with a Subcontractors module that allows you to setup subcontractors details and assign their CIS status. When a Payment Application or subcontractor timesheet is recorded, the system will automatically calculate their tax liability based on this CIS status. Should you decide to certify and pay a subcontractor, Pegasus CIS will produce the payment certificate together with the cheque or BACS output. When it comes to producing the CIS300 Monthly Return, Pegasus CIS will accurately give you all the details of the payments and deductions made to subcontractors in that month. This data can be submitted electronically to HMRC or you can take the figures and enter the information online or onto the paper return. You need never be late with this return when using Pegasus CIS!
However, Pegasus CIS offers much more than a Subcontractors Ledger, it is a contract costing system that has been specifically designed for the construction industry. Not only does it control all of the costs of a contract, it also controls all of the revenue so that you can see the financial performance of all of your contracts. As part of the Contracts Sales Ledger the system allows you to enter Payment Applications, print, certify and produce the associated invoices, handling both the retentions and main contractor discounts.
Pegasus CIS is a powerful contract costing system designed to give you complete management control over your contracts. It controls the whole process from Payment Applications and invoicing through to cost entries from subcontractors, purchases, stock, labour etc. Pegasus CIS comes with state-of-the-art data analysis and reporting tools that provides you with the information you need when you need it.