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Compliance, compliance, compliance

HMRC have revised leaflet IR40(CIS) Construction Industry Scheme, 'Conditions for getting a subcontractors certificate' in preparation for the new CIS scheme in April 2007.

A tax certificate entitles the holder to be paid gross. Those who cannot make the conditions will hold Registration Cards and receive payments after deduction on account of tax and National Insurance contributions (NICs).

To qualify for a tax certificate, a subcontractor must pass three tests per s.562 to 565 ICTA 1988 (which lays down respectively the conditions for individuals, partners and companies), these are:

• Business test
  
• Turnover test
  
• Compliance test

Business test
The business must be carrying out construction work in the UK or providing labour for such work; run through a bank account, with proper records; and run from proper premises with proper stock, equipment and other facilities.

Turnover test
This test is based on net turnover, which is gross income(net of VAT), from construction work less the cost of materials. There are no changes to limits in the three different turnover tests; the standard three-year test, the six-month test and the alternative test. Individuals and partners need to have a turnover of £30k p.a. or a minimum of £81k over three years. Large partnerships and companies need to show turnover of £200K p.a. or a minimum of £540k in total over three years.

Compliance test
For this test the period of three years ending with the date of application is known as the 'qualifying period’. For all periods ending within the qualifying period a scheme applicant must have

• completed and returned all tax returns on time
  
• supplied any information to do with tax that HM Revenue & Customs (HMRC) has requested
  
• paid all tax and NICs due personally or from a business, payroll or as a contractor on time.

Complying in full with the CIS scheme is possibly the most onerous task facing anyone in business, however, HMRC may in certain circumstances consider that some compliance failings are 'minor and technical', and if so, these will be ignored.

Minor and technical failure
Whether a compliance failure is minor and technical or not, is a matter of judgment, and the question does often have to be decided by the courts. Judges frequently point out that guidance given in IR40 CIS is only HMRC’s interpretation. More importantly, a decision may often need to be made about the applications prospects of complying in the future, given significant problems in the past.
The appendix of the revised leaflet sets out the main types of failure that can be disregarded from HMRC’s point for view. These range from failing to submit returns and pay taxes on time, to failing for technical reasons, such as not operating the CIS scheme correctly or completing returns or vouchers incorrectly.

The following are normally regarded as minor and technical failures in respect of returns and tax payments:

• Failure to submit a SA tax return on time which did not attract a penalty (perhaps because of a successful appeal), or where the penalty is cancelled because there is no outstanding tax.
  
• Where a return is late and a penalty (other than a continuing daily penalty) is paid promptly, providing the delay had not resulted in the postponement of a significant amount of extra tax.
  
• Failing to make a tax payment on time, providing it does not attract a surcharge.
  
• Two or less late payments of PAYE or subcontractors deductions (paid within 14 days of due date).

Examples of minor and technical failures in respect of operation of the scheme include:

• an occasional delay in providing a voucher to a contractor
  
• transposed or slightly incorrect figures on a voucher
  
• occasional omissions, such as a signature or payment date.

Failures not treated as minor and technical:

• Non-payment of any tax or two or more late payment surcharges. For PAYE, this means making payments more than 14 days late on three or more occasions.
  
• The existence of formal proceedings for recovery of unpaid liabilities.
  
• Tax irregularities discovered after an enquiry for periods ending within the qualifying period and outstanding liability has not been paid or payments under an instalment offer have lapsed.
  
• Abuse of the Scheme where penalties are imposed or criminal proceedings instigated, or any continuing failures to operate the scheme correctly, such as failing to inspect cards or ensure that they are valid.
  
• Persistent failure to complete returns correctly or sign returns, including vouchers, understating deductions from subcontractors or claiming excessive repayments of deductions.

HMRC are not inclined to accept that ignorance of the full working of the scheme or the illness of a key person are reasonable excuses for not operating the scheme per se. There have to be pretty exceptional circumstances. Whilst it is common sense for anyone in business to have contingency plans for an emergency such as a prolonged illness, for those in the CIS scheme, it is almost mandatory.

Employment status problems
Subcontractors and contractors can call HMRC's new Employment Status Indicator tool to help them out, but persistent failure to identify employees correctly is going to rank as a significant failure from HMRC's perspective within the scheme. This is an area where only judgment of the specific facts of the case will determine whether such a failure can be deemed as minor and technical.

Nichola Ross Martin