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Construction Industry Targeted by the Revenue

The Inland Revenue recently issued 57,000 letters to taxpayers working in the construction industry asking them to consider their self-employed status. The reason for this attack relates to the Construction Industry Scheme (CIS) and where a contractor has paid particular sub-contractors regularly. If they have, then they can expect to receive a letter saying they may have got it wrong and these sub-contractors should be treated as employees. The net result is a potentially large tax and NI bill.

This is clearly an exercise in preparation for the new CIS, which comes into force in April 2006, and preventative action needs to be taken to ensure that you protect yourself against this Revenue move if you are in this industry sector.

What does it mean to the contractor and sub-contractor in the Construction Industry?

Simply, the Revenue is seeking to re-classify some workers as employees. They will make the case that a worker should not have been operating through his CIS certificate, and as he is an employee he should be taxed through the PAYE system, and pay his tax at the basic and higher rates, and most importantly, there will be a liability to Class I National Insurance Contributions of 11% for employees and 12.8% for employers. In addition, the expenses claimable will have to be reviewed as the rules for the self-employed and employees are substantially different. There may also be interest and penalties charged where the Revenue believe the contractors and sub-contractors have got it wrong.

How does a worker know whether he should be within the Construction Industry Scheme or if he should be an employee?
This is a grey area and he needs to examine his working practices and consider if he controls how and when he works, does he provide all his own equipment and could he send a substitute instead of himself?

There may also be interest and penalties charged where the Revenue believe the contractors and sub-contractors have got it wrong.

These are only some of the issues to be considered. There are many other questions the Revenue will want answers to, should they review the status of a worker.

In the letters the Revenue will invite the recipients to contact them and they will ask them for their details and run them through a computer programme, which will make the decision. This software is by no means infallible and its findings should be checked in all cases. They will also invite those without letters who are concerned to contact them and again their computer will provide their answer.

What should contractors and sub-contractors do?

Firstly you should take advice from Glazers and have your own status or the status of your workforce reviewed and a risk assessment carried out. This would determine how much additional tax and National Insurance may have to be paid by the contractors or sub-contractors, if you or they have been operating within the Construction Industry Scheme incorrectly. You should not rely on the Inland Revenue checking your position. An independent review may take a completely different view and offer some hope that you may not be charged additional duties. Secondly, you should consider what would happen if the Revenue were to review your status in detail. Who would pay the professional fees for this review? Some status reviews can last over 12 months with the Revenue calling for meetings with all the parties concerned.

Glazers can provide advice and insurance, which limits your exposure as a construction industry contractor. We can help you to avoid the penalties by ensuring that your sub-contractor arrangements are compliant and correct, and we can defend you in the event of an enquiry through our insurance policy, which will cover our fees for this work.

For more information contact our tax partner Pratima Patel on 020 8458 7427 or email pratima.patel@glazers.co.uk

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