A year after HM Revenue & Customs consulted on its proposals to tackle
what the taxman saw as an abuse of the Construction Industry Scheme (CIS), the
issue still rankles among many involved with the industry.
A petition to the Treasury in June, protesting that the government’s
proposals “unfairly single out self-employed construction workers”, garnered
nearly 2,000 signatures.
So are court cases the best medium for dealing with the vagueries of the
industry’s tax system or are there other options?
With the recent spate of cases in the courts, wrangling with the sometimes
potentially ruinous penalties, the scheme has so far been, according to Smith
& Williamson’s national tax director Richard Mannion, “something of a
Cases involving HMRC rescinding the gross payment status of a subcontractor,
often to see it later reinstated on appeal, are particularly problematic. A
number of cases over the last year have questioned whether the subcontractor had
a reasonable excuse for failing to meet all the strict conditions for gross
payment status. It has been hard for advisers and their clients to see where the
line falls in cases where a subcontractor relied on a third party who failed to
do something or in cases where they were unable to pay their tax on time due to
By the rulebook
Tax inspectors have to follow a strict set of rules that have very little
leeway, according to some, leaving cash-stricken subcontractors having their
gross status removed after just one failed payment.
One way to remedy this would be for HMRC to take into account the taxpayer’s
whole payment history, says Williams.
Other CIS cases in the courts over the last year – arguably much higher
profile, especially when involving relatively large amounts, are those involving
penalties levied on contractors and subcontractors under the CIS regime. Some
judges have expressed the view that the penalties levied on the taxpayer breach
the human rights principle of proportionality; that the total penalty amount was
excessive compared to the amount of tax at stake – sometimes even large
multiples of the amount of tax at stake.
In the case of those who failed to file a nil return for a subcontractor on a
monthly basis, the actual tax due is nil, yet penalties have run into thousands
of pounds. Observers note that many cases have gone to court because of the
number of penalties that have been charged, which can mount up fast.
Not everyone is convinced the penalty regime will be adjusted for EU human
rights rules. BDO national head of employment tax Teresa Payne argues that,
unless someone takes their CIS penalty case through the EU courts, it’s unlikely
the penalty regime will change. However, it is believed that a number of tax
inspectors are quietly concerned at the level of penalties charged, with HMRC’s
policy division apparently looking into the CIS penalty regime.
Rather than rely on the courts to deal with the various issues that have
arisen out of the CIS rules, another option would be to tackle the rules with a
proverbial wrecking ball and rebuild afterwards.
Unfortunately, the government’s plans to change CIS have been interpreted by
some as the ball knocking down the wrong building.
Under the government’s proposals, for a construction worker to be considered
self-employed, one of the following criteria needs to be met: provision of their
own plant and equipment to carry out their job; provision of all materials to
carry out the job; and the provision of other workers to carry out the work.
Any worker that does not satisfy any of these criteria will be deemed
employees and taxed accordingly.
However, advisers say the criteria are unfair. In the first year, a worker is
unlikely to meet any of those conditions. And what about those labourers whose
materials and tools of the trade are negligible, or likely to be provided at
their place of work by the contractor, for example a plasterer working on a
building site? They would be deemed employed by the new criteria.
David Williams, managing director of CIS Tax Advice and the man behind the
petition, said: “It will put a lot of people who are genuinely self-employed
into ‘false employment’, paying more tax than they should.”
Rather than penalising the one-man operation working or starting up in
construction, alternative criteria to the government’s plan should be
considered, such as looking at the issue of how much control a worker has over
their working life or whether they pay for the appropriate insurances and health
and safety training at their own cost.
In addition to scrapping the government’s proposals, says Williams, more
resources should be devoted to attacking false self-employment using the current
CIS rules, rather than penalising the genuinely self-employed.
For their part, the Treasury has acknowledged the construction industry is
currently in recession, and has postponed enforcing any new proposals until the
For the time being, there are likely to be more CIS appeals in the courts,
but contractors and subcontractors can minimise the tax risks to themselves in
these difficult financial times.
As far as the construction industry goes, advisers simply suggest working
with HMRC to try and ensure compliance with CIS rules and seek advice when
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