Agencies must be aware of their responsibilities relating to the CIS

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Danbro, the award winning specialist accountancy firm for contractors and temporary workers, are advising agencies to be tentative with the way they manage their construction industry scheme (CIS) contractors.

The Construction Industry Scheme (CIS) sets out the rules on how payments to subcontractors for construction work must be handled by contractors in the construction industry. The majority of contractors under the CIS scheme are operating as self-employed, where the amount of tax deducted and paid to HMRC is just 20% of their gross payment if registered and 30% otherwise. The main issue on which the Government aims to clamp down, is the fact that many of these self-employed CIS workers should be classified as employees, with PAYE and NICs being due on all the payments they receive.

The government has announced that they may tackle this issue of false self-employment in the next budget, with the construction industry being hailed as the primary area for concern.

 The main benefit for the worker operating as self-employed is primarily driven by the differences in tax and NICs, which are as follows;

  • Employers NICs is paid by employees but not on payments to those engaged on a self-employed basis
  • Self-employed workers pay NICs at a lower rate than employed; and
  • The rules on expenses that can be deducted from gross income are more generous than those applied to employment income

Due to these tax differences, many CIS construction contractors have a financial incentive to operate as self-employed via service providers that heavily promote their self-employed business model. At present many agencies outsource the administrative burden of managing and making the necessary CIS deductions to service providers. They simply pay over a gross amount, relying on the service provider to correctly deduct and pay the CIS tax due to HMRC and then the net amount to the contractor.

However, the agency has to be aware that:

  1. In HMRC’s eyes, the service provider is merely an administrator or nominee (just a vessel for payment to be made to the contractor). The ultimate responsibility for ascertaining the CIS status (0, 20% or 30% of gross) of each contractor, making the correct CIS deductions and sending payment to HMRC is still with the agency. Thus any tax shortfalls that need to be paid can fall back on the agency.
  1. HMRC have made it clear that they do not like the self-employment model that is being promoted by these providers.  The main reason is because many of the CIS contractors running through such schemes can actually be classified as employees and thus have avoided paying the correct amount of tax and NICs.

Following on from this, it is likely that if the new proposed legislation (which will classify whether a worker is employed or self-employed) comes into effect in April 2010, many service providers promoting their self-employed solution will have to re-assess their business model. Furthermore, if agencies have relied on such service providers to administer the CIS deductions and payments to HMRC for their contractors, and the service provider has failed to make these payments, then the agency would be liable for any tax shortfalls, which could be a considerable amount.

Danbro’s Gerry Gregoire explained, “Agencies need to be aware that it’s only a matter of time before changes are going to be made and they need to be ready to embrace them. Danbro have the systems in place to provide each worker with an effective accounting solution to fit their individual circumstances. Whether they set up under our Umbrella as an employee or operate as self-employed under our CIS Construct service, we can help.”

“It’s inevitable that providers promoting their self-employed business model will be affected by the proposed legislation. They no longer will be able to pigeon hole all construction contractors as self-employed, and as a result many will have to use an alternative solution. Such changes could leave agencies dealing with hundreds if not thousands of contractors mid contract, with no payroll solution to use. Now may be the time for agencies to assess their current practices, ensuring the risks identified are minimised if not eliminated.”

For more information on how Danbro’s solutions could help your agency, feel free to contact us today on:

Head Office: 01253 600140

London Office: 0207 836 8400

Manchester: 0161 238 4918

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