The Scope of CIS
The definition of which occupations fall within the scope of the construction industry has not changed.
Types of work covered by the scheme:

Site preparation
Alterations
Dismantling
Construction
Repairs
Decorating
Demolition

Property developers or speculative builders, erecting and altering buildings in order to make a profit are treated as “mainstream” contractors and should register as such.
There is a small amendment to be observed. The scheme now includes any operations that form an integral part of, are preparatory to, or render complete any works connected with painting and decorating. If a contract includes some work within and some outside the Scheme, then all payments made under the contract will come within the scheme.

New subcontractors need to register for new CIS with HMRC

New subcontractors need to register with HMRC. They may apply to be paid gross by contractors for whom they work, like those who had tax certificates under the previous CIS, or they can simply register to be paid under deduction, like those who had registration cards under the previous CIS
To qualify for gross payment, subcontractors must pass the business, turnover and compliance tests

Contractors must check or verify subcontractors with HMRC

Subcontractors must give contractors their name, unique taxpayer reference and NI number details (or Company Registration Number) when they enter into a contract. HMRC will give subcontractors this information when they register and existing subcontractors will find it on form CIS336, which HMRC will send out before the Scheme starts.
Contractors must then be satisfied, where the subcontractors are not limited companies, that any contracts they have with the subcontractors are not contracts of employment
Contractors must then contact HMRC to check the subcontractor’s payment status (gross payment or payment under deduction). This is called “verifying”. They will usually only need to do this when they take on a new subcontractor.
HMRC will tell contractors whether to pay the subcontractor gross or after a deduction has been made. The standard deduction rate will be 20% to take effect from 6th April 2007.
If the subcontractor has not registered with HMRC or has not given the accurate details to the contractor and they cannot be matched, a deduction at a higher rate must be made from the subcontractor’s payments.

Verification number

HMRC gives contractors a verification number for the subcontractors that can be matched with the database. The number will be the same for each subcontractor verified at any one time.
If the subcontractor cannot be matched, the contractor will be given a special verification number unique to each “unmatched” subcontractor. These numbers are important and the contractor must record them on the subcontractor’s payment statement(s) – see below.

Paying subcontractors and making deductions

Contractors must pay subcontractors in accordance with what HMRC has told them. That is, gross payment to those subcontractors who have agreed this with HMRC or payment under deduction, at the standard rate, for the other subcontractors. Subcontractors that were unable to be matched during the verification process should have higher rate deductions made from their payments.

Subcontractor’s payment statement

Contractors must give a statement to each subcontractor from whom they have made a deduction, whether at the standard or higher rate. These can be made electronically.
Statements must be issued within 14 days of the end of the tax month. The contractor can issue a statement to cover all payments made in the month or issue statements with individual payments. They should show the contractors details and details of the payment made and the deductions made from that payment.
Contractors must enter onto this statement the “unmatched” verification reference number if this was given to them by HMRC during the verification process. The subcontractor will need to get a refund later.
Statements can be provided in any style the contractor chooses (including electronically) but they must be in writing and contain certain information.
Statements do not have to be issued to subcontractors from whom a deduction does not have to be made.

Contractors Monthly Return

Contractors must make a return every tax month to HMRC showing the payments made to all subcontractors, whether paid gross or under deduction. It must show all details of the subcontractors’ names and reference numbers and of the payments made to them and any deductions made, where appropriate.
HMRC will send contractors the monthly return in plenty of time already completed with the subcontractors names and reference numbers where they are known.
Contractors must send back these returns to reach HMRC within 14 days of the end of the tax month to which they relate.
There will be penalties if HMRC receive the return back late and the contractor’s own gross status as a subcontractor may also be at risk.
Monthly returns may also be sent electronically or over the Internet. Nil returns can also be made by phone.
There are no annual returns in new CIS

Paying over deductions

Contractors must pay over all deductions made from subcontractors in any tax month by the 19th of the following tax month (or by 22nd if payments made electronically). If your business is a company which itself has deductions made from it’s payments as a subcontractor, you may set these deductions against the companies liabilities for PAYE and NICs and any CIS deductions it is due to pay to HMRC.

These notes are for guidance only and reflect the position at the time of writing February 2007. They do not affect any right of appeal.
For further information on employment status please feel free to contact us.