FINANCE BILL 2002: EXPLANATORY NOTE
CLAUSE 40: TREATMENT OF DEDUCTIONS FROM PAYMENTS TO SUB-CONTRACTORS
SUMMARY
1. This Clause takes effect from 6 April 2002 and provides for companies who are in the Construction Industry Scheme (CIS) to set off any sums deducted under the scheme from payments they receive as a subcontractor, against payments they are due to make to the Inland Revenue in respect of their liabilities arising as an employer or contractor. These amounts include income tax under PAYE, NICs deducted from payments to employees and any deductions under the scheme that they make in their capacity as a contractor. (REV C&E 2)
2. The clause will not affect the overall amounts that a company is due to pay to the collector of taxes but it will change the way it can set deductions made from its income under the CIS against those payments.
3. The clause replaces the existing provision under which scheme deductions can be set only against a company's corporation tax liability once that liability has been calculated after the end of it's accounting period. The new provision will enable most companies who have scheme deductions made from their income to make practical use of those deductions at a much earlier point in time than has previously been possible.
4. Only those CIS deductions made from a company's income on or after 6 April 2002 can be set off in this new way. Equally, those deductions can only be set off against payments the company is liable to make to the Inland Revenue from 6 April 2002 in respect of deductions of PAYE, CIS, NICs and student loans made from the payments to it's own employees and subcontractors.
5. The clause provides for the detailed procedures for implementing the new rules to be contained in regulations to be made by the Board. It is intended that these regulations will specify matters such as the accounting for offsetting excess CIS deductions remaining after all obligations as an employer have been satisfied.
6. The Clause does not change the way that deductions are set against income tax or Class 4 National Insurance where payments are made to individual subcontractors or unincorporated bodies. However those parts of the CIS legislation that relate to the way deductions are treated for all subcontractors (including those that are not companies) have been moved to a new S559A to make the legislation as a whole more easy to follow. This change is purely technical and has no practical effect on how the scheme operates or what subcontractors who are not companies should do.
7. The revised S559 will continue to provide, as it does now, for a deduction to be made in particular circumstances, for the percentage to be deducted to be determined by Treasury Order and for the amount of the payment to which that percentage to be applied. There are no changes to these provisions.
DETAILS OF THE CLAUSE
8. Clause 40 (1) inserts a new section - Section 559A into Chapter 4 Part 13 of the Income and Corporation Taxes Act 1988. The new section comes after Section 559. It imports from S559 all aspects relating to procedures for dealing with CIS deductions from payments made to companies.
9. The new Section 559A has seven subsections:
10. Section 559A(1) provides for any deduction made by a contractor to be paid to the Inland Revenue, and also ensures that the whole amount of any payment made to a subcontractor, including the amount of any deduction, is brought to account for the purposes of calculating the amount on which tax (either income tax or corporation tax) is calculated.
11. Section 559A(2) deals with the treatment of CIS deductions from payments to subcontractors who are not companies. It provides for the deductions to be treated as income tax paid on their profits from the same income. The total amount that the subcontractor pays to the collector of taxes to satisfy it's liability to tax is therefore reduced by the amount of the deductions. The subsection also provides for any deductions remaining after the whole of the tax liability is satisfied to be used against any liability to Class 4 National Insurance that is collected at the same time.
12. Section 559A(3) enables the Board of the Inland Revenue to make regulations to deal with the treatment of CIS deductions from payments to subcontractors that are companies. It has four paragraphs.
13. Paragraph (a) specifies that the regulations shall provide for the deductions that have been paid by the contractor to the Inland Revenue to be treated as paid on account of ?relevant liabilities? of the subcontractor. In particular, the regulations will provide for the order in which the deductions will be set off against the particular payments that the subcontractor is due to make for PAYE, NICs, student loans and CIS obligations and will determine whether the subcontractor should, after taking into account the deductions, make any remaining repayments monthly or quarterly.
14. Paragraph (b) enables the regulations to provide for the deductions to be set against the payments that the subcontractor is due to make in the same income tax year as the deductions are made. For example, if a deduction is made from a payment on 10 June it will be set against the payments that the subcontractor is due to make to the collector of taxes in the income tax year 6 April 2002 to 5 April 2003. Further, the regulations will set out the procedure for dealing with the deductions on a month by month basis. For example a deduction in month one of the income tax year will be set against the ?relevant liabilities? arising in that month. Where the deductions are greater than the value of the relevant liabilities for that month the excess deductions will be carried forward to month two to be set against any relevant liabilities arising in that month; and so on.
15. Paragraph (c) allows the regulations to specify circumstances in which any excess deductions remaining by a company after being set against it's ?relevant liabilities? may be treated as corporation tax. The purpose here is to allow any excess deductions that remain after the end of the income tax year to be franked against any corporation tax due rather than be repaid.
16. Paragraph (d) sets out the general rule (which applies to all subcontractors) that where the deductions exceed the relevant liabilities? the excess will be repaid. The regulations will deal with the mechanics governing the repayment, the intention being that any excess remaining will be repaid following the submission of the end of year PAYE documentation which is due in May after the end of the income tax year.
17. Section 559A(4) explains the meaning of relevant liabilities? in Section 559A(3) and provides for these liabilities to be payments that a subcontractor is due to make to the collector of taxes in accordance with obligations placed on him in his capacity as an employer or a contractor. These obligations are PAYE, NICs, deductions under S559 ICTA 1988, and student loan recoveries.
18. Section 559A(5) contains definitions of terms used in the new Section 559A. It has three paragraphs.
19. Paragraph (a) defines a subcontractor as a person for whose labour (or the labour of his employees or officers) a payment is made.
20. Paragraph (b) defines ?relevant profits?. This term appears in Section 559(A)(2) and (3)(c) and means the amount of the profit that relates to the income from the business that gave rise to the payment. The effect is to limit the availability of a set-off so that, for example, a subcontractor that is not a company can set deductions made from his income as a subcontractor against the liability to income tax on his profits only from construction operations.
21. Paragraph (c) defines Class 4 National Insurance Contributions as being those contributions that are payable under the Social Security Contributions and Benefits Act 1992.
22. Section 559A(6) provides for regulations under Section 559(A) to be made by the Board of the Inland Revenue.
23. Section 559A(7) provides scope to deal in the regulations with incidental and consequential issues or to adapt the general procedures to fit the circumstance of particular cases. The mechanics of the scheme as a whole are covered in regulations and the nature of the construction industry means that business practices are constantly developing. These powers will, where appropriate, enable the Inland Revenue to respond to these developments within a reasonable timescale.
24. Clause 40 (2) is a consequential amendment to Section 829 Taxes Act 1988 and is required because the reference in Section 559 to deductions made under that section being income tax is being moved to the new Section 559A. The addition of a new subsection (2A) to Section 829 ensures that where a public department is a contractor a deduction required to be made under Section 559 is deemed to be income tax. Consequently, the public department has the same obligation as other contractors to make deductions under Section 559 from payments they make to subcontractors.
25. Clause 40 (3) is a consequential amendment to Section 59D of the Taxes Management Act 1970. This section contains the general rules about when corporation tax is due and payable. The amendment at S59D(4)(d) substitutes reference to Section 559 for Section 559A which replaces the provisions in Section 559 on the treatment of deductions in the Construction Industry Scheme. The effect of the amendment is that the deductions cannot be set off twice - once against ?relevant liabilities? of the subcontractor as an employer or contractor, and again against the subcontractor's liabilities as a company. They can only be set off as set out in the regulations under the new Section 559A.
26. Clause 40 (4) deals with the commencement of the clause. It provides for the provisions of Section 559(A) to cover any deductions made from the 6th April 2002. It also provides that any regulations made under S559(A) may take effect from that date. This means that there is no need for subcontracting companies to distinguish between deductions made before and after the Finance Bill and so provides for consistency in treatment of all payments made in the 2002-2003 income tax year.
27. Nothing in the subsection requires any deductions that have already been set against corporation tax as part of a self-assessment, or any repayment of deductions that may have been made up to the passing of the Finance Bill to be undone. In practice, companies will be able to choose whether to set deductions that are made from their income between 6 April 2002 and Royal Assent against corporation tax when they send in their return.
BACKGROUND NOTE
28. In 2001-2002 we received complaints from the construction industry that the 18% rate of deduction for companies in the Construction Industry Scheme was not consistent with their corporation tax liability, which was, in many cases, significantly lower than 18% of their profits. Before this measure was introduced, companies could only receive a repayment of excess deductions when they filed their corporation tax self assessment at the end of their accounting period. This therefore hit the company's cash flow and their ability to compete effectively in the market place.