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Pre-Budget Report
08 November 2000
Building on the review of the Construction Industry Scheme (CIS) undertaken since Budget 2000, the Government has decided to extend the scope of electronic data exchange, starting at the end of November 2000.
As a first step, more subcontractors will be able to qualify for the CIS5 certificate which removes the requirement for them to present a certificate in person, and which allows contractors to provide details of payments electronically to the Inland Revenue. The Government believes that, in the longer term, big savings can be achieved through a more fundamental shift to electronic data exchange, and will continue to consult with the construction industry on the precise steps required to achieve that shift.
The changes to the CIS announced today will help around 8000 businesses and save over £1 million of administration costs across the industry.
DETAILS
1. The Construction Industry Scheme is successfully identifying workers who have previously not declared their earnings to the Inland Revenue and the turnover test has ensured that the majority of subcontractors who supply only their own labour face tax deduction at source. As a result, over 100,000 construction workers are paying tax for the first time on their income. Over £1 billion has been deducted from subcontractors in the first year of the scheme. And the reduction in the rate of deduction to 18% from 6 April this year will mean that substantially fewer subcontractors will need to claim a repayment.
2. The compliance tests which were introduced with the new scheme have been successful in making sure that even businesses which pass the turnover tests can only receive payments without deduction of tax if they have a history of good tax compliance. The Government believes that the scheme is more effective than the previous scheme in tackling tax fraud and evasion within the industry.
3. On 21 March the Chancellor announced that two consultative groups would be set up to review the scheme:
4. This review, carried out through the summer, aimed to identify ways to improve the scheme whilst continuing to protect the flow of revenue to the Exchequer. Both consultative groups have identified electronic business as the way to reduce substantially the administration costs of the scheme.
5. Allowing more businesses to qualify for a CIS5 certificate will automatically mean that payments made to them will be vouched using the CIS23 procedures, rather than the CIS 24 procedures. (The particulars on CIS 23s can already be sent electronically, unlike CIS 24s.) Additionally it will mean that representatives of those businesses will not have to present their certificates in person and this too will reduce their costs.
6. The first change will be to reduce the turnover test for a CIS5 to £1 million. This will take effect from the end of November. The second change will be to allow partnerships to qualify for CIS5 certificates on the same basis as companies. This change requires IT changes so cannot take effect before April 2001.
7. The Inland Revenue has also been asked to continue to work with a wide and fully representative cross section of the industry to design a secure scheme that enables all data to be exchanged electronically: and to work on any transitional steps needed to help the industry meet the challenges of e-business.
NOTES FOR EDITORS
8. The new scheme that took effect from the 1 August was built largely on the principles of the old scheme. Changes to the Scheme were introduced in Schedule 27 Finance Act 1995 and Section 178 Finance Act 1996. Further minor changes were introduced in Schedule 8 of Finance Act 1998.
9. Changes were necessary because the rules that governed the entitlement to 714 certificates - which allowed subcontractors to be paid gross - proved increasingly ineffective in limiting the numbers of subcontractors who were paid without deduction.
10. Under the new scheme, all subcontractors must register with the Inland Revenue and the majority must present their documents to the contractor before they can receive payment for work they have done. Vouchers need to be completed (either by the contractor or subcontractor) for all the payments that are made under the scheme. These are ultimately sent to the Revenue to facilitate compliance checks.
11. The majority of subcontractors have been given a CIS4 registration card, which requires them to be paid after deductions on account of tax and class 4 National Insurance Contributions. The card carries a photograph of the cardholder and must be presented in person.
12. The CIS6 certificate is issued to those subcontractors who pass the statutory tests and allows them to receive payment gross. It is the normal gross payment certificate available to those working within the industry. It carries a photograph of the certificate holder and must be presented in person.
13. The CIS5 certificate (which replaced the old 714C) has up to now only been issued to companies that can make a business case - there are published rules - or have a turnover in excess of the set limit - this will now be reduced from £3 million to £1 million. From April partnerships that meet the criteria will also be able to qualify. This certificate does not carry a photograph and need not be presented in person, but the contractor completes a CIS23 voucher making it more secure than under the previous 714C scheme.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 020 7438 6692 / 6706 / 7327 (Out of hours: 07860 359544)
Non-media enquiries to: 020 7438 6420 / 6425 (Office hours only)
