Howard Royse explains why the deduction of tax at source from workers’ invoices, as required under the construction industry scheme (CIS), should not be expanded to other industry sectors.
Discussions following the Taylor Review, and the problem of defining the self-employed status of some workers, have generated a number of proposals. One of these is the suggestion that principle of tax-deduction-at-source should be borrowed from CIS and applied to other industries.
However, before running with this idea, I strongly urge you to consider the cost that the construction industry bears in administering CIS.
Lies and twaddle
“The cost of CIS can’t be all that much, surely?” That was the attitude of HM Treasury when it assessed the cost of the old CIS prior to the introduction in 2007 of what is the current scheme. The Treasury reckoned that the old scheme cost industry £52m per year, but that the new improved scheme would only cost £30m per year.
The workings on the back of the Whitehall envelope failed to take account of the fact that there were about 150,000 registered CIS contractors in 2007. Using the Treasury’s figures would mean each of them spent, in administering CIS for the whole business, the equivalent of half an hour per week of one person on minimum wage. This was not realistic.
The fine minds in the Treasury obviously hadn’t read the 2006 government report commissioned from KPMG, which arrived at the figure of £321m as the cost to industry of CIS. To put that into context, the whole cost of VAT – to all industries – was about £1bn at that time.
The cost of the current CIS can be reasonably estimated as being upwards of £250m per year. Think about the tasks required:
- verification of subcontractors,
- entering and updating their details,
- reviewing work for the scope of CIS,
- reviewing invoices to establish work to which deductions should apply,
- making and checking the deductions of tax,
- issuing deduction certificates,
- completing the monthly returns (and getting the right person to sign them off, including the statement on the employment status of the subcontractors),
- paying over the tax; plus
- cost of the software to help with all of that and the additional accountancy costs of incorporating the deductions taken and, potentially, suffered.
Thousands of companies lose the availability of funds from the tax deducted (once PAYE deductions are netted off). Also hundreds of thousands of subcontractors are in the same position, waiting until after 5 April for their own money back. It’s not just a bit of interest if payments are paid late – gross payment status could be in jeopardy.
Does the CIS raise revenue?
Something like £5bn is paid each year to HMRC under the CIS. But, the answer to how much tax is raised should be: nothing. The deductions are offset against SA liabilities for sole traders and partnerships, PAYE deductions for companies, with any excess tax repaid once it is claimed.
However, each year HMRC retains £300 -£400m of CIS deductions. This was revealed by a FOI request, for the three years to 2009/10, and it has remained at that level since.
HMRC was asked for an explanation. Eventually HMRC discovered that some tax was claimed several years after it has been deducted under CIS, and that some of the deductions related to tax that would have been due had the workers declared their income (except they didn’t).
HMRC’s estimate was that it was probably keeping £60m per year after off-setting tax which should have been paid on undeclared income against the gross amount of £300- £400m, but given HMRC’s form on tilted estimates, the net gain for the tax department is probably more than that.
The Public Accounts Committee asked what steps were being taken to identify and repay this money, in the event of a registered subcontractor underclaiming. This question has never been answered. But of course, why would HMRC use resources to invest in a system that hands back money it doesn’t have to work for?
What’s the point?
This begs the pertinent question: what has tax deduction at source got to do with employment status?
CIS came about because of undeclared income paid to subcontractors. Now that there are far fewer cash transactions, this is much less of an issue. But the discussions around the Taylor Review revolve around employment status and not about declared income (albeit with the side issue of employer’s NI).
Imposing a withholding tax on other workers will not make a scrap of difference to the determination of their employment status based on the circumstances of their respective engagements. Nor, indeed, to their employment rights. In the meantime, more businesses would have to shoulder the cost of more bureaucracy. Why would this idea gain any traction?
Cloud on the horizon
You can see how the idea of more withholding taxes would appeal to HMRC. Plus points are: the acceleration of tax receipts from income, some of which may never be claimed to offset liabilities, industry would do all the hard work, and there would be penalties to be farmed if the businesses didn’t comply with the rules 100%.
There is far less validity in the argument for retention of CIS as a system to compensate for under the table cash payments, than there was at its inception. The idea that other industries should have to manage such a system is not only bonkers, but also entirely at odds with the government’s pledge to reduce the administrative burden on business.
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Howard Royse is the ICAEW representative for CIS and author of Construction Industry Scheme – Guidance and Commentary (Claritax Books)