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CIS: Cost is huge and benefits are small

24th May 2018
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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. 

Taylor Review

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.

Fat chance.

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.

How much!?

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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Replies (5)

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By rememberscarborough
24th May 2018 23:37

Why do people opt to take such complicated measures not to be paid through the PAYE system? Purely because it saves them money through paying less tax. Come up with a system where all pay the same level of taxation and the CIS system becomes redundant. Mind you a good few accountants might be out of a job....

Thanks (1)
Chris M
By mr. mischief
25th May 2018 09:47

Most people in the CIS scheme are about as far away from being employees as it is possible to get.

I don't have many in my own client base - 10 or so - but the features they ALL share are:

1. Expected to , and do, provide a lot of their own tools and other equipment.

2. Work more or less every month for more than one contractor.

3. Often laid off at very short notice due to problems with building regulations etc.

4. nothing which could even remotely be described as an employee "benefit".

That's a quick and dirty, I am sure I could think up more.

Was the previous poster an accountant? Because it would worry me that accountants would be supporting HMRC on this sort of issue.

Thanks (4)
By Kate Upcraft
27th May 2018 14:32

Howard is right to expose the cost to industry/agents of running CIS. What appears to me to be missing from the research on off-payroll in the public sector is any quantification of the total cost of ‘off payroll’. All the focus has been on the upfront burden/cost of the employment status assessment. What about the cost of obtaining the data/net fees to set up a ‘company’ on payroll software designed for individuals, paying over the net amount post payroll when the VAT is still on the invoice not in payroll and providing a statement of witholdings to the PSC and payment over to HMRC. Then there is the small matter of all the incorect autonated tax codes and student loan notices that HMRC issue as they can’t distinguish PSCs from employees as they never thought to introduce a ‘deemed worker’ marker. Of course it would be far too inconvenient to consider these costs. Bear in mind too most PSCs will have tax arrears to be collected outside PAYE as HMRC have instructed us to apply tax code BR to off-payroll fees, rather than the more sensible 0T/1.

Thanks (4)
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By Agutter Accounts
04th Jun 2018 18:58

CIS can be hugely time-consuming, and produce severe cashflow problems for some clients.
not sure it does much for government revenues either when all the deductions are adjusted for tax overpayments.

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By geraldw
25th Jun 2018 12:17

Apologies for late contribution,just catching up after a much needed holiday.My biggest complaint about CIS deductions ( apart from trying to get client's money out of the grasp of HMRC ) is the disturbing recent cases where HMRC are strictly applying the rule of applying the CIS calculation after deducting materials supplied ONLY. i.e. CIS tax is being collected by HMRC on overheads and profit, way in advance of when corporation tax is due. Seems immoral to me, and surely not in line with the original purpose of stopping labour only subbies walking away without paying any tax.

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