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Intellect becomes the first CIS reform software to be approved by HM Revenue and Customs

The IT implications of the reform of the Construction Industry Scheme

The HM Revenue & Custom's (HMRC) Construction Industry Scheme (CIS) applies not only to Contractors in the construction industry but any other organisation that employs Sub-contractors - like Local Councils, Corporates etc. There are over 250,000 registered contractors and over 2 million sub-contractors on HMRC records that will be affected by these reforms.
 
The reform of HMRC CIS was due to commence in April 2006 but, after pressure from the Industry, has now been postponed by the Revenue to April 2007. Historically the CIS has been associated with Payroll systems, but the changes are more related to an Accounts Payable function than Payroll. 

Changes proposed

The new CIS will require records to be kept by Contractors of the Sub-contractors they employ, their different tax status (3 levels proposed), payments made to them - showing any tax deductions. HMRC wants each Contractor to issue a monthly statement to its Sub-contractors showing the payments made and tax deducted each month. HMRC requires a monthly tax return from each contractor showing the Sub-contractors paid each month, their ID details for verification, the amounts paid and the tax deducted.

HMRC will require that new Sub-contractors employment status is verified before employment. This can be undertaken by telephone, web-access or by electronic message. The verification number will be required to identify the Sub-contractor. There are complex ‘roll over rules so that a ‘subbie' paid under the old scheme may be paid under the new scheme without verification. These rules allow Contractors to continue to pay a verified Sub-contractor if they have been paid & reported to the IR in the current tax year or previous 2 tax years. Contractors have to sign a clause each month that confirms that they have considered the employment status of every Sub-contractor included in the monthly return, and they are satisfied that the contracts that exist are not employment contracts.

HMRC will send out pre-printed monthly returns to registered Contractors. These will show those Sub-contractors already working for the contractor. Some Contractors may find it easier to complete this information on HMRC's web-page or alternatively the information can be sent electronically by EDI or the more flexible XML upload to the Government Gateway.

Software Availability

Many existing Payroll providers will not be providing an upgrade to their payroll systems for CIS. Suppliers of Finance Systems will be providing an upgrade to their Accounts Payable package but that may be a significant system change for the Contractors.

HMRC has now finalised the technical specifications, but some software developers may not yet have notified their users of their readiness to support the changes to CIS. BASDA has listed its member's products that will have the new CIS capability at the bottom of this page.

Some Contractors with an IT capability may be planning to modify their own systems to meet these changes. That should not be a problem for the data recording and the monthly returns, but they will find it extremely difficult to meet the stringent requirements for HMRC's eFiling of returns. The CIS messages had been complicated by the introduction of the IR-MARK which requires a SHA-I Hash - a cryptographic message digest algorithm using Canonicalised XML - not for the faint hearted!

IT Issues

The biggest issue is the matching of the data held by HMRC on approved Sub-contractors with the data held by the Contractors. HMRC's system will only support one of the many different trading names Sub-contractors may have. HMRC will supply a Unique Tax Reference (UTR) to the parent company but will be unable to identify subsidiary trading names.
 
HMRC holds data on the sub-contractor either from its Self Assessment database (4 fields - Salutation, Firstname, Middlename, Surname) or its Corporation Tax database (2 fields - Registered company name and Trading name). For the electronic returns we have to be able to return the 4 field version or the 2 field version for an exact match. Contractors may only have one field in their Accounts Payable system for supplier name. 
 
Contractors will also be required to hold the sub-contractor's Unique Tax Reference (UTR) as well as the Company Registration Number (CRN) or National Insurance Number (NINO).
 
Since approved trading names have been truncated in the past by HMRC, there may be problems verifying trading names longer than 20 characters with HMRC systems. Only 13% of companies have registered an alternative trading name with HMRC. 
 
HMRC will allow corrections to be made to sub-contractors as long as the monthly return only shows payments to a sub-contractors.  Any refunds have to be agreed with HMRC beforehand and arrangements made separately.

The above information was kindly supplied by BASDA.

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