It is not just the money that is an issue. Many of Winter's loyal subcontractors may well turn to the black market because they find it too difficult to live with the Construction Industry Scheme, as the new system is called. And skilled workers may even be forced out of the industry altogether 鈥� something construction can ill-afford.
The Revenue's aim is to recoup the 拢100m in tax and National Insurance contributions that goes unpaid each year because of tax evasion in the construction industry. The big difference between the existing 714 system and the CIS that replaces it from this summer is that most self-employed contractors will be taxed at source, rather than calculating their own returns.
The CIS is based on three taxation forms: CIS4, CIS5 and CIS6. CIS5 and CIS6 are gross payment certificates. This means that contractors are paid gross and send the Revenue its tax cut at a later date. To qualify for this status, firms have to have had clean tax records for the past three years and a turnover greater than 拢30 000 a year. Under CIS4, the employer, say, a main contractor, takes tax off before paying its subcontractors, even though the subcontractors remain self-employed.
Problems, problems
The problem for many small contractors is that currently they have 714 self-employed status and pay their own taxes, but will not qualify for the equivalent CIS5 and CIS6 status under the new rules. Instead, they will have to pay as they earn under CIS4, resulting in them being less well off because they cannot earn interest on their tax money before handing it over at the end of the financial year. This is why many reputable 714 contractors may turn to the black market.
This problem is not just being faced by small contractors, such as Winter's 拢1.5m-turnover Shellard Winter, which will have to turn to the large, expensive subcontractors to install its central heating. Large contractors are feeling the effects, too. Colin Cole is group deputy finance director with major housebuilder Westbury Homes, which has eight regional divisions and works with 1000 subcontractors. Most of Westbury's subcontractors have a 714 certificate and are paid gross. Cole is worried that subcontractors that don't qualify for the equivalent CIS5 and CIS6 will go to ground, reducing competition and increasing costs. He says: "My main concern is the number of contractors that will say 'I can't be bothered', which will create cost pressures and could push up prices."
On the other side of the coin, there is a fear that contractors will discriminate against companies with CIS4 status. Small subcontractors fear that the administration involved in taxing firms at source will create too much hassle. So, even if the CIS4 contractor is the best for the job, it may not be employed 鈥� not a very Egan-friendly outcome.
The Federation of Master Builders is concerned about discrimination and is intending to collect evidence of how major contractors and clients behave once the scheme is up and running.
FMB deputy director-general Brian Flint fears the worst: "We are building a strong picture that there is likely to be a number of clients refusing to deal with people with a CIS4 registration card," he says.
Major clients and contractors think Flint's fears are unfounded. They say that having a good relationship with a subcontractor is more important than the card they carry.
Added bureaucracy
Even those that qualify for the all-important gross payment certificates are being saddled with additional burdens. The problem is that the CIS6 certificate must carry a photograph of a company director and, in order to receive payment, the director must present his card 鈥� mug-shot and all 鈥� to the client in person. This is to ensure that the card is not misused. The 714 certificate carried no photocard and was on occasion used unlawfully.
David Croft is a director of 拢1m-turnover general contractor New Homes and a member of the FMB. The company works for clients such as National Power and the Atomic Weapons Establishment. "Although we work within a 5 mile radius of Swindon, the payment centres for our clients are all over the country," he says.
Croft is waiting to hear if his business has been accepted for a CIS5, which does not require a photocard. If he is unsuccessful and has to use a CIS6 card, it is likely that Croft will have to turn down work. "If it was a small job and I had to go to a payment centre miles away, I would think twice about doing it," he says. While directors of small and medium-sized contractors will find themselves careering around the country to get paid, main contractors are dreading the amount of extra administration that the new system will generate. Apart from working out and paying subcontractors' tax liabilities, they will have to send vouchers to the Revenue that state the amount of work done, along with proof of payment and National Insurance numbers.
Kier regional financial director Richard Turner is a fierce critic of the new scheme: "I think the Inland Revenue has created a monster and that it doesn't realise what problems are out there." Kier deals with a large bank of subcontractors, most of whom currently use the 714 gross payment certificate.
Although it is difficult to estimate the number of firms that will not qualify for the new CIS5 or CIS6, the Revenue estimates that about half of the 400 000 holders of the 714 certificate will have to pay tax at source.
"I am hoping not to have to employ more administrative staff, but I will have to watch the situation," says Turner.
Main contractors will have to be vigilant in ensuring all subcontractors have an appropriate card or certificate. If they fail to do so and the Revenue catches them out, they will be liable for a 拢3000 penalty. For some contractors, this rule creates a problem if they have contracts running that span both systems. If they use a contractor that does not have a CIS4 registration card, as of 1 August, they risk a fine if they pay them and a claim if they do not. Kier's Turner has asked KPMG and the Construction Confederation about this dilemma. "The advice we have had is to make strenuous efforts to ensure the subcontractors comply, so if the situation arises, we can tell the Revenue we tried," he says. The Revenue says the date of payment is crucial. If payment is made after 1 August, the subcontractor must have a card regardless of when the contract started.
Living with a compromise
The Revenue itself is keen to point out that it has tried to introduce a scheme to cater for the diversity of the construction industry. At the end of the 1980s, the Inland Revenue realised that most firms had gross payment certificates. The fault lay in the original business test. Frank Dunbar, project manager on the development of CIS, says: "Someone in a council flat with a trowel was persuading us that he was running a genuine businesss." The solution was to set a more serious business test based on turnover. According to the Revenue it was based on the amount a one-man-band could feasibly turn over in a year. Dunbar, who spent a day with a small local builder to get a feel for the issues, candidly admits: "Neither side is totally happy, but our job is to achieve the best balance." He describes the turnover threshold that is required for CIS eligibility as a "judgment of Solomon". The Revenue also intends to monitor the voucher returns to see if large contractors and clients are using a broad base of certificate and card holders.
Much of the concern over the new scheme is that smaller contractors are simply not ready for its introduction. As of 2 May, only 244 807 application forms had been returned to the Revenue out of the 700 000 it sent out before Christmas. To avoid chaos come 1 August, Construction Confederation tax expert Liz Bridge is advising firms to ensure that all their subcontractors have a certificate or card by 1 July.
She says: "The take-up has been slow. We most definitely need anyone that works with subbies to say after 1 July: 'I am tempted not to give you any work if you have not got a card'." Despite the difficulties, the new scheme has its supporters. Chief executive of the Construction Industry Council Graham Watts praises the system as an important weapon in the battle against cowboy builders. Watts claims that the extra cost is a price worth paying if it introduces greater efficiency and contributes to enhancing the image of the industry. Clients also dismiss the concerns of contractors and subcontractors, arguing that it will help to stamp out cowboy builders. Construction Clients Forum executive secretary Tony Pollington is adamant that the industry needs the scheme to weed out firms that lack the skills and facilities to operate as dynamic companies.
But this is of little comfort to Winter, who is currently pricing jobs that cover the period after the introduction of the new scheme. After August, he will have only one decorator willing to work under the CIS; the other two will have drifted into the domestic market and, in some cases, be competing for jobs against him. Winter predicts: "It is going to be like the Wild West."
