Verification replaces cards and certificates

CIS4s 5s and 6s are being phased out. They are being replaced by a procedure known as verification. This requires that the subcontractor register their tax credentials with HMRC, and HMRC will decide on how much tax you should deduct from their labour costs.

Before you engage a new subcontractor you must contact HMRC and obtain a verification number from them. At the same time, HMRC will also tell you what rate of deduction to apply.

For the 1st year of the scheme, any subcontractors whom you have paid since 6 April 2005 who had a CIS 4/5/6 valid until 04/2007 or later when you paid them do not need to be verified. Subcontractors with whom you have not traded before must be verified.

After the 1st year of the scheme, different rules apply. You can continue to pay any subcontractor that you have verified without checking. Any subcontractors who have not been verified because you had seen CIS 4/5/6s covering them until 04/2007 must now be verified.

Higher rates of deduction

As with the existing scheme, some contractors will be paid gross, some will have tax deducted at 20%. For others, where HMRC cannot match the details you have with their records, tax will be deductible at a new higher rate of 30%.

Record keeping

Your records must be complete and kept up to date. You must be able to provide a subcontractor with a reprint of their Payment & Deduction statement. If your records do not match the details held by HMRC, your subcontractors may end up having 30% withheld, because HMRC will enforce this deduction rate for any “unmatched” subcontractors.

Telephone / web verification

To verify a subcontractor, you must contact HMRC. HMRC have allowed for several options: Telephone, Internet, third-party software (such as CIS-Connect) or for larger organisations, Electronic Data Interchange (EDI).

You may find that your company’s Payments system has been amended to do this for you. Many systems will not cope with verification across the web.

You should also be aware of the difference sorts of verification : if you are not sure that the subcontractor details you have are correct, you should request a match rather than a verify.

Payment & Deduction Statements

If you make deductions from a subcontractor, you must provide them with a statement advising them how the deduction has been calculated. HMRC have stipulated the minimum information that you must provide, but the contractor can decide what format the statement is in. Some contractors may wish to include this information on a remittance slip for each payment instead of a regular statement.

These statements replace the CIS 25 vouchers.

Monthly Returns

There are no more annual returns for CIS. The CIS36 is replaced with a monthly return. This can be filed using the internet, on paper, with a third-party package such as CIS-Connect or once again your Payments system may do this for you.

Data Quality Checks

In November 2006 and March 2007, contractors will receive a file of data from HMRC which detail all the subcontractors that you have paid over the preceding two years. You need to use this data to update your Payment systems to make sure that your systems are in step with HMRC.

This data will provided on CD for contractors who deal with a large number of subcontractors. You must act on this data. Failing to match your subcontractor data with HMRC systems can mean that your subcontractors get the wrong tax treatment, or your returns may be rejected.

Automatic fines

After a bedding-in period, punitive fines based on the number of subcontractors you employ will be imposed automatically. Fines can be levied because of late returns, and significantly, poor data quality.

Accounting software

At the bare minimum your accounting software will need to be aware of the new “un-matched” 30% deduction, and will need to produce the new statements. But can your system cope with storing Unique Tax References, NI numbers? Verification numbers must also be retained for “unmatched” subcontractors. There are also changes in the way you process credit notes, which your Payments team must be aware of.

This all requires planning and your teams will need to be trained.