Autumn 2007 – Current Issues

Welcome to our Autumn 2007 newsletter, we are using this quarter’s newsletter to highlight some changes being implemented on 1 October 2007, which could impact on your business.

Construction Industry Scheme (CIS) “Penalty Regime”

If you are a contractor or sub-contractor you should note that tough financial penalties under the new Construction Industry Scheme (CIS) will soon come into force. Following the introduction of the new CIS in April of this year, HM Revenue & Customs is now preparing to implement the final phase, the introduction of the “penalty regime” for non-compliance. These penalties will broadly fall into two categories:-

• Automatic penalties for late returns
• Withdrawal of gross payment status from sub-contractors

Automatic penalties for late returns

Initially HM Revenue & Customs allowed a six-month amnesty on late returns under the new version of CIS which ends on 19 October 2007. Contractors must submit a monthly return to HM Revenue & Customs, detailing payments made to sub-contractors, and a declaration on the employment status of its workers – that is, whether they are directly employed or a sub-contractor.

From 19 October 2007, a contractor employing between one and 50 sub-contractors will be charged £100 for missing a monthly deadline and another £100 for each additional group of up to 50 sub-contractors. That includes any returns due from May to September that are still outstanding on 19 October 2007, and there will be a £3,000 penalty for incomplete or incorrect monthly returns if HM Revenue & Customs rules the error or omission was deliberate or due to negligence.

On an ongoing basis, when a return is not received by its due date, HM Revenue & Customs will issue an automatic, interim, penalty of £100 for that month and for each subsequent month that the return remains outstanding. When they eventually receive the return, they will count the number of subcontractors shown and adjust the amount of the penalty, where necessary. For example a monthly return for April which was due on the 19th May and which remains outstanding on 19 October will incur a penalty of at least £600, even if it is a nil return which needs to be submitted.

Withdrawal of gross payment status from sub-contractors

The Tax Treatment Qualification Test (TTQT) is an automated process that checks the compliance history of an applicant sub-contractor applying for gross payment status within the “qualifying period” (twelve months) prior to the date the TTQT is run.

This system will be completely system generated, with HM Revenue & Customs generating reports which access data populated from systems covering corporation tax, self assessment, PAYE and new CIS. The report will verify whether returns were submitted and payments made by the due dates, this test is applied on a rolling 12 months of sub-contractor data and will be implemented on a phased basis so that over a 12 month period all sub-contractors’ records will have had the test applied to them.

The withdrawal of gross payment status can have serious cashflow implications where the sub-contractor is also a contractor. What is of serious concern is that the output from the first run of the test on the 12 months to March 2007 identified that 40% of those currently in receipt of gross payment could lose this due to payments not being made on time.

Where gross status is withdrawn and the sub-contractor believes this to be incorrect, a sub-contractor will have 30 days to appeal, until this appeal is resolved they will still be entitled to be paid gross. If the withdrawal is proved correct the sub-contractor has to wait 12 months before they can reapply for gross payment status, and the sub-contractor will be allocated net payment status

It is therefore imperative that any business falling within CIS rules ensures they are up to date and filing their monthly returns in a timely manner, so as to avoid any unnecessary penalties arising. If you are worried about this situation, or are struggling to meet the time restraints being imposed on your business please do not hesitate to contact one of the partners at our practice for further advice or assistance.

Companies Act 2006 (1 October 2007 New Provisions)

Much of the new Companies Act comes into effect in October 2007. This is not the case however, in relation to those sections of the Act which deal with accounting and reporting matters, where for the most part there implementation has been deferred until 2008. There are still changes to the Act in October 2007 which will affect company directors, whether of a small and privately owned company or a large listed one. The changes concern the basic structure of the law governing directors’ duties.

The main common law-derived duties now set out in the Act are as follows:-

• A statutory statement of directors’ duties sets out the duties and responsibilities of directors. For example directors must respect the terms of their company’s constitution, exercise independent judgement, avoid conflicts of interest and not except benefits from third parties. Any interest in any proposed transaction or arrangement must also be disclosed.
• There will no longer be a statutory requirement for private companies to hold annual general meetings (AGMs), you may however continue with AGMs if you decide too.
• It will become much easier for a private company to make decisions by written resolution of its shareholders
• There will be a clearer way for shareholders to make derivative claim to sue directors on behalf of the company i.e. for fraudulent management.

Directors of small and private companies in particular should bear in mind that if they take full advantage of deregulatory exemptions available to them under the Companies Act 2006 once it is fully implemented, for example dispensing with company secretaries it will leave the onus of complying with the various financial and administrative provisions of the Act even more squarely on the directors shoulders. Any person currently acting or considering becoming a director of a company, need therefore to familiarise themselves with what the law expects of them and feel confident that they can meet the standard.

In anticipation of the introduction of the Companies Act between now and 2008 we have tailored a new package for clients to help alleviate the administrative burden. Should you like to discuss any of these points further please do not hesitate to contact us for further advice.

Employment Law Changes

The National Minimum Wage has been increased, this applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall. From 1 October 2007 the national minimum wage will increase again as follows:

• Adult Rate (workers aged 22 and over) will increase to £5.52 per hour
• Development Rate for 18-21 year olds will increase to £4.60 per hour
• Development Rate for 16-18 year olds (above compulsory school leaving age) will increase to £3.40 per hour

The minimum holiday entitlement (including bank holidays) also rises from 1 October 2007 from 20 days per annum to 24 days and to 28 days from the 1 April 2009 (was 2008). Businesses will need to build the cost and reduction of employee availability into business plans and contracts.

KEY DATES

Whilst all due care and attention has been taken in the preparation of this review, we cannot accept responsibility for loss occasioned by any person acting or refraining from action as a result of material contained therein. There is no substitute for professional advice specifically tailored to your personal circumstances. We can give that advice and welcome the opportunity of assisting you. If you would like to discuss any of the issues raised further, or for us to arrange a review of any of your procedures, please contact Alan Cohen or Darren Swann as follows:-

Tel: 0161 249 5040 Fax: 0161 448 9287
Email - alanc@leonherman.co.uk or darrens@leonherman.co.uk