Finance Bill

House of Commons

Session 2002 - 03
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
65

Deductions on account of tax from contract payments to sub-contractors
60
Contract payments
(1)
In this Chapter “contract payment” means any payment which is made under
a construction contract and is so made by the contractor (see section 57(3)) to—
(a)
the sub-contractor,
5
(b)
a person nominated by the sub-contractor or the contractor, or
(c)
a person nominated by a person who is a sub-contractor under another
such contract relating to all or any of the construction operations.
(2)
But a payment made under a construction contract is not a contract payment if
any of the following exceptions applies in relation to it.
10
(3)
This exception applies if the payment is treated as earnings from an
employment by virtue of Chapter 7 of Part 2 of the Income Tax (Earnings and
Pensions) Act 2003 (c. 1) (agency workers).
(4)
This exception applies if the person to whom the payment is made or, in the
case of a payment made to a nominee, each of the following persons—
15
(a)
the nominee,
(b)
the person who nominated him, and
(c)
the person for whose labour (or, where that person is a company, for
whose employees’ or officers’ labour) the payment is made,

is registered for gross payment when the payment is made.
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But this is subject to subsections (5) and (6).
(5)
Where a person is registered for gross payment as a partner in a firm (see
section 64), subsection (4) applies only in relation to payments made under
contracts under which—
(a)
the firm is a sub-contractor, or
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(b)
where a person has nominated the firm to receive payments, the person
who has nominated the firm is a sub-contractor.
(6)
Where a person is registered for gross payment otherwise than as a partner in
a firm but he is or becomes a partner in a firm, subsection (4) does not apply in
relation to payments made under contracts under which—
30
(a)
the firm is a sub-contractor, or
(b)
where a person has nominated the firm to receive payments, the person
who has nominated the firm is a sub-contractor.
(7)
This exception applies if such conditions as may be prescribed in regulations
made by the Board of Inland Revenue for the purposes of this subsection are
35
satisfied; and those conditions may relate to any one or more of the following—
(a)
the payment,
(b)
the person making it, and
(c)
the person receiving it.
(8)
For the purposes of this Chapter a payment (including a payment by way of
40
loan) that has the effect of discharging an obligation under a contract relating
to construction operations is to be taken to be made under the contract; and if—
(a)
the obligation is to make a payment to a person (“A”) within paragraph
(a) to (c) of subsection (1), but

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
66

(b)
the payment discharging that obligation is made to a person (“B”) not
within those paragraphs,

the payment is for those purposes to be taken to be made to A.
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Deductions on account of tax from contract payments
(1)
On making a contract payment the contractor (see section 57(3)) must deduct
5
from it a sum equal to the relevant percentage of so much of the payment as is
not shown to represent the direct cost to any other person of materials used or
to be used in carrying out the construction operations to which the contract
under which the payment is to be made relates.
(2)
In subsection (1) “the relevant percentage” means such percentage as the
10
Treasury may by order determine.
(3)
That percentage must not exceed—
(a)
if the person for whose labour (or for whose employees’ or officers’
labour) the payment in question is made is registered for payment
under deduction, the percentage which is the basic rate for the year of
15
assessment in which the payment is made, or
(b)
if that person is not so registered, the percentage which is the higher
rate for that year of assessment.
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Treatment of sums deducted
(1)
A sum deducted under section 61 from a payment made by a contractor—
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(a)
must be paid to the Board of Inland Revenue, and
(b)
is to be treated for the purposes of income tax or, as the case may be,
corporation tax as not diminishing the amount of the payment.
(2)
If the sub-contractor is not a company a sum deducted under section 61 and
paid to the Board is to be treated as being income tax paid in respect of the sub-
25
contractor’s relevant profits.

If the sum is more than sufficient to discharge his liability to income tax in
respect of those profits, so much of the excess as is required to discharge any
liability of his for Class 4 contributions is to be treated as being Class 4
contributions paid in respect of those profits.
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(3)
If the sub-contractor is a company—
(a)
a sum deducted under section 61 and paid to the Board is to be treated,
in accordance with regulations, as paid on account of any relevant
liabilities of the sub-contractor;
(b)
regulations must provide for the sum to be applied in discharging
35
relevant liabilities of the year of assessment in which the deduction is
made;
(c)
if the amount is more than sufficient to discharge the sub-contractor’s
relevant liabilities, the excess may be treated, in accordance with the
regulations, as being corporation tax paid in respect of the sub-
40
contractor’s relevant profits; and
(d)
regulations must provide for the repayment to the sub-contractor of
any amount not required for the purposes mentioned in paragraphs (b)
and (c).
(4)
For the purposes of subsection (3) the “relevant liabilities” of a sub-contractor
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are any liabilities of the sub-contractor, whether arising before or after the

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
67

deduction is made, to make a payment to the Inland Revenue in pursuance of
an obligation as an employer or contractor.
(5)
In this section—
(a)
“the sub-contractor” means the person for whose labour (or for whose
employees’ or officers’ labour) the payment is made;
5
(b)
references to the sub-contractor’s “relevant profits” are to the profits
from the trade, profession or vocation carried on by him in the course
of which the payment was received;
(c)
“Class 4 contributions” means Class 4 contributions within the meaning
of the Social Security Contributions and Benefits Act 1992 (c. 4) or the
10
Social Security Contributions and Benefits (Northern Ireland) Act 1992
(c. 7).
(6)
References in this section to regulations are to regulations made by the Board
of Inland Revenue.
(7)
Regulations under this section may contain such supplementary, incidental or
15
consequential provision as appears to the Board to be appropriate.
Registration of sub-contractors
63
Registration for gross payment or for payment under deduction
(1)
If the Board of Inland Revenue are satisfied, on the application of an individual
or a company, that the applicant has provided—
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(a)
such documents, records and information as may be required by or in
accordance with regulations made by the Board, and
(b)
such additional documents, records and information as may be
required by the Inland Revenue in connection with the application,

the Board must register the individual or company under this section.
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(2)
If the Board are satisfied that the requirements of subsection (2), (3) or (4) of
section 64 are met, the Board must register—
(a)
the individual or company, or
(b)
in a case falling within subsection (3) of that section, the individual or
company as a partner in the firm in question,
30

for gross payment.
(3)
In any other case, the Board must register the individual or company for
payment under deduction.
64
Requirements for registration for gross payment
(1)
This section sets out the requirements (in addition to that in subsection (1) of
35
section 63) for an applicant to be registered for gross payment.
(2)
Where the application is for the registration for gross payment of an individual
(otherwise than as a partner in a firm), he must satisfy the conditions in Part 1
of Schedule 11 to this Act.
(3)
Where the application is for the registration for gross payment of an individual
40
or a company as a partner in a firm—
(a)
the applicant must satisfy the conditions in Part 1 of Schedule 11 to this
Act (if an individual) or Part 3 of that Schedule (if a company), and

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
68

(b)
in either case, the firm itself must satisfy the conditions in Part 2 of that
Schedule.
(4)
Where the application is for the registration for gross payment of a company
(otherwise than as a partner in a firm)—
(a)
the company must satisfy the conditions in Part 3 of Schedule 11 to this
5
Act, and
(b)
if the Board of Inland Revenue have given a direction under subsection
(5), each of the persons to whom any of the conditions in Part 1 of that
Schedule applies in accordance with the direction must satisfy the
conditions which so apply to him.
10
(5)
Where the applicant is a company, the Board may direct that the conditions in
Part 1 of Schedule 11 to this Act or such of them as are specified in the direction
shall apply to—
(a)
the directors of the company,
(b)
if the company is a close company, the persons who are the beneficial
15
owners of shares in the company, or
(c)
such of those directors or persons as are so specified,

as if each of them were an applicant for registration for gross payment.
(6)
See also section 65(1) (power of Board to make direction under subsection (5)
on change in control of company applying for registration etc).
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(7)
In subsection (5) “director” has the meaning given by section 67 of the Income
Tax (Earnings and Pensions) Act 2003 (c. 1).
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Change in control of company registered for gross payment
(1)
Where it appears to the Board of Inland Revenue that there has been a change
in the control of a company—
25
(a)
registered for gross payment, or
(b)
applying to be so registered,

the Board may make a direction under section 64(5).
(2)
The Board may make regulations requiring the furnishing of information with
respect to changes in the control of a company—
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(a)
registered for gross payment, or
(b)
applying to be so registered.
(3)
Section 840 of the Taxes Act 1988 (control) applies for the purposes of this
section.
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Cancellation of registration for gross payment
35
(1)
The Board of Inland Revenue may at any time make a determination cancelling
a person’s registration for gross payment if it appears to them that—
(a)
if an application to register the person for gross payment were to be
made at that time, the Board would refuse so to register him,
(b)
he has made an incorrect return or provided incorrect information
40
(whether as a contractor or as a sub-contractor) under any provision of
this Chapter or of regulations made under it, or
(c)
he has failed to comply (whether as a contractor or as a sub-contractor)
with any such provision.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
69

(2)
Where the Board make a determination under subsection (1), the person’s
registration for gross payment is cancelled with effect from the end of a
prescribed period after the making of the determination (but see section 67(5)).
(3)
The Board of Inland Revenue may at any time make a determination cancelling
a person’s registration for gross payment if they have reasonable grounds to
5
suspect that the person—
(a)
became registered for gross payment on the basis of information which
was false,
(b)
has fraudulently made an incorrect return or provided incorrect
information (whether as a contractor or as a sub-contractor) under any
10
provision of this Chapter or of regulations made under it, or
(c)
has knowingly failed to comply (whether as a contractor or as a sub-
contractor) with any such provision.
(4)
Where the Board make a determination under subsection (3), the person’s
registration for gross payment is cancelled with immediate effect.
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(5)
On making a determination under this section cancelling a person’s
registration for gross payment, the Board must without delay give the person
notice stating the reasons for the cancellation.
(6)
Where a person’s registration for gross payment is cancelled by virtue of a
determination under subsection (1), the person must be registered for payment
20
under deduction.
(7)
Where a person’s registration for gross payment is cancelled by virtue of a
determination under subsection (3), the person may, if the Board thinks fit, be
registered for payment under deduction.
(8)
A person whose registration for gross payment is cancelled under this section
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may not, within the period of one year after the cancellation takes effect (see
subsections (2) and (4) and section 67(5)), apply for registration for gross
payment.
(9)
In this section “a prescribed period” means a period prescribed by regulations
made by the Board.
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67
Registration for gross payment: appeals
(1)
A person aggrieved by—
(a)
the refusal of an application for registration for gross payment, or
(b)
the cancellation of his registration for gross payment,

may by notice appeal to the General Commissioners or, if the person so elects
35
in the notice, to the Special Commissioners.
(2)
The notice must be given to the Board of Inland Revenue within 30 days after
the refusal or cancellation.
(3)
The notice must state the person’s reasons for believing that—
(a)
the application should not have been refused, or
40
(b)
his registration for gross payment should not have been cancelled.
(4)
The jurisdiction of the Commissioners on such an appeal shall include
jurisdiction to review any relevant decision taken by the Board of Inland
Revenue in the exercise of their functions under section 63, 64, 65 or 66.

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Construction industry scheme
70

(5)
Where a person appeals against the cancellation of his registration for gross
payment by virtue of a determination under section 66(1), the cancellation of
his registration does not take effect until whichever is the latest of the
following—
(a)
the abandonment of the appeal,
5
(b)
the determination of the appeal by the Commissioners, or
(c)
the determination of the appeal by the High Court.
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Registration for payment under deduction: cancellation and appeals
The Board of Inland Revenue may make regulations providing for—
(a)
the cancellation, in such circumstances as may be prescribed by the
10
regulations, of a person’s registration for payment under deduction;
(b)
appeals against a refusal to register a person for payment under
deduction or the cancellation of such registration.
Verification, returns etc and penalties
69
Verification etc of registration status of sub-contractors
15
(1)
The Board of Inland Revenue may make regulations requiring persons who
make payments under contracts relating to construction operations, except in
prescribed circumstances, to verify with the Board whether a person to whom
they are proposing to make—
(a)
a contract payment, or
20
(b)
a payment which would be a contract payment but for section 60(4),

is registered for gross payment or for payment under deduction.
(2)
The provision that may be made by regulations under subsection (1) includes
provision—
(a)
for preventing a person from verifying unless such conditions as may
25
be prescribed have been satisfied;
(b)
as to the period for which the verification remains valid.
(3)
The Board of Inland Revenue may make regulations requiring the Board to
notify persons of a prescribed description who make payments under contracts
relating to construction operations that—
30
(a)
a person registered for gross payment has become registered for
payment under deduction or has ceased to be registered under section
63, or
(b)
a person registered for payment under deduction has become
registered for gross payment or has ceased to be registered under
35
section 63.
(4)
The provision that may be made by regulations under subsection (1) or (3)
includes provision for a person to be entitled to assume, except in prescribed
circumstances, that—
(a)
a person verified or notified as being registered for gross payment, or
40
(b)
a person verified or notified as being registered for payment under
deduction,

has not subsequently ceased to be so registered.
(5)
In this section “prescribed” means prescribed by regulations under this section.