TT222: Beware a hidden cost increase for the construction industry

Various changes are afoot to restructure in the construction industry to minimise the costs from a new Construction Industry Training Board (“CITB”) Levy (”the Levy”). There is a significant change now here which will potentially increase this costs to many businesses.

Background – if you provide construction services then you legally are obliged to register with the CITB and pay an annual Levy. This allows the CITB to provide grants and training. Depending on the amount of Levy paid you can claim different levels of support.

Registered companies have to do a return for the fiscal year (to 5 April). For 2014/15 the deadline is 19 June 2015 (but do not rely on this as the deadline is likely to change – this year it was later as there was a delay in issuing the forms). The Levy assessed is payable one year in arrears, around April 2016. Direct debit payment schemes are available.

The Levy for 2014/15 (payable April 2016) is based on the old calculation:

  1. 0.5% of gross salaries paid under PAYE, plus
  2. 1.5% of the Labour Only Subcontractor payments made (there are rules which determine if a contract is “labour only” – if only incidental materials or machinery is supplied the contract is still “labour only”, see the CITB website for guidance)
  3. Less: 1.5% Labour Only Payment Receipts from customers in the construction sector (likewise this is sales made by the business of a “labour only” nature)

Obviously, a negative sum does not lead to a repayment!

Note, that for many businesses who are in the middle and supply mainly labour, working for a main contractor and engaging their own subcontractors in turn, the fact that a mark-up leads to a profit probably means that there will most likely be a nil balance to pay under the current Levy system.

However, for 2015/16 (payable April 17) the supposed “simplification”, which is claimed to not be designed to collect more Levy, makes a great difference. The new calculation is:

  1. 0.5% of gross salaries paid under PAYE, plus
  2. 1.25% of the labour cost of subcontractors registered net (you tell the CITB the CIS deducted from net subcontractors you have paid and they gross it up on the 20% deduction rate)
  3. Less: nothing! There is no offset.

The following should help: http://www.citb.co.uk/levy-grant/levy-simplification/ There is a link to a calculator on the page to assist.

For example, if you were a company with a payroll of £1.5M and you paid sub-contractors with a net deduction, about £15M of labour, then bill this labour on to customers at £20M (plus incidental materials), the old CITB levy was nil due to the offset. The new one is in the order of £195,000! Admittedly this is an extreme example, but it is not outside the realms of possibility.

This is a simple run through the computations. There are complexities and nuances within this. It is important to take advice now if you need to restructure your business to minimise this cost. Please contact your Barnes Roffe partner if you need assistance.

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