EXPLANATORY NOTE

1. This clause allows subcontractors in the construction industry applying for gross payment certificates to count all their construction income, net of materials, as turnover for the purpose of the turnover tests under the new Construction Industry Scheme. This will mean that, in addition to income received from construction contractors, or large concerns which are deemed to be contractors for the purpose of the scheme, subcontractors will be able to count as turnover payments received from private clients for construction work. The provision, which will replace the existing extra-statutory concession (B51) announced in the Inland Revenue Press Release: "Construction Industry Tax Scheme: Extra-Statutory Concessions" (23 October 1998), will apply to applications made for certificates which are valid from 1 August 1999 onwards.

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2. Subsection (1) substitutes a new definition of "relevant payments" in subsection 562(2B) of the Taxes Act (itself inserted by paragraph 4(3) of Schedule 27 to the Finance Act 1995). The subsection also withdraws the amendments to sections 564 and 565 of the Taxes Act made by paragraphs 3 to 5 of Schedule 8 to the Finance Act 1998, which allowed partnerships and companies to count all construction income for the purposes of the alternative turnover thresholds only.

3. Subsection (2) contains the new definition of the "relevant payments" which comprise the turnover to be demonstrated in order to pass all the turnover tests. These are payments, net of the direct cost of materials, relating to contracts or to work carried out for construction operations within the parameters set out in section 567(2)&(3) of the Taxes Act.

4. Subsection (3) provides for the new definition of relevant payments to be used in relation to any application for the issue or renewal of a certificate which is valid for any period beginning on or after 1 August 1999.

5. The construction industry scheme was introduced in 1971 with the specific aim of tackling the very serious problem of tax evasion in the industry. Under the scheme, only those subcontractors issued by the Inland Revenue with gross payment certificates (known as 714s) can be paid in full for construction work. Others must be paid with a deduction withheld for tax and national insurance contributions. The deduction system secures revenue that might otherwise not reach the Exchequer.

6. However the rules which determine eligibility for these certificates have proved to be insufficiently robust, allowing subcontractors carrying out construction operations without any of the hallmarks of genuine businesses, such as premises, stock or equipment, to hold certificates. As a result, tax evasion has continued to persist in the industry, through non-payment of tax and NICs, sale of scheme documentation on the black market and concealment of earnings.

7. Changes to the rules were therefore provided for in the Finance Act 1995. These will ensure that, from August 1999, eligibility for certificates will be restricted to those subcontractors whose annual business turnover exceeds a prescribed level. This level has been set in regulations at £30,000 per annum for an individual subcontractor, and is multiplied by the number of partners, or directors (and shareholders, in the case of a close company) to arrive at the multiple partnership and company thresholds. Under alternative thresholds, partnerships and companies may pass the turnover test with a turnover of £200,000 per annum. Separate provisions allow some leeway for subcontractors with fluctuating turnovers, or who have newly entered the industry, to qualify for certificates. The thresholds should mean that the majority of subcontractors providing just their own labour will be paid under deduction.

8. Originally only income arising from within the construction industry scheme could be included for the purpose of demonstrating turnover under the turnover tests. However, in response to representations from the industry, a change was made in the Finance Act 1998 to allow partnerships and companies to count all construction income, whether received within or outside the scheme, under the alternative turnover test. Following further representations last year, and in order to minimise the impact of the new scheme on the industry, the government decided that this concession should be extended to all subcontractors, whether individuals, partnerships or companies and for all the turnover thresholds.

9. Under the new scheme all subcontractors who do not qualify for certificates will be required, under provisions contained in the 1996 Finance Act, to carry registration cards demonstrating that they are registered for the purposes of tax and national insurance contributions.