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HMRC internal manual

Construction Industry Scheme Reform Manual

HM Revenue & Customs
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The Scheme: miscellaneous: notification of sole-trader's bankruptcy


CISR18600 Action guide contents

Where a court on hearing a bankruptcy petition is satisfied that a person has no reasonable prospect of paying their debts, a bankruptcy order (known as an award of sequestration in Scotland) is normally made against the debtor. The Official Receiver is appointed as an interim receiver of the debtor’s property pending appointment of a trustee in bankruptcy. The task of the receiver (or trustee in bankruptcy, if appointed) is to determine the extent of the debtor’s assets and liabilities and distribute the debtor’s property among the creditors.

Insolvency is not covered in the CIS legislation and bankruptcy itself has no direct relevance to the Scheme. However, the circumstances associated with it often do.

For example, the financial problems leading to bankruptcy may also have resulted incessation of the business.

Where a bankrupt makes an application for gross payment status, this may need to be refused because HMRC arrears figure in the proceedings. Again, this is done not simply because the applicant is a bankrupt, but because the arrears, if arising within the qualifying period’, mean that the compliance test is failed.

Where the bankrupt operates in the construction industry the following issues are important

  • is the subcontractor’s trade continuing?
  • does the taxpayer hold gross payment status?
  • if so, should that status be formally cancelled?
  • is the subcontractor also operating as a contractor under CIS?

Where you become aware that a subcontractor holding gross payment status has been made insolvent, you should run an “ad-hoc” TTQT. This will inform you that if a TTQT was run now whether CISR would still allow the subcontractor to continue with gross payment status. An “ad-hoc” TTQT is run by using the function “Manage TTQT”, and this function will be available from October 2007.

Cessation or continuation of business

Where bankruptcy results in the cessation of trading, the implications for CIS are the ceasing of the CIS record (when this functionality permits).

In some cases, however, trading will continue, such as in the case of a labour-only subcontractor where the business may be the only or major source of income. Then it becomes necessary to make the following changes to the SA system

  • create a new SA record
  • make arrangements to delete the NINO on the old SA record
  • cross-reference the taxpayer files for the two records.

Continued trading - contractor schemes

When an individual is made bankrupt, any existing P(SC) or XP scheme will be ceased by the Employers Section.

If trading continues under the oversight of the trustee and subcontractors are engaged, the Employers Section will open a new P(SC) or XP scheme in the name of the Trustee (INS2205). For the purposes of CIS this scheme should be associated with the sole trader’s new SA record.

Taxpayer records on CIS

CIS taxpayer records are fed from SA and COTAX so all of these changes to SA records have significance for CIS. For this reason when a second SA record is set up for a bankrupt whose business continues, a matching record needs to be set up on the CIS system.

See CISR18100 for further information on partners’ bankruptcy.