The Construction Industry Scheme (CIS) is applicable to businesses involved in construction, both contractors and subcontractors. Other businesses are also affected that are not part of the construction industry but spend large amounts of money on constructions work. Special rules are outlined in the scheme for paying tax and making national insurance contributions. In this article, Team 4 Solutions examines what CIS is. We also look at the obligations for contractors and subcontractors and the work that CIS covers. We also cover the domestic VAT reverse charge, which came into effect on 1 March 2021 and include useful links to more information from the government.
What is The Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a scheme used by HMRC to collect tax from subcontractors who work in the construction industry. As a contractor or subcontractor you need to be aware of your obligations. In essence, it is a scheme similar to PAYE whereby a contractor withholds 20-30% (more about that later) of the payment to a subcontractor and pays this to HMRC. The payments act as advance payments towards the subcontractor’s tax and National Insurance (NI) contributions. The scheme is aimed at reducing tax evasion and fraud as well as helping subcontractors to spread their tax liabilities over the year.
What are the obligations for contractors?
As a contractor, you must register for the scheme if you pay subcontractors to do construction work. Or you have spent more than £3m on construction in the past twelve months, even though your company does not do construction work. It is important to register before you take on your first subcontractor. You will need to check with HMRC if a subcontractor is registered with CIS as this determines how much you hold back.
- Include all deductions on a monthly return to HMRC
- Deduct 20% for CIS registered subcontractors
- Deduct 30% for non registered CIS subcontractors
- Keep accurate records to avoid penalties
What are the requirements for subcontractors?
You will have to register with CIS if you are self-employed, own a limited company, are a partner in a partnership trust. You will then have to deduct 20% from your payments from contractors and pay HMRC. This is a way of paying advance tax so that you do not have to make a large payment at the end of the tax year.
- You may be due a rebate if your profit is lower than expected after allowable expenses
- You can apply for gross payment status if you do not want your contractor to make deductions
It is important to note that you must register as both if you fall under both categories.
Work covered by CIS
CIS covers most construction work to a permanent or temporary building or structure. It also includes civil engineering work such as roads and bridges.
For the purpose of CIS, construction work includes:
- Preparation of the site including foundations and providing access works
- Demolition and dismantling
- Building work
- Alterations, repairs and decorating
- Installation systems for heating, lighting, power, water and ventilation
- Cleaning the inside of buildings after construction work
Domestic Reverse Charge VAT
On 1 March 2021, there was an update to CIS. This requires VAT-registered contractors to apply the domestic VAT reverse charge on qualifying services supplied by VAT-registered subcontractors. This had been due to start in October 2019 but has been delayed due to Brexit and the pandemic. Again this has been established as an anti-fraud measure. The aim is to stop companies receiving high net amounts of VAT from customers, which then doesn’t get paid to HMRC. Here the customers charge themselves the VAT, rather than the supplier, meaning it is the customer’s responsibility. The reverse charge only applies between the two VAT registered businesses within CIS. It therefore does not affect invoices to the general public. Invoices relating to Reverse Charge VAT need to be entered on the invoice date or the date the payment is received, whichever is earlier.
How can Team 4 Solutions help you with CIS?
CIS is not straightforward. It is therefore important to work with a bookkeeping company that thoroughly understands the intricacies. This will help to minimise the effects on your cash flow. Penalties are quite heavy for filing late returns. They start at £100 for being a day late to £300 or 5% of the CIS deductions on the return, whichever is the higher if you are 12 months late. You could also get a fine of £3,000 if you give the wrong employment status for a subcontractor on your monthly return. If you need help with CIS, call the experts at Team 4 Solutions as we work with a lot of businesses involved in the construction industry. Call us on +44(0)1825 763378 or email firstname.lastname@example.org