For those who work in the construction industry, it is crucial to be familiar with The Construction Industry Scheme (CIS), since it is a system that can lead to much confusion and significant financial penalties where not correctly applied. The CIS is essentially a scheme that was introduced (many years ago now!) to help reduce tax evasion within the construction industry, as well as protecting workers from being illegally employed. The CIS works by having contractors withhold money on payments to a subcontractor, for which the contractor must then make a payment of that money to HMRC. It is in effect an advance payment towards the subcontractor’s tax liability.
Who is impacted by the scheme?
The scheme applies to any construction work carried out in the UK, where a contractor pays a subcontractor for construction work. You can be acting as a contractor or subcontractor, as either a sole trader or a limited company. In some situations, you may be both contractor and subcontractor and it is worth noting that the definition of ‘contractor’ is very broad for the purposes of the legislation. In most cases it is relatively clear what ‘construction’ work is, but as a general rule it includes any construction work on buildings and structures. This might be anything from demolition, site clearance, new buildings, repairs to new internal systems. HMRC do publish a full guide with examples of work that falls inside and outside the scheme. As a starting point this is worth referring to where doubt may exist on applicability of CIS to the work you are doing and it may be prudent to seek formal advice as the penalties for failing to apply the rules are severe.
How to comply with CIS
As a contractor impacted by the scheme, you must register for CIS with HMRC either by phone or online. Once HMRC have then confirmed your registration in writing, you must then do the following:
- Verify subcontractors, to know the rate of tax to be deducted (20% or 30%) or indeed if no deduction is required (i.e. gross payment status).
- Submit a monthly return to HMRC, detailing all payments within CIS.
- Pay over monthly, the tax deductions to HMRC.
For subcontractors, you don’t have to register for CIS, but failing to do so will mean that tax will be deducted at the higher rate of 30%. For that reason, it often makes sense to register so that a deduction of only 20% is applied or even no deduction where the qualifying conditions for gross payment are met.
As a subcontractor, you can recover any tax deductions incurred on receipts, by off-setting against PAYE & NI payable or where this doesn’t apply, by the company making a reclaim submission. However, for a sole trader, if the tax deductions exceed the tax liability for the year, HMRC will repay any excess tax after submission of the self-assessment tax return.
Edge Tax are fully able to assist you meet all of these requirements, taking away the administration, whilst giving you the knowledge that compliance is being met.
Practicalities of CIS
Some of the common issues that arise around CIS have been highlighted below and will assist in understanding how the scheme works in real-life and matters which should be considered when businesses are seeking to comply with the rules.
Calculate the CIS to deduct – In order to work out the level of tax deduction that will be withheld, the contractor must have a record which shows how the invoiced amount is split between labour, materials, plant hire and consumables. If they are lucky, the subcontractor will have shown this split when raising their invoice, but if they haven’t, this information needs to be requested by the contractor. Armed with this information, the contractor must then deduct these ‘materials’ from the gross invoice amount, so that the tax deduction is only calculated on the labour element.
Property Developers – Many businesses might not necessarily believe they are a mainstream contractor because they are not ordinarily a builder. It is however important to recognise for example, that a property developer can be considered a main contractor and so required to register. If a builder is contracted to construct a building, as they are paying a subcontractor for construction work, this draws them into the definition of a contractor. On that basis the property developer would verify the CIS status of the builder and deduct CIS tax if appropriate.
VAT reverse charge – a more recent rule change which impacted CIS, was the introduction on 1 March 2021, of the domestic VAT reverse charge. The aim of the charge was to reduce VAT fraud in the construction sector. The charge applies to standard and reduced-rate VAT services, for business or individuals who are registered for VAT in the UK and are reportable within CIS.
It’s too much detail for this article to address, but HMRC publish an extremely helpful flowchart, which can assist the subcontractor in ascertaining when the reverse charge applies Annex 1 – VAT: domestic reverse charge for building and construction services (publishing.service.gov.uk)
However, as an example of where the charge is deemed to apply, the subcontractor will raise an invoice in the usual way, except for the fact that they won’t charge VAT. A note will be included on the invoice, stating that the VAT reverse charge for CIS applies and that the customer will account for the VAT. The subcontractor therefore receives payment of the invoice (without any VAT), whilst the contractor will then account for both the input and output VAT on their own VAT return.
The Construction Industry Scheme is both wide-reaching and detailed in terms of both the operations and rules that comprise the scheme. It is therefore important to understand where it impacts a business and put in place the appropriate steps to ensure that the business is compliant. Don’t delay looking into this matter because HMRC can issue penalties to contractors for each and every month that a return is late (this includes those months prior to registration if CIS should have applied).