Contractors in the construction industry have big regular construction industry scheme (CIS) tax obligations and responsibilities. A contractor will have to get relevant financial and fiscal details regarding the subcontractor they plan to use to carry out construction work. The contractor will then have to ‘verify’ them. This means going online, submitting the appropriate details to HMRC, and waiting for a decision from HMRC as to how to pay them. HMRC will instruct the contractor to pay the subcontractor in one of three ways:
- net of 20% CIS tax deducted if the subcontractor is ‘registered net’ with HMRC; or
- deduct 30% CIS tax if the subcontractor is not registered whatsoever with HMRC.
However, CIS tax is not deducted from everything! If the subcontractor splits up and analyses their fee, the following items can be paid gross when included within the fee rendered by the subcontractor:
- The direct cost of materials purchased and charged by the subcontractor.
- The hire of plant with no operator.
The amount for materials which can be paid gross is restricted to the direct cost to the subcontractor of the materials used in construction operations.
Materials include the costs of:
- paving slabs;
- piping; or
- fixings that a subcontractor supplies as part of the construction project.
HMRC treats materials as also including the cost of renting or hiring plant, equipment or scaffolding from a third party. The term ‘materials’ does not cover the cost of using plant or equipment owned by the subcontractor. However, consumables such as fuel for this plant or equipment can be claimed.
The subcontractor must indeed pay for the materials itself to obtain a CIS materials deduction. The cost of the materials must be incurred directly by the subcontractor. The figure of materials must represent the actual cost to the subcontractor of the materials (no mark-up). The contractor must check that the materials charge is ‘reasonable’. The amount shown for materials cannot be inflated. Materials cannot be a percentage of the overall invoice.
Payments for the hire of plant without an operator are outside the scope of CIS, but payments for the hire of plant with an operator are subject to CIS. Hire of plant without an operator would include:
- the hire of skips;
- the hire of concrete mixers; and
- the hire of pumps.
An example of plant with an operator would be when a crane is hired with an operator. This would be subject to CIS! Accordingly, when the contractor gets an invoice from a CIS net registered subcontractor, the contractor must deduct 20% CIS tax from the labour element, the profit on materials (if included in the fee by the subcontractor) and from any travel and subsistence included. If the subcontractor is not registered, HMRC will advise the contractor to deduct 30% CIS tax from certain parts of the invoice. The same CIS tax deduction principles must be used; however, CIS tax is deducted at a higher rate of 30%, not 20%.
Contractors must verify new CIS subcontractors they take on for the first time. HMRC will then notify the contractor as to whether to pay the subcontractor ‘gross’ or ‘net’.
It is vital for contractors to make the correct and full CIS tax deductions when engaging and paying a net registered CIS subcontractor, who has performed ‘construction operations’. If insufficient CIS tax deductions have been made, HMRC will issue a ‘Regulation 13 determination’ on the contractor, seeking payment of the balance of any underpaid CIS tax.