The Construction Industry Scheme
CIS (Construction Industry Scheme) is an activity that was authorized by HMRC in 1971 to shield development laborers from bogus business and limit tax avoidance in the development business. Special tax rules apply to the construction industry and workers which are motoring in The Construction Industry Scheme (CIS).
CIS uses a verification system for contractors to confirm whether a subcontractor should get gross or net pay. Our CIS accountants keep track of your VAT and generate reports to gain perspective on your accounting year.
Construction Activities
The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships, and Private Companies but not to private householders who are paying contractors. Get in touch with our CIS accountants for more information and further guidance.
Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor. Our CIS accountants educate you throughout.
Registration
New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already knows about you. The subcontractor finds out whether they can receive payments gross or net. To qualify for gross payment a subcontractor must pass the Business Turnover and Compliance Tests. In summary, these are:
- Run in the UK with a bank account;
- Has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
- Complied with all its tax obligations to date.
Verification
When a contractor engages a subcontractor who has not been their employee in the current or previous two tax years, they must get the name, unique taxpayer reference, and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain the subcontractors pay is gross or net, this process is verification. The contractor must also decide the proposal of the contract is it one of self-employment, or whether the worker is as an employee.
It is important to ensure that the status of the worker in terms of self-employment or employment is established correctly. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.
If the subcontractor registers with HMRC the contractor is going to be informed to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor does not register with HMRC, a higher rate of tax deduction of 30% is required. The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year.
Example
31 Dec they apply for an in-year repayment. The deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC, and CIS deductions that they owe. Contractors provide verification number for subcontractor/ group(of subcontractors), to match with the HMRC records in one query/phone call. This number is for the contractor’s reference only.
For each subcontractor that cannot match either because of the registration issue or wrong details. A special verification number is given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.
Records
Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.
Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the number of materials, and deductions. The return must be filed with HMRC within 14 days of the month-end, with nil returns made if there were no payments in the month. There are penalties for filing returns late. There is no annual return required under the new CIS.
Real-Time Information (RTI)
Under the rules of RTI, you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered”, to offset any liability due to HMRC.
How We Can Help You
ACCOTAX – Chartered Accountants can assist you with all aspects of CIS including:
- Assistance with applications for registration.
- Advice on employment status and disputes with HMRC.
- Completion of contractors’ returns.
Get in touch with our CIS accountants now!
