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Construction Industry Scheme (CIS) 8th September 2014

Posted in: Payroll

This is a brief introduction to CIS. The guidelines for CIS are detailed in an HMRC document that you can find here.

Due to the large number of mobile self-employed workers in the construction industry HMRC designed a system around them to minimise the potential loss of tax revenues that could otherwise result.

CIS applies to all contractors and subcontractors, whether sole traders, partnerships or companies who are working within the construction industry.It is possible to be both a contractor and a subcontractor at the same time. If this is the case, then you need to register as both.

Contractors fall into two groups:

  1. mainstream contractors: those whose business is construction; and
  2. deemed contractors: those whose main business is not construction, but who carry out construction operations and spend on average £1m a year over a three year period.

Someone who works on construction projects for a contractor and who is not an employee of the contractor is a subcontractor.

CIS does not apply to ordinary householders who are having work done on their property. Nor does it include businesses that are not in the construction industry who are having work done (unless caught by the deemed contractor definition) – even then, CIS does not have to be applied for certain work.

There are also exceptions to applying CIS. For contractors, CIS doesn’t apply to your work:

  • if you are being paid by a charity
  • if you are paid by a head teacher of a school on behalf of the local education authority
  • if you are working on the subcontractor’s own property and the value of the work is less than £1,000 (excluding materials). However, you need to apply for an exemption for this situation.

For deemed contractors, CIS does not apply for:

  • work on property for you own business use
  • a contract worth less than £1,000 (excluding materials) – again an exemption must be sought from HMRC to cover this.

Both contractors and subcontractors should register under CIS. Contractors must register. Subcontractors do not need to register, however, if they do not then amounts withheld by the contractor for work done will be greater.

Contractors

You must regsiter for CIS before you take on your first subcontractor. Once you have registered and take on a subcontractor, you will need to verify how to treat the subcontractor. There is an HMRC online service for doing this. This will tell you whether the subcontractor is registered with HMRC and what rate of deduction to apply to their pay.

When you pay the subcontractor you need to make deductions from their payments and pay those deductions to HMRC. These deductions are treated as advanced payments towards the subcontractors tax and NI.

The rates of deduction are as follows:

  • registered subcontractors with ‘gross payment’ status – 0%
  • registered subcontractors – 20%
  • unregistered subcontractors – 30%

The deductions you make are to the invoice amount (before VAT) and excluding material costs. In simple terms, the deductions apply to the labour costs invoiced.

When you pay the subcontractors, you must give them a statement of their pay and deductions within 14 days of the end of the tax month in which they were paid. Tax months end on the 5th of each month.

You must also keep full CIS records for your subcontractors, detailing:

  • gross amount of each payment invoiced by the subcontractor
  • costs of material invoiced for by the subcontractor
  • deductions made

These records must be kept for 3 years after the end of the tax year to which they relate.

The deductions you have made must be paid over to HMRC. CIS payments are made in the same way as payroll payments for employees, just under a CIS scheme as opposed to a PAYE scheme. You can have a joint PAYE and CIS scheme to cover both types of payments.

Payments need to be made every month by the 22nd (if submitted electronically) and by the 19th (if submitted by post).

In addition to the payments, you must also file a monthly return to HMRC. You must also file the return even if you have made no payments to subcontractors in that month.

The return must be filed by the 19th of every month.

Penalties apply for failing to submit a return or late submission.

Lateness Penalty
1 day £100
2 months £200
6 months higher of: £300 or 5% of the CIS deductions
12 months higher of: £300 or 5% of the CIS deductions

Subcontractors

In case you skipped over the contractors section and missed it, contractors are obliged to deduct amounts from invoices presented to them by subcontractors, as follows:

  • registered subcontractors with ‘gross payment’ status – 0%
  • registered subcontractors – 20%
  • unregistered subcontractors – 30%

The deductions are made to the invoice amount (before VAT) and excluding material costs.

If you don’t want deductions to be made, then when you register you can apply for ‘gross payment’ status. You can apply for gross payment status at any time after registration as well.

To qualify for gross payment status, you must satisfy the following:

  • you’ve paid your tax and NI on time in the past
  • your business has a bank account
  • your turnover is at least £30,000 – sole traders
  • your turnover is at least £30,000 for each partner in a partnership (or £200,000 for the partnership as a whole)
  • your turnover is at least £30,000 for each director in a limited company (or £200,000 for the company as a whole)

The figures for turnover is ignoring material costs.

The gross payment status is review by HMRC annually and can be cancelled by them if you fail the review, for example by not making payments on time. If you have your gross payment status cancelled, you have to wait a year before you can reapply.

Registration can be made online. The way in which you register is determined by your status: sole trader, partnership or company. Details for how to do this can be found here.

When you get paid by the contractor, they will make a deduction based on your CIS status. Usually the contractor will deduct 20%. However, if you aren’t registered under CIS, or the contractor can’t verify you then the contractor will deduct 30%. Make sure to you the same name (business/trading name) you registered yourself with under CIS when invoicing the contractor, else they may not be able to verify you.

The contractor is obliged to give you a statement of payments and deductions each month you are paid and they must do this by the 19th of each month. You should keep these statements as proof of the deductions made, so that when you do your self assessment you can offset these deductions against your tax bill.

If you are a company, the way to claim the deductions back is through your payroll – not against the corporation tax liability. You will send in your payroll Full Payment Submission (FPS) and Employer Payment Summary (EPS) as usual and fill out the deductions made on the EPS. You pay the balance of what is owed to HMRC in the usual way.