Construction Industry Scheme
What is the CIS?
The Construction Industry Scheme (the CIS) has introduced a requirement for contractors to make deductions from the payments they make to subcontractors in many cases, and notify HMRC of the subcontractor relationship in all cases.
This means that if you are a contractor, and hire subcontractors, you now need to register with HMRC under the CIS.
If you are a subcontractor, you may also wish to register with HMRC in order to apply to be paid gross and treated as you were prior to the introduction of CIS.
Businesses and Work covered by CIS
CIS covers construction work, such as:
• site preparation
Business types covered by CIS include:
• self-employed individuals
If you or your business is acting as both a contractor or a subcontractor, you should follow the guidelines for the appropriate role for the work you are undertaking at the time.
You should note that certain work may result in you being a “Deemed Contractor” even if you are outside of the mainstream construction industry. This would normally be if you are carrying out or commissioning construction work on your own premises or investment properties.
However, homeowners working on their own property, or firms that have spent less than an average of £1 million a year for the past three years on construction are exempt. If in doubt, consult https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340.
If you’re a contractor, you should register with HMRC when you’re about to take on and pay your first subcontractor, whether or not that subcontractor is going to be paid gross, or under deduction.
If you’re a subcontractor, you may also register with HMRC in order to request Gross Payment status. You should do this when you or your business is about to start work within the construction industry.
As a subcontractor you will need to meet certain conditions in order to have HMRC apply Gross Payment status. These are:
• Show that you’ve paid your tax and National Insurance on time in the past
• Your business does construction work (or provides labour for it) in the UK
• Your business is run through a bank account
• Meet income thresholds for Gross Payment
Operating within CIS
Operating as a contractor under CIS means you need to fulfil certain recordkeeping, reporting and payment obligations:
1) Once a Contractor has registered, they must notify HMRC of all subcontractors with which they work, before they make any payments to the subcontractors.
2) HMRC will then verify each subcontractor’s status, and confirm to the contractor what rate of deduction should be made from any payments made to the subcontractor (note, deductions are not made from payments for materials).
3) When making any payments to a subcontractor, the contractor then must use the HMRC rate to calculate the amount of the deduction, and make the deduction from the gross payment.
4) The contractor is also responsible for maintaining records of the payment made, materials amount and deduction.
5) The contractor must also supply the subcontractor with the appropriate statement regarding the deduction.
6) Each month, the contractor must make a report and payment to HMRC. Although in some cases the payments may be quarterly.
If you’re a subcontractor a you’ve had deductions made from your payments, you need to take these into account when completing your tax return. If deductions withheld from your payments amount to more than your calculated tax on profits for the year, you will receive a refund from HMRC. If there is a shortfall, you will need to make a balancing payment.
Subcontractors operating via a company will also need to manage a process of offsetting deductions withheld against amounts the subcontractor is due to pay HMRC for:
• PAYE tax due from employees
• Employer and employee National Insurance Contributions
• Student loan repayments due from employees
• CIS deductions made from subcontractors of the company
How We Can Help
At Optimum Office we can assist you with CIS through our CIS compliant payroll service and, if you’re a subcontractor, through our bookkeeping and corporation tax services. Get in touch now to find out more.