If you’re a contractor or sub-contractor in the construction industry, you need to be aware of your obligations under the Government’s Construction Industry Scheme (CIS).
Essentially, this is a scheme similar to PAYE that requires contractors to withhold 20 or 30 percent of any payment due to a subcontractor and pay the deduction to HMRC.
The scheme has two aims – to reduce levels of fraud and tax evasion in the construction industry and to help subcontractors spread their tax liabilities over the financial year.
We’ll explain the basic workings of CIS later in this article, but first you need to be aware of recent and upcoming changes to the scheme.
In November 2020, the government published a draft finance bill which included proposed changes to the CIS to tackle abuse ensuring HMRC can act quickly where the rules are being broken.
The bill will tackle four issues:
A clarification to the cost of materials provision will remove scope for different interpretations of the existing rule.
Changes to CIS set-off amendment power, allowing HMRC to correct errors or omissions on deductions claimed by sub-contractors.
Changes to the scope of ‘deemed contractor’ designed to prevent manipulation of the current rules so that a business can avoid operating the CIS.
Changes to the CIS registration penalty to expand the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.
Following consultation, the measures will have effect from 6 April 2021. We will update you in more detail closer to the time.
March 1st sees HMRC’s change to VAT rules for the construction industry come into operation - ‘VAT reverse charge on construction and building services’.
Under the new system, if you are a VAT-registered subcontractor supplying qualifying services to other construction industry contractors, you must show, but no longer charge, the correct rate of VAT on your invoices to contractors from 1st March 2021. Instead, the contractor has to account for the VAT to HMRC.
The new system applies to activities covered by CIS payment rules. It covers both standard and reduced-rate VAT supplies to VAT-registered contractors making onward supplies of the services to ‘end users’, such as landlords, property developers, tenants or property owners.
You can find out more about the new VAT Reverse Charge rules here.
Under CIS, registered contractors deduct money from payments due to a sub-contractor and pass it to HMRC. The deductions of either 20 or 30 percent count as advance payments towards the subcontractor’s tax and National Insurance contributions.
Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from your payments at the higher rate of 30 percent if you’re not registered.
Registered contractors can use the CIS online service to make monthly returns or check if a subcontractor is registered.
CIS covers the following types of work:
Demolition or dismantling
Installation of heating, lighting, power, water and ventilation
The scope of work is covered in more detail in this guide - CIS guide for contractors and subcontractors.
You must register as a contractor with the CIS if:
You pay subcontractors to do construction work
Your business does not do construction work but you usually spend more than £1 million a year on construction
You must register for CIS before you take on your first subcontractor.
You must check if you should be treating the sub-contractor as an employee. HMRC has guidelines on status.
Before making any payments to sub-contractors, check with HMRC that they are registered with CIS. Registration changes the percentage of the payment you deduct.
Each time you pay subcontractors, deduct 20 percent (registered subcontractors) or 30 percent (non-registered) from their payments and pay the money to HMRC.
Include all deductions on a monthly return to HMRC and keep full accurate records of all CIS payments and deductions to avoid penalties.
You must register as a sub-contractor with CIS if you work for a contractor and you’re one of the following:
The owner of a limited company
A partner in a partnership or trust
Each time contractors pay you they must deduct 20 percent from your payments and pass the deduction to HMRC. If you don’t register for CIS, contractors must deduct 30 percent from your payments.
By paying tax in advance this way, you will not have to make a single large payment at the end of the year. You may be due a rebate if your accounts show a lower profit after allowable expenses.
However, if you don’t want contractors to make deductions before they pay you, you can apply for ‘gross payment status’ when you register for CIS.
This is a brief outline of the steps you have to take to comply with CIS. If you would like to discuss any aspect of the scheme or the changes, our team of experienced small business accountants will be glad to help.
To find out more, get in touch on 0207 043 4000 or email@example.com.
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