Companies and individuals that operate in the construction industry must be compliant with the requirements of HMRC’s Construction Industry Scheme (CIS). In this detailed guide, Neill McKillop runs through the parameters of the CIS and outlines the definitions used by HMRC to enforce the rules.
What is CIS?
CIS was introduced to reduce tax fraud by subcontractors not declaring income on their tax returns. It obligates contractors to deduct money from a subcontractor’s payments and pass it to HMRC. CIS applies to construction work to a permanent/temporary building or structure and includes most construction activities, but also has various exceptions (see table below):
|CIS Applies||CIS Exceptions|
|Preparing a site e.g. foundations and access works||Architecture and surveying|
|Demolition and dismantling||Scaffolding hire (without labour)|
|Building work||Carpet fitting|
|Alterations, repairs and decorating||Making materials used in construction|
|Installing systems for heating, lighting, power, water and ventilation||Delivering materials|
|Cleaning inside of buildings after construction work||Work on site that is clearly not construction e.g. running a canteen or site facilities|
Commonly Used Definitions
Contractors, subcontractors and the self-employed
A contractor is a business that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many others. Other businesses can be included as a contractor if their annual average expenditure (over a period of 3 years) on construction operations is +£1m.
Private householders are not counted as contractors so are not covered by the scheme.
The contractor must decide on the individual’s employment status when the subcontractor is first engaged. The fact that the subcontractor has worked in a self-employed capacity before is irrelevant in deciding on their employment status – it’s the terms of the engagement that matter. For a contract to be used within the scheme, it must not be ‘a contract of employment’. This means that the scheme applies to workers who are self-employed under the terms of the contract, and who are not employees subject to Pay As You Earn (PAYE).
Registration and verification of Contractors
All contractors must register with HMRC for CIS. Subcontractors can choose whether to register or not, and this will affect the level of deductions that are taken from their payments.
Before a contractor makes a payment to a subcontractor, they must contact HMRC to check the payment status of the subcontractor, to ensure the correct deduction is made. This process is usually only required for new subcontractors in the last 3 tax years.
The process will establish the level of deduction to be made in accordance with the subcontractor’s payment status:
- 0% Gross payment
- 20% Net of standard deduction payment
- 30% Net of higher deduction, usually if the subcontractor is not registered with HMRC, or cannot provide accurate details
The verification process is completed online, and it is important that details provided are accurate to ensure correct deductions are made.
Monthly returns and deductions
Each month, contractors must send HMRC a complete return of all the payments they have made within the scheme. The return will include:
- Details of the subcontractors
- Details of the payments made, and any deductions withheld
- A declaration that the employment status of all subcontractors has been considered
- Declaration that all subcontractors that need to be verified have been verified
Where no payments have been made to a subcontractor in a tax month it is advisable (though not mandatory) to make a nil return to avoid HMRC issuing penalties for failure to make a return. All contractors are obliged to complete returns monthly, even if they are entitled to pay their PAYE quarterly.
Once the payment status has been established it is not always necessary to deduct tax on the whole payment made to the subcontractor. The following items should be deducted from the gross payment when calculating what deduction should be made:
- The cost to the subcontractor for materials (including VAT if not registered for VAT)
- Fuel (but not for travelling)
- Plant hire used in construction operations
- Cost of manufacture of materials used in construction operations.
Payment of deductions must be made to HMRC either by the 19th or 22nd (if paid electronically) of the following tax month they relate to.
Types of subcontractors – Individuals or limited companies
Subject to certain qualifying conditions, subcontractors who are individuals can apply to be paid gross (with no deductions from their payments). Subcontractors who make a return of their profits each year and their respective tax liability will be driven by this return. Where a subcontractor has already suffered deductions from their payments given to them by contractors, and the amount deducted is greater than the amount due, HMRC will repay the excess. If there is a shortfall, the subcontractor must make a balancing payment.
Subcontractors that are limited companies should offset deductions on their receipts against the following sums payable to HRMC:
- PAYE tax due from employees
- Employer and employee NIC
- Student Loan repayments from employees
- CIS deductions made from subcontractors
The company will need to reduce the sums payable on the above by the amount of CIS deductions made from the company’s own income. This should be done monthly (or quarterly, as appropriate) and the calculation should be shown on the company’s Employer Payment Summary (EPS).
If for any period the company’s own CIS deductions are greater than the sums payable above, the company should offset the excess against future payments in the same tax year. At the end of the tax year, once HMRC has received the Full Payment Submission (FPS) and final EPS, any excess CIS deductions will either be refunded or set against Corporation Tax due.
The penalty system under CIS can be severe and directly impact operations should a business fall foul. There are a variety of penalties which cover an incorrect monthly return that is filed negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declaration in respect of employment status. Late monthly returns also generate penalties as follows:
- £100 fixed penalty (if one day late)
- £200 fixed penalty (if 2 months late)
- Tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 6 months late)
- Second tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 12 months late). Where HMRC believe information is deliberately withheld, the penalty will be higher.
If a contractor fails to produce records relating to payments made under the scheme when asked to do so, HMRC may charge up to £3,000.
Please note contractors are no longer charged penalties in respect of any months for which a return is not due, however HMRC should be notified in this situation.
Future changes to be aware of – VAT Reverse charge
The UK Government recently postponed a new measure designed to reduce VAT fraud in the construction industry. The ‘reverse charge’ will now be introduced from 1 October 2020 and will have an impact on businesses in the construction industry.
From this date it will be necessary for subcontractors to ensure their invoices provide for ‘domestic reverse charges’. This will make it clear that the VAT responsibility is with the contractor and that the subcontractor will not take any cash.
Iain Masterton – Director of VAT at Chiene + Tait previously published an article on the VAT Reverse Charge that can be found here – https://www.chiene.co.uk/vat-reverse-charge-construction/
How we can help
Chiene + Tait helps businesses comply with the arduous requirements of the Scheme. If you have any issues or queries surrounding CIS or are looking for a supplier to administrate the scheme on your behalf, please do not hesitate to get in touch with our team.