CIS - Construction Industry Scheme - Does it affect me and what do I need to know?
The Construction Industry Scheme is a scheme that has been developed to prevent the evasion of paying tax for subcontractors in the construction industry.
If you are self-employed and work in construction this more than likely will affect you.
In essence a percentage of a subcontractor’s wages are deducted by the contractor before this is paid, this deduction is paid directly to HMRC as an advance payment of your annual tax bill, with any final balance being calculated once you complete your annual self-assessment.
What kind of construction is eligible for the scheme?
CIS covers most construction projects, including:
- Permanent or temporary buildings or structures
- Civil engineering projects such as bridge building and roads
- Preparation of building sites such as foundation work and access works
- Demolition and dismantling
- Alterations, repairs and decorating
- Installing heating, lighting, power, water and ventilation systems.
- Cleaning the insides of buildings after construction work has been completed.
- There are however areas that are not included under the CIS scheme, with the following list of exceptions:
- Scaffolding hire (no labour)
- Production of materials used in construction; this includes any plant and machinery items.
- Architecture and Surveying
- Carpet fitting
- Delivery of materials
- Any work that is on a construction site that is not directly related to the actual construction, such as working in a canteen.
- Something to also be aware of is whether you would technically fall under the self-employed category. For example, if you work exclusively for one contractor and are effectively under their control on a day-to-day basis and have little or no financial risk when you are working for them, you may actually be counted as an employee and should be paid through PAYE and not the Construction Industry Scheme.
Who needs to register for CIS?
The two groups that predominantly need to sign up for CIS are Contractors and Subcontractors, depending on which category you fall in to will differentiate between what your responsibilities are under CIS.
Contractors:
Are an entity (Sole trader/partnership/Limited Company) that employs and pays subcontractors to complete construction work.
Have spent £3 million or more on construction in the past twelve months since the first payment was made, regardless of whether your business does not do construction work.
Subcontractors:
A sole trader/ Partner/ Owner of a Limited Company that works for a contractor and is not a direct employee.
What are your responsibilities for CIS?
Contractors: - As a contractor you have the following responsibilities to stay compliant with CIS.
- Verifying your subcontractors – you must ensure that all subcontractors have their CIS status checked with HMRC prior to any payments being made to them to ensure that the correct deduction rate is applied to their pay. (20%, 30% or Gross Payment)
- Making the correct deductions – you must ensure to deduct the correct proportion of your subcontractors’ wages. This is normally 20% if they have registered with CIS or will be 30% if they are not registered. They can also request ‘gross payment status’ with HMRC, which means that no deductions are necessary from their wages.
- File monthly CIS returns – A CIS return must be filed every month to HMRC detailing all payments that have been made to subcontractors, this must also be completed in months were no payments are made, entering zero when necessary. Late submissions can result in fines from £100 for a day up to £3,000 or 100% of the value on the CIS return, so ensuring to submit these on time can be critical.
- Providing Payment and Deduction Statements – A monthly statement must be provided to each subcontractor, detailing payments and deductions that have been made throughout the month.
- Keeping Records – You must ensure to keep records of the gross amount of each payment invoiced by subcontractors, excluding any VAT, as well as any deductions you have subsequently made from these payments. It is also important to keep details of the cost of any materials that subcontractors have invoiced you for. All these records need to be maintained for three years after the end of the tax year they relate to, as HMRC can request for this information in the event of an inspection.
Subcontractors: - As a subcontractor you have the following responsibilities to stay compliant with CIS.
- Complete Registration – Ensuring to register for CIS can reduce the deductions that you see on your pay from 30% to 20%.
- Tracking your Deductions – Keeping a record of all deductions that have been made from your payments under CIS is important as these count towards your end of year tax and National Insurance Obligations.
- Filing a Self-Assessment Tax Return – At the end of the tax year you will need to complete your self-assessment tax return where you can claim the CIS deductions that have been made against your pay to reduce your tax and NI obligations.
Hopefully the above has given you a better understanding of the responsibilities that are bestowed upon contractors and subcontractors under the Construction Industry Scheme, but most importantly ensures you have the know how too make sure that your business stays compliant.