What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme can be very confusing at the best of times, though in our experience, a lot of small business owners are not even aware it exists, especially as they may be subject to it and not even realise it. This article provides a brief overview of what you need to know.

If you’re a Contractor or Subcontractor in the construction industry, the HMRC’s Construction Industry Scheme very likely applies to you. And the definition of ‘construction industry’ can be surprisingly wide.

The key to understanding how it affects you is to understand why it exists. And a key reason is because HMRC loses a lot of tax revenue from work being carried out ‘off the books’.

CIS is not a new tax. It just means that HMRC receives income tax on a regular basis by way of monthly submissions by contractors, similar to how PAYE works. If you register for CIS and follow the rules, you’ll pay the right amount of tax. However, if you don’t register or don’t play by the rules, you’ll probably end up paying a lot more tax than you would expect.

But the good news is it’s actually very simple to work with and we at Diligent Accounting can help you through it.

The basic idea is that contractors that fall within the scheme must collect income tax at source from payments made to subcontractors, which must then be passed on to HMRC. There are special meanings of what a Contractor and a Subcontractor is, and it is also important to be aware that other trades, in addition to building or construction type work also falls within the scope of the CIS; something that a lot of businesses get caught out by.

Who does the CIS apply to?

The scheme applies to sole traders, partnerships and limited companies engaged in certain types of work (as described below), where they subcontract all or part of this work to a third party. The third party may be a self-employed individual, a partnership or a limited company. However, the CIS does not apply to persons performing this work under a contract of employment, where tax deductions are taking place via PAYE.

What types of activities falls within the scope of the CIS?

The scheme covers all types of construction work carried out in the UK, including site preparation, alterations, dismantling, construction, repairs, decorating and demolition.

However, the CIS also applies to areas such as installation of systems of heating, lighting, air-conditioning, ventilation, power supply and distribution, drainage, sanitation, water supply and distribution, and fire protection works. There is a long list of included and excluded operations contained in Appendix C of the HMRC’s CIS guidance.

The CIS does not apply to work being carried out by businesses outside of the UK. However, the scheme does apply to work being carried out in the UK by businesses based outside the UK.

What is the meaning of a Contractor?

A contractor is a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.

Some other types of businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of 3 years is £1 million or more. But if your business comes under the definition of construction and you hire a subcontractor then you’re in scope even if your sales are truly tiny. Private householders are not counted as contractors so are not covered by the scheme.

What is the definition of a Subcontractor?

A subcontractor is a business that carries out construction work for a contractor. A much broader meaning is contained in the HMRC’s CIS guidance.

Can you be a Contractor and a Subcontractor at the same time?

Yes. Many businesses pay other businesses for construction work but are themselves paid by other businesses too.

What do I need to do if my business activities fall within the CIS?

If you’re a business who contracts or intends to contract out all or part of any work as described above to a subcontractor, then you will need to register your business as a contractor with HMRC.

There is an incentive for subcontractors to also register with HMRC as a lower rate of tax applies to their deductions if they do. Currently, this is 20%, but this rises to 30% if they’re not registered.

Once registered as a contractor, you need to verify any subcontractors you take on with HMRC using their online portal before you start paying them. Registered subcontractors will also be set up for self-assessment tax returns and will have a unique taxpayer reference.

Once a subcontractor is verified, HMRC will tell you what rate of tax to deduct from their gross pay (after taking into account any deductions for materials and ay VAT paid by the subcontractor). A CIS return must be submitted to HMRC each month (even if there is nothing to pay), and any deductions in that month must be passed on to them.

How can Diligent Accounting help?

If you think your business falls within the Construction Industry Scheme, and you haven’t already employed the services of a bookkeeper or accountant, then we can help you register and deal with your monthly CIS returns on your behalf. If you would like to speak to us, please contact James on 07775 513097 or email james@diligentaccounting.co.uk.

If you’re reading this and are unsure whether it applies to you, or maybe you know it does but you haven’t registered yet, then we can also help.

Disclaimer

This article is intended to provide general information only and you must not solely rely on the information contained within it. The author does not accept any responsibility or liability for any inaccuracies contained within this article. Businesses are responsible for establishing whether they fall under the scope of the Construction Industry Scheme and must seek professional help if they may be affected by it.

Do I need a bookkeeper or an accountant?

Started your business recently but not sure whether you need a bookkeeper or an accountant? This blog post tells you what you need to know, including the differences between the two and which services you may require depending on how your business has been set up.

In order to establish whether you need a bookkeeper or an accountant (or both!), it is firstly important to distinguish between what a bookkeeper and an accountant does.

What does a bookkeeper do?

A bookkeeper organises and records the day-to-day incoming and outgoing transactions of a business. Transactions include customer sales, purchases from suppliers and incoming/outgoing payments such as expenses. A bookkeeper will categorise these transactions into different ledger accounts and prepare closing balances at year-end.

They may also provide other ancillary services such as monthly reconciliation of business bank statements (against transactions posted in accounting software, for example), management of staff payroll, and preparation and submission of regular VAT returns.

If you’ve recently set up your own business, it’s entirely possible that you’re doing a lot of this yourself. In the early days there aren’t many transactions to manage and it seems simple enough. However, as you get busier and your records get more complicated, it can get ever more difficult to keep on top of and you can begin to ask yourself why you’re spending more time on your books than building your business. It’s around this time many firms hire their first bookkeeper.

Bookkeepers provide an extremely valuable service to businesses. A qualified bookkeeper can also prepare basic self-assessment tax returns and financial accounts for sole traders and partnerships. However, they do not prepare or submit financial accounts to Companies House for limited companies or produce or submit Corporation Tax returns to HMRC, therefore an accountant is required for these additional services.

What does an accountant do?

A professional accountant can provide a much broader range of services than a bookkeeper; in particular, they can prepare annual financial accounts based on the closing year-end ledger account balances a bookkeeper has prepared.

In addition, they prepare and submit self-assessment and Corporation Tax returns to HMRC, and perform other services including management accounting, such as budgeting and forecasting.

Professional accountants can also perform the same services as a bookkeeper. However, some may outsource the bookkeeping part to focus on the other service areas they provide or treat this as a secondary service.

If your business is a Limited Company or Limited Liability Partnership (LLP)

In a nutshell, you will definitely need to employ the services of an accountant. One of the legal obligations incumbent on limited companies and LLPs is that they must produce and file a confirmation statement and financial accounts to Companies House on an annual basis by the due date, usually within nine months following the business’s accounting reference date.

A set of financial accounts must be produced in a prescribed format and consists of four separate documents; the Statement of Profit or Loss, the Statement of Financial Position, the Statement of Changes in Equity and the Cashflow Statement. All of these documents need to be prepared with precision and accuracy. Depending on the size of your firm, some of them must also be submitted to Companies House.

In addition to filing accounts, businesses must also complete and file a Corporation Tax return to HMRC, usually within twelve months of the accounting reference date. Rather oddly, payment of Corporation Tax to HMRC is usually due before the actual tax return needs to be filed.

In order to keep the financial side of your business organised and accurate from the outset, or as early as possible, it is recommended that you hire both a bookkeeper and an accountant, or a firm who performs both services together, at the earliest opportunity.

If you’ve found yourself wondering what a ‘confirmation statement’ is, or even what your ‘accounting reference date’ is, then don’t worry: one of the advantages of hiring a bookkeeper or accountant is that they can keep on top of this so you don’t have to. Your valuable time should be spent running and building your business.

If you are a sole trader or an unlimited partnership

Unlike limited companies and LLPs, the same legal requirements to file financial accounts to Companies House do not apply to sole traders and unlimited partnerships (i.e. non-LLPs). Therefore, you may only require the services of a bookkeeper; unless you have the patience to manage the recording of daily financial transactions yourself and complete your own tax returns.

However, it is still extremely good practice to produce annual financial accounts for your own purposes if nothing else, as they provide a vital snapshot of the current financial position of the business, and how the business has performed financially over the last tax year. If financial accounts are produced each year in the same format, direct comparisons can then be made against previous years to track performance.

Diligent Accounting can help

It is vitally important that businesses get the financial side right from day one, or as early as possible, to provide the best chance of being compliant with the relevant authorities and, in turn, avoid the potential for fines and penalties.

At Diligent Accounting, we support sole traders, partnerships and small limited companies and can provide you with bookkeeping services only, or both bookkeeping and accountancy services, taking the burden off your hands so you can focus on your business.

We offer a warm, friendly, personalised and dedicated service at competitive prices and we are truly passionate about bookkeeping and accounting. We apply the highest professional and ethical standards to our work at all times and treat your business like it’s our own, supporting you every step of the way.

If you haven’t hired a bookkeeper or accountant yet, then we’d love to hear from you. If you would like to make an enquiry regarding our services, or would like to book a free, no obligation consultation, then please contact James on 07775 513097 or email james@diligentaccounting.co.uk.