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 firstname.lastname@example.org.
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.
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.