WHAT IS THE CONSTRUCTION INDUSTRY SCHEME?
The Construction Industry Scheme (CIS) is the process by which HMRC collects tax from payments to subcontractors working in the construction industry.
HMRC’s definition of “construction industry” is very broad. As well as obvious trades such as building, bricklaying and roofing, it includes activities such as painting and decorating, installing telecommunications equipment, fire protection and ventilation, and even landscaping. It applies to new builds, renovations and alterations.
HOW DOES A SMALL BUSINESS COME UNDER THE CIS?
A small business can be
- A contractor
- A subcontractor
- Or both
Contractors and sub-contractors can be individuals (sole traders), partnerships or limited companies.
For CIS purposes a contractor is a construction business that subcontracts work to another party such as another company or a self-employed individual, but not an employee paid under PAYE.
It is the contractor who is responsible for administering the CIS on payments to sub-contractors. This includes calculating the CIS tax at the correct rate, creating “Payment and Deduction“ statements for the subcontractors and remitting the deductions to HMRC.
Contractors and subcontractors cannot mutually agree to “opt out” of the CIS process. HMRC can, and do, impose substantial penalties on contractors who fail to comply or who submit returns late.
The subcontractor must keep records of payments received under CIS. If they are VAT registered, they must account for VAT correctly which can be complicated. Subcontractors should register with HMRC. Although it is possible to work as an unregistered subcontractor, the CIS deductions will be at 30% rather than the more usual 20%.
The CIS deducted on payments to the subcontractor is effectively an advance payment of tax. The subcontractor still needs to complete accounts and submit tax returns. Sole traders and partnerships offset the CIS already paid against the tax due for the year and either pay the excess to HMRC or claim a rebate from HMRC.
The process for limited companies is different. The CIS deducted can be used as payment for tax due on PAYE payments to employees or CIS on their own subcontractors (remember a business can be both a contractor and a subcontractor). If the deductions exceed the PAYE and CIS due, the company claims a rebate from HMRC.
Established subcontractors with a good tax payment record and CIS turnover of at least £30,000 can register with HMRC for “Gross Status”. They will not suffer CIS deductions on payments they receive. The contractor and subcontractor must still process the payments under the CIS and report them to HMRC as “CIS deductions at 0%”.
RECORD KEEPING FOR CIS
CIS does increase the complexity of bookkeeping and accounting, especially if the business is VAT registered. The accounts must be accurate. The amounts involved can be substantial, up to 20% or 30% of turnover; mistakes can risk substantially over or understating taxes due to tor rebates from HMRC.
A good accounting system such as Xero will automate the process and help ensure the accounts are correct; The cost of Xero can be easily justified by the time it will save you and the reduction in mistakes.
Alternatively you can engage an accountant or bookkeeper such as Aston Black to maintain your books and accounts.
HOW ASTON BLACK CAN HELP WITH CIS
We can provide a full CIS service:
- Help with registering you with HMRC as a contractor or subcontractor
- Set up and run CIS payments, calculate deductions, generate the Payment and Deduction statements, submit returns to HMRC
- Register you with HMRC for Gross status (if you are eligible)
- Reclaim excess CIS suffered from HMRC
- Preparing your VAT returns and annual accounts, correctly reporting CIS