Construction Industry Scheme
Construction Industry Scheme: Opinions differ about the Construction Industry Scheme or CIS. To some, it’s yet another evil government plot to strip them of their hard-earned cash. To others it’s a welcome way of stamping out unscrupulous cowboys. In this article, it looks at CIS with a view to providing a simple and clear overview. In addition, he warns about some of the traps as well as a way of making life easier.
When I tell my friends that work in the trade that I have the answer to their tax problems, I tend to get a response that almost mirrors the five stages of grief.
It starts with denial, especially if you are new to the trade and its strange CIS rules. But if you’ve been in the industry a while, you have probably jumped straight past anger and onto depression and acceptance.
So just what is CIS?
Let’s start at the beginning. Stay awake at the back please. Just what is CIS?
CIS (Construction industry scheme) is a tax law relating to work done by subcontractors for contractors in the UK. It involves the contractor deducting CIS before they pay each subcontractor invoice.
Work covered by the scheme is all construction and field trade work that is subcontracted. This covers contractors and subcontractors of any type – sole traders, self-employed, companies or partnerships. No escape!
Any business whose main activity is not construction but spends more than £1m per annum on construction, such as a Housing Association, is considered a contractor subject to CIS.
There is some good news. CIS does not apply to work done directly for and paid directly by home owners or businesses not engaged in construction. Architecture, surveying, carpet fitting, delivering materials and running a canteen on site are also never subject to CIS.
HMRC’s motivation was undoubtedly to try to increase their tax take. The scheme is almost worthy of a James Bond villain as it’s very clever. Avoiding CIS is only possible by collusion between a contractor and a subcontractor. If CIS is not deducted and the subcontractor subsequently fails to pay up their tax, the contractor is liable for the full amount. Contractors are usually more visible and have more to lose, so that makes sense to HMRC.
Registration and Verification
All contractors and subcontractors, including sole traders, must register under CIS with HMRC, you might even need to register as both. Employees of these companies do not need to register individually.
Contractors must “verify” their subcontractors before work starts and this process will tell the contractor what percentage to deduct. Subcontractors who have not registered will have 30% CIS deducted, the normal rate is 20% and subcontractors that have applied for and been granted “gross” status don’t have anything deducted.
How does CIS work?
As I am just about to demonstrate figuring out CIS can be a little complex. If you’re still in the denial or anger phase then feel free to skip this section and hop straight to the next.
First of all, CIS is only deducted from labour costs plus any mark-up on materials plus personal expenses e.g. Mileage. CIS is not deducted from VAT or from the cost of materials, equipment hire or manufacturing.
The subcontractor sends an itemised invoice. The contractor deducts CIS from the appropriate parts of the invoice at the rate specified by the verification process.
Here’s an example, but don’t worry, there won’t be a test at the end of the article.
Total before VAT:£400
VAT @ 20%: £80
Invoice total (before CIS): £480
CIS @ 20% on labour: £ (60)
Total payable by contractor to subcontractor: £420
Total payable by contractor to HMRC: £60
The subcontractor receives a credit with HMRC for the CIS paid and can deduct this from any tax or NI due when they submit their tax return. Subcontractors who pay employees through PAYE can claim back their deducted CIS each month.
Reporting is based on the date that the payment is made and the contractor has to provide the subcontractor with a statement of the deductions made and provide HMRC with a monthly report. There are heavy penalties for failing to submit reports on time.
How can you legally avoid CIS?
In most cases CIS can’t be avoided. However, if two or more small businesses are doing a project for a homeowner, then if each business separately invoices the customer, CIS is not applicable.
Common CIS misconceptions
- The job is small so the rules won’t apply
- I can take my profit through a mark-up on materials to avoid CIS
- CIS doesn’t apply because I am doing work external to a property
- I haven’t processed any CIS deductions this month so I don’t need to do a monthly contractor return
Who can help?
We’ve teamed up with the mobile app and software provider to help demistify the complexities of CIS. Powered Now spent a lot of last year developing our app to support CIS Invoices. Provided that you record all payments for invoices relating to CIS, then Powered Now automates most of the administration:
- CIS is automatically estimated on invoices sent from the subcontractor to the contractor saving manual calculations
- The reports that contractors must send to subcontractors are generated automatically
- The information needed for the monthly CIS report by contractors to HMRC is generated automatically
- A running total of CIS that has been deducted from a subcontractor’s invoices is kept so that it can be claimed back at the end of the tax year
- A Powered Now user can be both a contractor and subcontractor
When both parties are Powered Now users, most of the information is sent electronically, saving re-keying effort.
Handle with care
HMRC created the CIS scheme to combat tax avoidance. As you might expect, the penalties for getting it wrong are very high. That means that every serious and ambitious business should make sure that they are thoroughly familiar with CIS. This short article should just be treated as an introduction. At least at the start, you should consult an accountant who fully understands CIS to make sure that you comply with every detail.