The Construction Industry Scheme (CIS) Explained
CIS applies to any construction work carried out in the UK, where a contractor pays a subcontractor for construction work.
In most cases it is relatively clear what ‘construction’ work is, but as a general rule it includes any construction work on buildings and structures. This might be anything from demolition, site clearance, new buildings, repairs to new internal systems.
You can be acting as a contractor or subcontractor, as either a sole trader or a limited company.
In some situations, you may be both contractor and subcontractor.
HMRC publish a full guide with examples of work that falls inside and outside the scheme.
How to comply with CIS
As a contractor impacted by the scheme, you must register for CIS with HMRC either by phone or online. Once HMRC have then confirmed your registration in writing, you must then do the following:
Verify subcontractors, to know the rate of tax to be deducted (20% or 30%) or indeed if no deduction is required (i.e. gross payment status).
Submit a monthly return to HMRC, detailing all payments within CIS.
Pay monthly the tax deductions to HMRC.
For subcontractors, you don’t have to register for CIS, but failing to do so will mean that tax will be deducted at the higher rate of 30%.
For that reason, it often makes sense to register so that a deduction of only 20% is applied or even no deduction where the qualifying conditions for gross payment are met. As a subcontractor, you can recover any tax deductions incurred on receipts, by off-setting against PAYE & NI payable or where this doesn’t apply, by the company making a reclaim submission.
However, for a sole trader, if the tax deductions exceed the tax liability for the year, HMRC will repay any excess tax after submission of the self-assessment tax return.
Mirandus Accountants are fully able to assist you meet all of these requirements, taking away the administration, whilst giving you the knowledge that compliance is being met.
How CIS works in practice
Some of the common issues that arise are highlighted below and to show you how the scheme works and what to consider when looking to get CIS approved.
Calculating CIS
In order to work out the level of tax deduction that will be withheld, the contractor must have a record which shows how the invoiced amount is split between labour, materials, plant hire and consumables.
The contractor must deduct ‘materials’ from the gross invoice amount, so that the tax deduction is only calculated on the labour element.
Property Developers
Many businesses might not necessarily believe they are a mainstream contractor because they are not ordinarily a builder.
It is however important to recognise that a property developer may be considered a main contractor and may need to register for CIS.
If a property developer hires a builder to help with construction, and they in turn hire subcontractors for the construction work, this draws the property developer into the definition of a contractor. The property developer would therefore need to verify the CIS status of the builder and deduct CIS tax if appropriate.
VAT Reverse Charge
The VAT reverse charge is a recent rule change which impacts CIS, introduced on 1 March 2021.
The aim of the domestic VAT reverse charge is to reduce VAT fraud in the construction sector. The charge applies to standard and reduced-rate VAT services, for business or individuals who are registered for VAT in the UK and are reportable within CIS.
HMRC have produced a handy flow chart to check if you VAT reverse charge applies to you, found here.
