What is the Construction Industry Scheme?
HMRC has started a new scheme called the Construction Industry Scheme (CIS), which applies to businesspersons and companies in the construction industry. Under this scheme, a registered contractor will have to deduct 20% from the payments of a registered subcontractor or 30% from an unregistered subcontractor.
The deducted tax has to be paid to the HMRC by the contractor, just like the PAYE and national insurance payments. The employees working under the contractor do not come under this scheme because they are covered under PAYE.
If you want to be covered by this scheme, you must first register with HMRC, which must not be confused with registering with HMRC for self-assessment.
Types of Businesses Covered
The construction industry scheme is applicable to all those businesses that operate in the construction industry, such as:
- Companies
- Partnerships
- Self-employed individuals
These businesses can be contractors, subcontractors or both.
Work Types that Come Under Construction Industry Scheme
There are specific types of work that come under the construction industry scheme. However, some works are not. Let’s first identify the eligible ones.
Firstly, construction industry work covers:
- A permanent or temporary building or structure
- Civil engineering work like roads and bridges
To elaborate further, construction work that comes under CIS includes:
- Preparing the site – for example, laying foundations and providing access works
- Demolition and dismantling
- Building work
- Alterations, repairs and decorating
- Installing systems for heating, lighting, power, water and ventilation
- Cleaning the inside of buildings after construction work
Exceptions
You do not have to register if you only do certain jobs, including:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in construction, including plant and machinery
- Delivering materials
- Work on construction sites that are not construction – for example, running a canteen or site facilities
Contractor, Subcontractor, or Both?
First and foremost, to get into this scheme, you will first have to ask a question about whether you are a contractor, a subcontractor, or both. Here is how you can identify it.
You will be identified as a contractor if:
- If you are getting the construction work done by a subcontractor and paying them for that.
- You are not involved in any construction, but from the year you have started making payments, you have spent more than £3 million on construction.
- Even government entities, local municipal can be considered contractors.
You will be considered as a subcontractor if:
- If you are working for a contractor on a construction project outside the PAYE scheme.
You will be considered both:
- If your business pays others to do construction work and, at the same time, gets payment from other businesses for doing their construction work, then you will be considered a contractor and a subcontractor.
Is the CIS Scheme Mandatory
The construction industry scheme is compulsory for contractors, and they must register for it. Subcontractors have the option to not register for it; however, there is a drawback. Subcontractors not registered in the CIS scheme will be subjected to 30% instead of 20%.
Contractor Guidance
Once you have registered as a contractor in the construction industry scheme, you will be responsible for the below-listed things:
- Verifying Subcontractors
- Deduction of Payments
- Returns
- Payments
Subcontractor Guidance
Although a subcontractor doesn’t need to register for Construction Industry Scheme, registering is ideal, or else the subcontractor will be subjected to higher deductions. If you are a subcontractor under this scheme, you are actually paying advance tax to HMRC by way of deduction from your payments by the contractor. This deduction will be counted against your overall tax liability on submission of your tax return.
As a subcontractor it necessary for you to maintain all the records of your monthly payments and deduction statements that you get from the contractor. For some reason, if you have not received it then ask for them from the contractor. If the contractor has stopped business and getting the records is not possible, then inform HMRC.
Refund of Overpaid Tax Under the CIS
Under the construction industry scheme is the process of refunding overpaid tax that depends on your status of business. By being a sole trader or having a partnership in a firm, you will have to file a tax return with HMRC for refund.
You can claim the refund in the next tax year, but CIS refunds can be claimed in the current tax year by filling out Form CIS40. However, a refund via the CIS40 Form is only claimed if you have stopped working in the CIS. There is no right to a refund under CIS from HMRC, and it can only be done if your overall tax liability for the tax year is less than you have already paid via CIS deductions.
For limited companies, CIS deduction claims can be made by submitting monthly payroll, i.e., Full Payment Submission (FPS) and Employer Payment Summary (EPS) to HMRC.
Penalties
Any negligence in following the CIS will lead to penalties of £100 if your CIS return is late by one day. If the penalty is still not paid, then you will be liable for increased penalties, which are as follows:
- Two months after the date it was due, a second fixed penalty of £200
- Six months after the date it was due, a further penalty of £300 or 5% of any liability to make payments that should have been shown in the return
- Twelve months after the date it was due, a second further penalty — the amount of this penalty will depend on why your return was late.
Conclusion
The primary purpose of the construction industry scheme was to reduce tax avoidance in the industry. Through this comprehensive guide, our main goal is to help you understand the importance of the construction industry scheme, who is covered by it, its workings, penalties, and responsibilities.
We understand that if you are liable for this scheme, then it will be an added responsibility for small businesses like yours. Not to forget the financial burden that will come because of recruiting accountants to manage CIS. Therefore, to reduce your financial burden and workload, it is essential to get a helping hand from a specialist such as CoxHinkins.
Our accountants are well-trained in Xero, QuickBooks FreeAgent, and Sage accounting software. We also offer year-end, payroll, bookkeeping, management, and VAT services. We can discuss our services in detail at your convenience by phone or online meeting.
Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.
