Tax

CONSTRUCTION INDUSTRY SCHEME – THE FACTS!!

Types of work that are covered by the scheme

The scheme covers all construction work carried out in the UK, including jobs such as:

  •  site preparation
  •  alterations
  •  dismantling
  •  construction
  •  repairs
  •  decorating
  •  demolition


The UK includes UK territorial waters up to the 12-mile limit.

The scheme doesn’t apply to construction work carried on outside the UK. However, a business based outside the UK and carrying out construction work within the UK is within the scheme and must register accordingly.

Types of businesses that are covered by the scheme

The scheme covers all types of businesses and other concerns that work in the construction industry, including:

  •  companies
  •  partnerships
  •  self-employed individuals


These businesses can be:

  •  contractors
  •  subcontractors
  •  contractors and subcontractors


Under the scheme, the terms ‘contractor’ and ‘subcontractor’ have special meanings that cover more than is generally referred to as ‘construction’.


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’.

Subcontractor

A subcontractor is a business that carries out construction work for a contractor.

Businesses that are contractors and subcontractors

Many businesses pay other businesses for construction work but are themselves paid by other businesses too. When they’re working as a contractor, they must follow the rules for contractors and when they’re working as a subcontractor, they must follow the rules for subcontractors.

Registering for the scheme

All contractors must register with HMRC for the CIS. Subcontractors who don’t wish to have deductions made from their payments at the higher rate of deduction should also register with HMRC. HMRC will provide registration details that contractors and subcontractors will need to use when they deal with payments.

Verifying subcontractors

Before a contractor can make a payment to a subcontractor for construction work, they may need to verify with HMRC that the subcontractor is registered. HMRC will check whether the subcontractor is registered and then tell the contractor the rate of deduction they must apply to the payment, or whether the payment can be made without any deductions.

Making deductions from payments

Under the scheme, all payments made from contractors to subcontractors, must take account of the subcontractors’ tax status. This may require the contractor to make a deduction, which they then pay to HMRC from that part of the payment that does not represent the cost of materials incurred by the subcontractor.

If no deduction is required, the contractor can make the payment to the subcontractor in full.

If a deduction is required, the contractor must:

  • calculate the deduction
  • make the deduction
  • record details of the payment, materials and deduction
  • make the net payment to the subcontractor
  • complete and give the appropriate statement of deduction to the subcontractor 


Returns

Each month, contractors must send HMRC a complete return of all the payments they have made within the scheme or tell HMRC that they have made no payments. The return will include:

  • details of the subcontractors
  • details of the payments made, and any deductions withheld
  • a declaration that the employment status of all subcontractors has been considered
  • a declaration that all subcontractors that need to be verified have been verified

 

Payments to HMRC

Each month, or quarter in some cases, contractors must send HMRC a payment for the deductions they’ve made from subcontractors.

How subcontractors pay tax

Subcontractors have to make a return of their profits each year, and their tax liability is based on that return. A subcontractor may already have paid tax by payments on account or had deductions made, as shown on the payment and deduction statements given to them by their contractors.

If the amount already paid or deducted is greater than the amount due, HMRC will repay the excess. If there is a shortfall, then the subcontractor must make a balancing payment.

Subcontractors setting off deductions

Subcontractors that are limited companies should set off deductions they bear on their receipts against the following sums payable to HMRC:

  • PAYE tax due from the company’s employees
  • Employers’ and employees’ National Insurance contributions due
  • Student Loan repayments due from the company’s employees
  • CIS deductions made from the company’s subcontractors


At the end of the tax year, once HMRC have received the company’s final Full Payment Submission (FPS) and final EPS, any excess CIS deductions that cannot be set off may be refunded or set against Corporation Tax due. No repayments or set-offs against other liabilities can be made in-year except where the company is in liquidation or administration.

Further guidance:
HMRC and CIS (click here)
What you need to do as a contractor (click here)
What you need to do as a subcontractor (click here)
CIS and VAT – further changes (click here)
DansonOsborne Accountants (contact us)