The Construction Industry Scheme (CIS) applies mainly to contractors and subcontractors in construction work and was originally conceived in 1971 to prevent evasion of tax by such workers. CIS maintains a registered database of subcontractors, with those subcontractors with a history of good compliance and a turnover above a certain threshold being granted Gross Payment Status (GPS) with the remainder having deductions made by the contractor from their payment on the labour content.
There are two types of contractors:
- Mainstream - builders, labour agencies, property developers
- Deemed Contractors - you count if you spend an average of more than £1 million a year on construction in any three year period, such as property investors, banks and public bodies.
Registering for CIS
Contractors who pay subcontractors for any and all construction work must register for the Construction Industry Scheme. Subcontractors don’t have to register for the Scheme, but deductions are taken from their payments at the higher 30% rate if they do not register.
How the scheme operates
CIS Process - engaging a subcontractor
Following the engagement and verification of a subcontractor, CIS also requires contractors to provide monthly statements to those subcontractors paid under deduction and a monthly return to HMRC, in addition to passing directly to HMRC any deductions made from payments to those subcontractors who are not gross paid.
Tax deduction
Deductions must only be made from that part of the payment that does not represent the cost of materials incurred by the subcontractor.
To calculate the amount to deduct there are two steps that contractors must follow.
Step 1
Work out the gross amount from which a deduction will be
made by excluding VAT charged by the subcontractor if the subcontractor is registered for VAT.
The contractor will need to keep a record of the gross payment amounts so that they can enter these on their monthly returns.
Step 2
Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor isn’t registered for VAT:
- materials (see below)
- consumable stores
- fuel (except fuel for travelling)
- plant hire (see below)
- the cost of manufacture or prefabrication of materials.
The importance of the materials element
The contractor should check the materials element and can ask the subcontractor for evidence of the direct cost of materials. If the subcontractor fails to give this information, the contractor must make a fair estimate of the actual cost of materials. The contractor must always check, that the part of the payment for materials supplied isn’t overstated. If the materials element looks to be excessive HMRC may seek to recover any under deduction or tax from the contractor.
Plant hire claimed as materials
'Plant' includes, for example, scaffolding, cranes, cement mixers, concrete pumps, earth moving equipment and compressors.
Where the subcontractor hires plant in order to carry out construction work, the cost of the plant hire and any consumable items such as fuel needed for its operation may be treated as materials for the purposes of calculating any deduction.
This treatment only extends to plant and equipment actually hired by the subcontractor from a third party. If the subcontractor owns the plant used in executing the work no notional deduction for plant hire may be made, although consumable items such as fuel used by the plant may still be treated as materials.
The contractor should check this with the subcontractor before making payment as failure to do so may leave the contractor responsible for any under deduction.
Submitting your return to HMRC
Each month, contractors must submit a complete return of all the payments they have made within the scheme or file a 'nil' return showing no payments have been made. The return includes:
- 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.
CIS penalties for late filing
If a contractor fails to submit the monthly return on time the following penalties are applied:
- 1 day late – £100
- 2 months late – £200
- 6 months late – £300 or 5% of the CIS deductions (whichever is higher)
- 12 months late – £300 or 5% of the CIS deductions (whichever is higher)
- Over 12 months late – potentially an additional £3,000 or 100% of the CIS deductions (whichever is higher).
The CIS penalties are cumulative and they are for each monthly CIS return not filed in time.
Typical CIS problem areas
We have seen a number of recent enquiries by HMRC into non-compliance with CIS generally but also specifically:
- how materials have been reported and the split out on invoices raised
- status of workers
- if the total contract has been included, rather than just part
- have the rules been applied to all construction payments it is much broader than simply providing building services, for instance
- a business involved with installing entry phones isn’t within the remit of CIS, but a company providing door access systems is
- the treatment of project management is frequently considered to be outside the scope of CIS when actually it is caught
- stained glass windows are included but sculptures are not!
How can we help?
We support organisations in:
- setting up or reviewing their procedures
- upkeep of your CIS business requirements
- navigating the legislation, what's in and what's out of scope
- any HMRC challenge
Please contact Simon Herbert or one of your usual Employer advisory contacts if you wish to discuss further.
Extending security deposit legislationLegislation introduced in the Finance Bill 2018 to extend the scope of the existing security deposits legislation to include Corporation Tax (CT) and Construction Industry Scheme (CIS) deductions will come into effect from 6 April 2019. A consultation on the implementation of this change was held between 13 March and 8 June. Responses to this can be found on the gov.uk website Consultation outcome. HMRC has the power to require high-risk businesses to provide an upfront security deposit when considered necessary for the protection of the revenue. Currently this power applies to VAT, PAYE and National Insurance contributions, Insurance Premium Tax (IPT) and some environmental and gambling taxes. From 6 April 2019 this measure will give HMRC the power to also require securities in relation to Corporation Tax and CIS deductions. This measure will strengthen HMRC’s ability to deal effectively with the small minority of rule breakers that will not pay, rather than cannot pay, tax that is due. Businesses that are experiencing genuine difficulties are not the target of this measure. View more information about the draft legislation. |