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:
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.
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.
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.
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.
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:
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' 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.
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:
If a contractor fails to submit the monthly return on time the following penalties are applied:
The CIS penalties are cumulative and they are for each monthly CIS return not filed in time.
We have seen a number of recent enquiries by HMRC into non-compliance with CIS generally but also specifically:
We support organisations in:
Please contact Simon Herbert or one of your usual Employer advisory contacts if you wish to discuss further.
Extending security deposit legislation
Legislation 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.