The Construction Industry Scheme (CIS) lays up special tax and national insurance provisions for construction workers, whether they are companies, partnerships, or self-employed people.
The CIS covers a wide range of construction-related tasks, including extensions, renovations, repairs, and even demolition. CIS is primarily a financial burden for the payer; however, the rate at which tax is withheld varies according to the recipient’s status. Contractors that pay a subcontractor are required to deduct CIS at three different levels:
- 30% if the subcontractor is not registered with HMRC under the scheme
- 20% if they are registered or
- Nil tax deducted (i.e. paid gross) if the subcontractor has a CIS gross certificate.
A subcontractor can apply for a gross certificate if turnover over the last 12 months is at least:
- £30,000 if a sole trader;
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership; or
- £30,000 for each director of a company, or at least £100,000 for the whole company.
Whether or not tax is withheld from a payment paid for work done in the CIS, the recipient must disclose the transaction to HMRC. CIS filings and payments must be sent monthly to HMRC within 14 days of the tax month-end or 17 days if paying online. Late payment and/or return submission triggers a £100 penalty. Quarterly payments may only be made if the average monthly obligation for CIS, PAYE & NI totals less than £1,500 per month; nevertheless, even if payments are made quarterly, the CIS reports must still be reported to HMRC on a monthly basis.
The CIS scheme is applicable only if a contractor engages another subcontractor to undertake the work; tasks negotiated directly with a private client are outside of the scheme. CIS deduction traps are when you may unintentionally fall foul of the CIS guidelines if you become engaged in what might be seen as a ‘joint contract’. This is the case when one contractor takes on the task and another assists, yet the bill is issued for both individuals’ efforts. An additional complexity might occur if a contractor engages a subcontractor, and then that subcontractor engages another under the original contractor’s agreement to another party. Therefore, in either situation, the original subcontractor might be both a contractor and subcontractor under the CIS regulations and be forced to apply CIS deductions.
Andy and James are both self-employed builders. They frequently work for other builders having CIS deducted at 20 per cent. However, Andy has been asked by a private client to undertake a project that involves construction work that he cannot manage, so he approaches James to help. Andy quotes for the task to include James’ labour. Despite both will work independently, to simplify the arrangement, Andy supplied the client with one invoice to cover James’ services, although the job is shown individually. On payment, Andy puts James’ part in his bank account.
The difficulty here is that James’ payment is inside the CIS scheme and Andy may fall into CIS deduction traps. Andy should have enrolled as a CIS contractor and withheld CIS tax from the payment provided to James at the proper rate. HMRC is authorised to take steps to collect the tax from Andy that he had not deducted and may also thereafter follow James for the CIS deductions which had not been received.
Call us if you need help with CIS registration or CIS deductions and reporting and do not fall into CIS deduction traps.