The Construction Industry Scheme: Everything a contractor needs to know

The Construction Industry Scheme: Everything a contractor needs to know

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Date20 Apr 2015
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Posted ByAdmin
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The UK Construction Industry has seen a resurgence in confidence after a drop to a 17-month low in December 2014. In fact, according to the Fourth Quarter 2014 edition of Barclays Local Insights, Construction is the  largest sector in Old Bexley and Sidcup constituency  as measured by turnover. 

In addition, six of the 10 fastest-growing industries among small businesses are tied to construction, including real estate, contractors and architects. If you are a contractor and planning on making a move to the construction industry, now is really a good time. Here are some considerations and resources that will help you get started.

Setting up a business in the construction industry

If you are setting up a small business in the construction industry, there are industry-specific regulations, taxes and requirements that you will need to consider and register for.

  1. Construction Industry scheme (CIS)

    The Construction Industry scheme was created by HMRC to handle tax payments made by contractors to sub-contractors for construction work. Under this scheme, a contractor will deduct a proportion of the money due to their subcontractors, at source.  The deductions are directly passed to HMRC and count as advance payments towards the subcontractor’s tax and National Insurance. The exact proportions deducted depends whether the sub-contractor is registered under the CIS scheme (see the point on deductions below). 

    Who is covered under CIS?

    The scheme applies to all types of contractors operating in the construction industry.  It doesn’t matter whether you are set-up as a sole-trader, partnership or a limited company; if your business operates in the construction industry or conducts work related to construction, then you’ll need to register for CIS with HMRC.

    In addition to that, non-construction businesses or organisations such as housing associations, local authorities and property developers, which spend annually £1 million or more over a three-year period on construction work, must also comply with CIS. Failure to comply with CIS can result in hefty penalties.

    Duties contractors must follow:

    • You must register for CIS before you take on your first subcontractor
    • You must register all sub-contractors with the scheme before the Construction starts
    • You must let HMRC know if there are any changes to your business
    • You must find out if you should employ a person instead of subcontracting the work. You might get a penalty if they should be an employee instead
    • You’ll usually need to make deductions from payments made to subcontractors and pay the money to HMRC
    • You’ll have to files monthly returns and keep full CIS records – there are penalties if you don’t
  2. What kind of work is covered by CIS?

    CIS applies to any construction operations carried out across the UK. Generally the CIS scheme covers work to buildings including site preparation, decorating and refurbishment but excludes things like architecture and surveying, hire of scaffolding without labour, carpet fitting, delivery of materials, and finally work on construction sites that is clearly not construction, e.g. running a canteen or site facilities.

    However there are a few exceptions. CIS doesn’t apply if a contractor’s work is:

    • paid by a charity or a trust
    • paid by a governing body or a head teacher of a school on behalf of the local education authority
    • on a business’s own property
    • small construction contracts of less than £1,000 which meet the exemption criteria and are authorised by HMRC.
  3. How to register for the CIS scheme?

    Contractors must go through the following process to set up as a new employer:

    • Register as an organisation on  Government Gateway (you’ll need your National Insurance number and email address)
    • Register as an organisation for HMRC online services (you’ll need a Unique Taxpayer Reference number (UTR) number for your business and a National Insurance number)
    • Once you are set-up HMRC will send you a letter with information you need to start operating as a CIS contractor
    • Number of employees

    Partnerships and limited companies will have to provide additional information. Once this is done HMRC will set up the contractor scheme for the business. 

  4. Verify subcontractors

    Contractors must do 2 things before they can pay subcontractors:

    • confirm with HMRC the subcontractor’s employment status as self-employed
    • find out whether the subcontractor has to be verified with HMRC

    Note: You must also verify subcontractors you’ve used before.

  5. Make deductions and pay subcontractors

    Once the registration and verification processes are complete, contractors will deduct tax at source on payments made to the subcontractor at any of the following rates:

    • 30% for subcontractors who are not registered under CIS, are not verified, or have given a wrong name for their business
    • 20% for subcontractors who are registered but not eligible for gross payments
    • 0% if the subcontractor is eligible to receive ‘gross payments’

    As a contractor, you must provide sub-contractors a CIS voucher/certificate confirming any deductions as these are counted as advance payments toward the subcontractor’s tax and NI bill. Invariably the amounts deducted at source end up being more than the subcontractors need to have paid, so most of them will be due for a refund because of overpayment.

    Remember that your subcontractors might be eligible to receive their payments in gross i.e. without any deductions if they have the ‘gross payments status’.

  6. Pay deductions to HMRC

    HMRC must be paid any deductions you’ve made by the 22nd (or the 19th if paying by post) of each month. If you already have employees, HMRC will change your existing PAYE Scheme to a PAYE/CIS scheme. To cover your PAYE tax, National Insurance and CIS deductions, you must make one payment each month or quarter.

  7. File monthly CIS returns

    Payments made to subcontractors must be reported to HMRC each month through a monthly CIS return. These can be filed using:

    • HMRC CIS Online service
    • Commercial CIS software
    • The paper CIS monthly return (CIS 300)

    On your return it must be declared that subcontractors are not your employees. Penalties up to £3,000 apply if you provide the wrong employment status for a subcontractor on your monthly return.

    Starting 6 April 2015, some amendments were made to the CIS system. The requirement for contractors to file a return even if no payments had been made to subcontractors has been removed. However, contractors may voluntarily file a ‘nil’ return but are no longer obligated to do so.

  8. Keep good records

    Under CIS, you must keep records of:

    • the gross amount of each payment invoiced by subcontractors, excluding VAT
    • any deductions you’ve made from subcontractor payments

    If you made deductions, you must also keep records of the costs of materials the subcontractor invoiced you for, excluding VAT. You must keep records for at least 3 years after the end of the tax year they are related to as HMRC can ask to see these records any time. Fines of up to £3000 apply for failing to do so.

  9. Deadlines

    You must submit CIS returns by the 19th of each month following the last tax month. For instance: if you’re making a return for the tax month of 6 August to 5 September, the return must reach HMRC by 19th September.  You’ll get a penalty for missing the deadline:

How late the return is Penalty
   1 day late    £100
   2 months late    £200
   6 months late       £300 or 5% of the CIS deductions on the return, whichever’s higher
   12 months late    £300 or 5% of the CIS deductions on the return, whichever’s higher

All advice provided by Alan McCappin is correct at the time of posting. However, you should not rely solely on this blog post and should instead seek professional advice before taking any action.