CIS – What Is it?
Construction activities are a core business activity within the UK SME business sector, and have been for generations.
In 2007, HMRC introduced the Construction Industry Scheme (CIS) for how payments to subcontractors for construction work must be handled by contractors in the construction industry. Where contractors make payments to subcontractors they must take the subcontractor’s tax status into account. In practice this means that the contractor must make deductions for the part of the payment which does not represent the cost of materials incurred by the subcontractor and pay this directly to the HMRC.
This type of scheme that requires tax deductions on gross earnings currently doesn’t exist on any other SME business type in the UK.
The CIS rules apply to all payments that are made by a contractor to a subcontractor (but not employees) under a construction contract. Failure to comply may result in expensive penalties.
CIS – Why?
So why has this come about in the construction industry alone?
The CIS is designed to minimize tax evasion within the construction industry. Traditionally, and probably as a result of the short term or project based nature of construction work, workers have tended not to be directly employed by large construction businesses and have instead been treated as casual staff or operated as freelance or subcontractor businesses.
The aim is therefore, to encourage individuals into direct employment and therefore obtain PAYE and NI tax revenues.
The scheme can be quite difficult to understand and operate given some of the detailed elements involved
- for both Contractors and Subcontractors to decide when and how to register under the scheme
- for Contractors to ensure that they make the correct deductions
- for Subcontractors to understand why deductions are being made from their invoices as well as trying to manage cash flow throughout the course of the year.
CIS – How Does it Work?
The legislation is broadly contained in Section 74 of the Finance Act 2004, and relates to specific relationships and types of work. The following conditions must be met for the requirements to apply:
- There needs to be a Contractor.
- There needs to be a Subcontractor, and
- There needs to be Construction operations carried out by the Subcontractor
If all 3 elements are not present then the CIS requirements are not appropriate to the relationship, for example if the subcontractor is a direct employee, then he will paid via payroll and CIS does not apply. Equally if the customer is not a contractor or the activities being carried out are not construction operations then CIS also does not apply.
What is a Contractor?
A contractor includes any person carrying on a business which includes construction operations, or in certain circumstances any type of business, e.g. supermarket, pub etc. if its average annual expenditure on construction operations in the 3 years up to the end of the last financial year exceeded £1m (deemed contractor rules).
What Is a Subcontractor?
A person is regarded as a Sub contractor where under the contract;
- He/she is under a duty to the contractor to carry out the operations, or to provide his own labour.
- He is answerable to the contractor for the carrying out of the operations by others, whether under a contract or under arrangements made or to be made by him.
What Are Construction Operations?
These are quite widely defined in Section 74, and generally cover anything that is done to a permanent or temporary building, structure, works or civil engineering or installing. In some cases the work can be unknown to contractors and/or subcontractors but where deductions should have been made, HMRC may still demand these amounts from the contractor.
Construction operations include but are not limited to:
- Constructions, alteration, repair, extension, demolition or dismantling of buildings or structures
- Construction, alteration, repair, extension, demolition of any works forming, or to form part of the land forming part of the land
- Installation (but not repair) in any building or structure of ‘systems’ of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation or fire protection
- Internal cleaning of buildings or structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration (for example after builders cleaning).
- Painting or decorating the internal or external surfaces of any building or structure (NB – only where there exists a Contractor/Subcontractor relationship).
Simple examples of activities that fall under CIS include; scaffolding with labour, plant hire with an operator, after build cleaning, door access systems, gates, barriers and automatic bollards and security fencing, installation of lifts, window cleaning hoists. Replacements of any existing system (lighting, heating, electrical re wiring etc.) will be deemed as installation and hence construction activities.
There are some specific operations which are excluded from CIS as follows:
- Manufacture of building or engineering components or equipment, materials etc, and/or the delivery of any of these materials to site.
- The professional work of architects or surveyors (as long as they are not ‘managing’ the project on behalf of the Contractor, which is subject to CIS).
- The making, installation and repair of artistic works.
- Sign writing and erecting signboards and advertisements.
- The installation of seating, blinds and shutters.
- The installation of security systems.
Examples may also include carpet fitting, skips, concrete mixers (no operator), burglar alarms, CCTV for security purposes only, temporary exhibition stands, marquees etc.
CIS – So When and How Do I Register?
If you are a Contractor who will be engaging with Subcontractors to carry out activities that will fall under the heading of construction operations, then you will need to register under the scheme with HMRC as a Contractor.
Ensure that individuals who work for you in the capacity of an employee, are paid via payroll as employees of the business.
Where Subcontractors are actually independent in nature that the appropriate level of deduction(s) Nil, 20% or 30%) are made from all payment of their invoices and from the correct values of activities that fall under the CIS regime.
Similarly if you are a Subcontractor and are likely to be engaging in activities for a Contractor, then you will need to register as a Subcontractor to avoid all of your invoices suffering a deduction of 30% by default i.e. applies to unregistered Subcontractors.
Situations Where a Contractor Is also a Subcontractor or Vice Versa
In many cases, a business may act both in the capacity of a Contractor and a Subcontractor and therefore it requires registration under CIS in both capacities.
CIS – How Does the Administration of the CIS regime affect Contractors and Subcontractors?
The administration requirements of the scheme are more onerous on the Contractor and this is where HMRC will attempt to obtain any tax revenue losses where appropriate. Hence it pays to follow the requirements as closely as possible.
So What Are the Requirements Applicable to a Contractor?
- The Contractor must register for CIS before taking on it’s first subcontractor
- The Contractor must check if the individual should be employed instead of subcontracting the work. (there are substantial penalties where a contractor has paid an individual as a Subcontractor where they act as an employee in reality).
- Verify every Subcontractor with HMRC to check that they are registered under CIS and determine the rate of deduction(s) applicable to the payment of their invoices
- When payments are made to Subcontractors ensure that the appropriate level of deductions are made, as well as from the appropriate elements of invoiced activity
- The Contractor should ensure that the CIS monthly returns are filed by the appropriate deadline each month
- The Contractor should ensure that the payment of the CIS deductions made from Subcontractors is made to HMRC by the appropriate deadline each month
- The Contractor must ensure that full and accurate records for CIS are maintained records – you may get a penalty if you don’t.
- The Contractor must let HMRC know about any changes to their business.
As a Subcontractor the requirements are less onerous, however you should register for the CIS scheme by providing the appropriate information to HMRC, and additionally for each new Contractor that you commence work for there is a requirement to provide him with information about the business necessary for the Contractor to verify you and apply the correct deduction rate.
Unless the Subcontractor has applied for and successfully been granted Gross Payment status which means no deductions are made from payments by the Contractor, then they will have amounts paid on account of the Self Assessment or other business taxes withheld by HMRC.
In certain circumstances these amounts can be repaid by HMRC after the tax year where all other returns and tax payments have been submitted or can be retained and used to offset the total tax on the tax return.
What Do I Do Next?
Disclaimer – This is a guest blog written by a third party. This blog does not represent the views or opinions of Right Surveyors Ltd or any of its affiliated companies.