It was back in 1971 that the government introduced The Construction Industry Scheme – or CIS. The idea was – and still is – to reduce tax evasion in the construction industry. Simultaneously, construction workers would be protected from false employment.

No-brainer

CIS requires contractors to deduct money from their subcontractors’ pay. This is to cover their tax and NICs. As a subcontractor, you don’t have to join the scheme, but we recommend that you do. Why? Well, it’s pretty simple and we can’t see you disagreeing. Register with CIS and your deduction will be 20%. Don’t register and you’re looking at 30%. ‘No-brainer’ is the word that springs to mind! The contractor pays these deductions to HMRC, as an advance payment towards your tax liabilities.

Is the CIS just for sole traders?

No. If you have a Limited Company that carries out sub-contracted work, it still applies – except the rules are slightly different. If you’re a Limited Company, you notify HMRC via an Employer Payment Summary (EPS) each month of the total CIS deductions for the year to date. These deductions are then used to offset against what you owe for PAYE tax and National Insurance. Any balance left owing to you can be refunded or offset against your Corporation Tax bill. If you’re a sole trader, you’re in a similar position. The difference is that you can offset those CIS deductions against your income tax or personal tax liability. This will be noted in your self-assessment.

So, for the CIS, what counts as construction work?

Anything to do with preparing a building site, demolition and dismantling, building work itself, alterations, repairs, decorating, installation of systems such as lighting, heating, water, power and ventilation – even cleaning the interior of buildings after construction work – all of these activities come under the heading of construction work.

How does it work?

You work for a limited Company

If you’re a subcontractor and you operate via a limited company or as a sole trader, the contractor who takes you on will pay you or your limited company after they’ve deducted the 20% or 30% (as applicable) for CIS payments.

The contractor files a monthly report to HMRC, showing the deductions they made from the subcontractors they took on.

If you’re a subcontractor who operates through a limited company, then your company will include the CIS amount deducted by the contractor through an Employer Payment Summary (EPS). Your limited company will submit an EPS to HMRC throughout the tax year as part of its PAYE arrangements. HMRC then take your CIS deductions off what you owe in PAYE tax and National Insurance. If there’s any leftover CIS credit, this will be refunded back to your company.

You’re a sole trader

In this case, you include on your annual self-assessment the CIS amount that the contractor has deducted from your payments throughout the year. This will reduce your tax bill and, as with limited companies, you’ll be refunded with any leftover CIS credit.

If you’re a sole trader who engages subcontractors

to do work, you will need to run a CIS payroll. As with the limited company example, you’ll need to produce a monthly report for HMRC and make all the required payments to them. Before making any payments to a subcontractor, the contractor must carry out a verification process to ascertain the correct rate of deduction to apply to payments made to the subcontractor.

Gross Payment Status

For some sub-contractors, the CIS deductions can cause short term cashflow issues. It is possible to register to receive your payments in full, without any CIS deductions. You must show HMRC that your business passes some tests. You’ll need to show that:

– you have paid your tax and National Insurance on time in the past
– your business does construction work in the UK
– your business is run through a bank account

HMRC will also look at your turnover for the last 12 months. Ignoring the VAT and the cost of materials, your turnover must be at least

– £30,000 if you’re a sole trader
– £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
– £30,000 for each director of a company, or at least £100,000 for the whole company

Here to help

Do you work in the construction sector? Do you have any doubt about whether you need to register for the scheme, the gov.uk website has plenty of information. Or, of course, you can talk to us. We specialise in supporting the trades about all matters relating to accounts and tax, and we’d love to help.

Here’s to a tax-efficient and highly successful 2020!

Call us – 01604 700020
Or send us an email to info@zincbooks.co.uk

It would be great to hear from you.