Your Tax Obligations Under the CIS

Recently we’ve seen a number of people online talking about paying 40% tax under the Construction Industry Scheme (CIS). As we work with a number of contractors and subcontractors who operate under the CIS, we thought it was worth taking a look at how tax obligations actually work within the scheme – including what you have to do to be paid correctly in the first place.

Registering for the CIS

If you qualify for the CIS as a contractor or as a subcontractor, you have to register with the scheme in order to take advantage of it. If you fulfil both roles, you must register as both. You can register as a contractor if you pay subcontractors for construction work as a business, or if your business has spent more than £3million on construction work in a 12-month period since making your first payment. Assuming your business is UK based, the process to register as a contractor is based on the process for setting up as a new employer. If the business is overseas but still carries out construction work in the UK, there is a different process, for which guidance can be found on the government’s own site. Registration as a subcontractor requires you to submit:

• Your legal business name or trading name
• Your VAT Registration (presuming you are registered for VAT)
• The date you started trading
• Your business’ Unique Taxpayer Reference (UTR)

You may also need to provide other information if appropriate, including:

• A copy of a relevant Joint Venture Agreement
• The details of a registering partner, including UTR and National Insurance Number
• Your own National Insurance Number
• Your Company Registration Number

You can register online using your UTR or a Government Gateway user ID. If you don’t yet have a UTR, you can create this by registering as a new business for Self Assessment. If you select ‘working as a subcontractor’ when the prompt comes up, you’ll register for both Self Assessment and CIS simultaneously.

What Work is Covered by the CIS?

As always with government schemes, there are specific definitions and exceptions to the work covered. Covering these fully is beyond the scope of this article, if you believe yours is an edge case we would recommend a specific consultation. In general the CIS covers most construction work done to permanent or temporary buildings or structures. Construction work is further defined, covering:

• Laying foundations
• Access works
• Demolitions and dismantling
• Alterations, repairs, and decorating
• Installing electricity, heating, lighting, ventilation and plumbing systems
• Building work
• A deep clean to the interior following completion of construction

There are some jobs within this which do not fit into the CIS, and if you only do these tasks you do not need to register. These include:

• Scaffolding hire (but not scaffolding assembly or dismantling)
• Surveying
• Architecture
• Carpet Fitting
• Delivery of Material
• Any work on-site that can be clearly said not to be construction, including running canteens, managing site facilities, etc.

For the most part, while the edges of these definitions may be somewhat loose, we would expect that you’ll already know whether you fall into an exception or not but, again, if you’re in an edge case, do check! The CIS 340 guidance issued by the government was recently updated if you’re unsure.

The Payment Process Under CIS

Make sure that you tell the contractor paying you the specific legal business name or trading name you used while registering for the CIS, and provide them with your UTR. These are used to verify your eligibility for deductions. A contractor should pay you with deductions made at the standard 20% rate. However, if you have not registered, if the business name they provide is not the one you registered with, or if they can’t verify you through your UTR, deductions must instead be made at the higher rate of 30% – a significant difference! You will be provided with monthly statements of payments and deduction. You can use these to cross-check whether you still owe tax and/or National Insurance, whether everything is already correct, or whether you’re due a refund. If you have contractor accountants working for you, we will be able to deal with this for you.

What Does Not Receive Deductions?

Certain aspects of your invoice will not receive deductions. These are:

• VAT
• Consumable stores
• Plant hired for the job
• Manufacturing or prefabricating materials
• Materials you paid for directly

Evidence may be requested for material you directly paid for. The contractor will estimate this cost if no evidence is provided, so as always, we recommend you retain all receipts.

Gross Payment Status Under CIS

You can instead avoid deductions by applying for gross payment status when you register for the CIS. Under this status your contractor will make no deductions, and you take responsibility for paying all deductions in full at the end of the year. If you operate as a contractor limited company, you will handle all deductions in your Corporation Tax return as you otherwise would.

Paying Tax and Claiming Deductions Under CIS

Responsibility for correct tax and NI payments remains with you, even if contractors have made deductions through the year. As a sole trader, you will need to send in your Self Assessment tax return as you would otherwise. There is a ‘CIS Deductions’ field to include those deductions contractors have made on your behalf. You should also submit the full amounts for each invoice, not the amount paid after deductions. As a limited company, if you do not have gross payment status, you must claim your deductions back through your monthly payroll scheme, not through the Corporation Tax return – attempting to claim them this way may lead to a penalty, so be careful! Instead, send your monthly Full Payment Summary to HMRC, along with an Employer Payment Summary (EPS) in which you should include your total CIS deductions for the year to date. HMRC will then calculate the balance, taking your CIS deductions off what you owe in PAYE and National Insurance. The balance must be paid by the usual date – however, if your PAYE bill is at zero and there are still deductions to claim back, you can carry these forward to the next month or quarter, provided that you are still in the same tax year. You should note in this case that you have nothing to pay in your EPS. If you have any further questions to ask about how the CIS affects you specifically, why not drop us a line and we’ll see what we can do to help?