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The Pay as You Earn (PAYE) and Construction Industry Scheme CIS systems deal with taxes in a parallel manner. Employees pay taxes through PAYE, whilst self employed individuals in the construction sector pay through CIS self assessment.
This article covers everything both contractors and subcontractors need to know about the Construction Industry Scheme, including how it operates, who needs to register for CIS, scheme exceptions, advantages for when a subcontractor is registered, and how to register for CIS.
What Is Construction Industry Scheme CIS
CIS tax rules govern everyone in the UK construction trade, including the responsibilities to register for CIS, the rate of tax deductions made in subcontractor’s tax and national insurance, modes of payment, payment and deductions statements, and more. HM Revenue and Customs implemented the scheme in 1971 to reduce misrepresentation in UK construction work, particularly illicit avoidance of taxes and exploitation of employment status.
These two correlates as a business records its employees as self employed to sidestep tax and national insurance bill, even construction VAT. Without any of the mediums, the subcontractor would have been considered a UK employee, not self employed. The CIS regulation has succeeded in forestalling tax bill avoidance practices in UK construction work purposes.
Through CIS, scheme contractors make deductions from their subcontractor’s payslips for their tax bill on a monthly or quarterly basis depending on their contract statement. The money taken from the subcontractor’s payment invoices account as their income tax and National Insurance contributions (NIC) as advance payments made to HM Revenue and Customs (HMRC).
A contractor must register with the UK government before taking on construction work, whilst a subcontractor has the option not to join the scheme. However, they may have to face an extra 10% tax and national insurance deduction, totaling a rate of 30% deduction. A subcontractor in the scheme only gets the standard 20% deductions; 30% higher rate deduction if they are not. Failure to file a CIS tax return attracts a penalty of up to £100 every month.
How Does Construction Industry Scheme CIS Operates?
The CIS ensures those who work for a contractor in the UK get the right amount of tax and national insurance deductions according to their CIS categories. These invoices deductions count as advance payments towards the UK tax authority for that tax year. A subcontractor has some control over the payment deductions by applying for CIS to hinder the extra 10% bill deduction.
Prior to undertaking construction work, a contractor will need to register for CIS. Following that, they will need to confirm their workers’ statuses before they can make deductions and payments towards UK tax authority on behalf of the subcontractor.
Consistently, the workers’ deductions count should always be based on the CIS filings. The money deductions count as advance payments towards their tax and national insurance bill for that tax year.
“Under CIS rules, contractors pay their labourer’s income taxes and NIC in advance.”
When a contractor incorrectly classifies workers’ categories, they can get a penalty of up to £3000. They are always held accountable by HMRC to accurately identify their labourers’ statuses. To do so, their workers’ employment experience should not be the basis, for example whether they have been self employed or not.
Considering the possible penalty, a contractor has to be wary about identifying statuses by checking the worker’s contract stipulations or looking into the CIS guide, for example. Given that the UK put the CIS policy in place to lessen fraud, contractors must reassess their worker’s statuses and other pertinent data to prevent any fines.
How Is Tax Paid Under the Construction Industry Scheme CIS?
At the designated deadline of a fiscal month, contractors must submit their monthly CIS tax return, which reports the overall salary their subcontractors obtain and the percentage deduction from the source.
Rendering CIS tax return promptly is equally important as completing them accurately. Contractors need to take heed of the cut-off date for rendering the returns, which is on the 19th of every month. Missing just one day is equivalent to handing them in a month late, so nevertheless, they are penalised for up to £100.
The returns that contractors render is for the fiscal month that passed. For example, if they are filing for June, they need to see to it they render tax return on or prior to July 19.
HMRC offers two options for documenting trading turnover. Contractors can use either UK CIS online source free of charge or HMRC CIS online assistance. To avoid overwriting their tax return, they should not be using both at the same time.
Subcontractors must submit returns too but yearly. They are held accountable for submitting a self-assessment tax return not later than the conclusion of the annual fiscal period.
A CIS subcontractor must also be wary about VAT reverse charge for any services or products they buy from businesses outside the UK. As some subcontractors claim VAT but do not pay it, the VAT reverse charge was implemented to prevent VAT fraud. The reverse charge obliges subcontractors to require their employers to pay any VAT reverse charge to HMRC.
For both contractors and labourers, there is a way to free themselves from all these hassles. Notwithstanding their roles in CIS, they can always opt for tax advice so they can direct more attention to matters regarding construction work instead of settling taxes. Legend Financial is just one call away to help.
Who Are Required to Register for CIS?
One benchmark for CIS is that all construction work delivered to private householders is not really considered in the CIS. But when it is a transaction among organisations, where the contractor has to get a labour force to help them achieve the task, then CIS registration is vital.
CIS encompasses a wide range of construction work, for example repairs, site preparation, plant or system installations, building or demolition of structures, and more. Contractors must register before starting construction work.
Nonetheless, even if an individual or business entity is not directly working on construction work, they must register for CIS in certain circumstances. One example is when their regular annual budget for construction work materials exceeds £1 million in a three-year timeline.
Those who work for a contractor register voluntarily. However, in the UK, almost everyone wants to be bound by the plan because of its benefits.
-Requirements for Contractor
A contractor notifies HMRC before taking on construction work and must register first. To proceed with the application, they must meet the following detail:
- Name
- Reference from a previous employer
- Accounting office as a source
- Taxpayer Reference
- Exact status identification of their labourers
Given HMRC’s stringent opposition to any illegal tax techniques, being vigilant, particularly in terms of supplying exact statuses and other detail, is essential. Incorrect details, deliberately or non-deliberately presented, are prone to CIS penalties.
-Requirements for Subcontractors
Before providing labour, subcontractors are highly encouraged to join CIS. This means their assessments would no longer be through PAYE but CIS. HMRC will request the following information so subcontractors must consider setting these up ahead of time:
- First and Last Name
- Unique Tax Reference Number
- National Insurance number
What Are the Exceptions in Construction Industry Scheme?
An individual, a limited company, or a partner engaging in construction work is not automatically categorised as a contractor. This concerns private householders who obtain a workforce for a typical site job.
Various construction materials needed in a normal household are usually for the purposes of building, extensions, repairs, decorating, or alterations. For these projects within their construction sites, they will need to hire people, yet this does not mean they are considered within the CIS.
Furthermore, companies that are not directly participating on the construction sites, but their cost goes no more than £1 million for materials are not regarded within the CIS too. They can also de-register from the scheme if their construction work costs do not go above 3 million for the past 12 months.
Once the total cost goes less than 3 million for the past 12 months, the company or partnership should ask guidance from the experts on how to opt out from the scheme.
Take a look at these kinds of construction activities considered in the bounds of CIS:
- Carpet fitting
- Transporting components
- Site surveying
- Architecture
- Scaffolding hire, excluding physical labour
- Manufacturing materials (e.g., plant)
Moreover, in the event that a construction work is sponsored by a charity, trust, school, or an authority figure of a local education institution, it is automatically opted out of CIS.
A construction work with cost not exceeding £1,000, building materials excluded, such that simple decorating materials and alterations are needed, is qualified for CIS exemption. If construction work and materials fit within this budget, contractors must inform HMRC to confirm if they are qualified for the exemption.
Contractors may want to get in touch with a CIS agent, check their software, or seek guidance from tax experts to examine if they’re qualified to be exempted from the scheme.
How to Register for the Construction Industry Scheme
-Registering as Contractors
Prior to setting out on construction work and dispensing pay to their labour force, contractors need to register in the scheme ahead of time. Fourteen days is adequate to have everything prepared, CIS-wise. Be in the know that HMRC prohibits a contractor from enrolling in the CIS as soon as two months before the real beginning date of the construction work.
First, a contractor can enroll as another business. If they have obtained their manager’s PAYE beforehand, the process is much smoother, as they simply present their PAYE and UTR numbers to HMRC, and their information will be updated in no time.
Assuming they did not have it ahead of time, they will have to essentially mark the box that attests they will be appointing assignments to a labour force.
Straight on, they will be assigned their reference number, then continue toward requesting to change their records into a contractor. When everything is settled, a contractor must carry out several responsibilities in the scheme.
-Registering as Subcontractors
Before they work for a contractor, subcontractors need to fix how they should operate. They have two choices for business use: sole proprietorship or limited company. Most subcontractors begin as sole traders.
On the off chance that they have recently been legalised as a sole trader and have procured their Unique Taxpayer Reference (UTR) number, they can apply for CIS using government’s online software service.
But assuming they are not sole traders or have not got their UTR password yet, they basically must register as another business, file for self-evaluation, and request that they are now recorded as a subcontractor.
Subcontractors have a choice on which types they receive their compensation, either through CIS net payment or gross payment. They can request to receive gross payment assuming they are giving services to huge businesses. Under CIS, their taxes are deducted from the source whilst with gross payment, they receive it full in their bank account.
Construction Industry Scheme CIS Benefits
It is the subcontractor’s discretion to be part of the CIS or not. In most cases, in the event that they take on construction work, they are urged to be subject to the scheme first for all its benefits.
Whenever they choose to acquire compensation grossly, they might obtain their full compensation yet have to deal with superfluous issues in the long run. In this arrangement, they are responsible for manually settling their income tax and NIC at the finish of the yearly tax period. Furthermore, dispensing their taxes in a year at one time can easily turn into a burden as well.
But with the CIS regulation in effect, a contractor takes complete charge of their worker’s income tax and NIC commitments, so subcontractors are relieved of these jobs themselves at the conclusion of the annual fiscal period. This also means they disseminate their taxes monthly rather than clearing them all at once.
Furthermore, registered subcontractors earn stable money from construction jobs and reap the perks of NIC. It is also very easy to raise complaints concerning their stipend, most especially if they are not promptly and accurately compensated.
As they have payment and deduction statement (PDS) copies, they can easily get a tax refund if they are owed any refunds. Tax overpayments are prevalent in any industry, but it is more prevalent in the construction sector. With PDS, subcontractors can easily file a refund and get the refund sooner.
Aside from that, registering increases the stipend that subcontractors obtain as they avoid the add-on 10% deduction ordinarily deducted from the source for those who are non-registered. Having a 20% subsistence deduction for being a CIS-registered subcontractor in lieu of 30% higher rate deduction reflects a huge difference to their stipend.
How Legend Financial Can Help
Chances are, a contractor can commit mistakes around CIS anytime, but with HMRC, deliberate errors or not, fines are imposed nevertheless. A lot of contractor’s CIS liabilities await, including but not restricted to confirming their labourers’ payment status, computing the withheld amount, preparing monthly returns, etc.
The possibility of undertaking a potentially CIS-exempted construction work is something a contractor should not miss out on. Tax professionals can help them better understand this and many aspects around CIS.
Subcontractors accomplish more when they work with tax specialists, particularly when it comes to overpaid taxes in the Construction Industry Scheme and VAT reverse charge. It is easier to claim any refund and be tax compliant with the help of professionals. Legend Financial’s tax professionals are well-versed in this area. Regardless of tax position in the scheme, we got everyone’s back.
References
Construction Industry Scheme (CIS). (n.d.). Retrieved from gov.uk: https://www.gov.uk/what-is-the-construction-industry-scheme
What you must do as a Construction Industry Scheme (CIS) contractor. (n.d.). Retrieved from gov.uk: https://www.gov.uk/what-you-must-do-as-a-cis-contractor/who-is-covered-by-cis
Register as an employer. (n.d.). Retrieved from gov.uk: https://www.gov.uk/register-employer
What you must do as a Construction Industry Scheme (CIS) subcontractor. . (n.d.). Retrieved from gov.uk: https://www.gov.uk/what-you-must-do-as-a-cis-subcontractor/how-to-register
What is the Construction Industry Scheme (CIS)? (n.d.). Retrieved from Low Incomes Tax Reform Group: https://www.litrg.org.uk/tax-guides/self-employment/what-construction-industry-scheme-cis
How do I register for CIS (the Construction Industry Scheme)? (2 February 2022). Retrieved from AMS: https://www.ams-accountancy.co.uk/blog/how-do-i-register-for-cis-the-construction-industry-scheme/
Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340). (n.d.). Retrieved from gov.uk: https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340
How does the Construction Industry Scheme (CIS) work? (n.d.). Retrieved from Tax Scouts: https://taxscouts.com/self-employed-tax-returns/cis-construction-industry-scheme/
