CIS tax: what is it and who pays it?

The construction industry was once a sector where cash-in-hand work and other informal practices were more widespread than they are now. Sites, as they still are, were populated by employees, contractors, subcontractors and casual workers all rubbing shoulders alongside each other, these complex working arrangements providing opportunities for companies and individuals to be economical with their taxes.

HMRC realised revenues were slipping through its fingers and in 1971 took action, bringing in the Construction Industry Scheme (CIS), aimed at improving compliance. This deduction-based scheme enabled HMRC to collect income tax throughout the year from people working in construction by getting contractors to withhold pay from subcontractors each month and passing it on to HMRC.

The scheme comes with a number of rules and requirements – and penalties – so people working in the construction industry must make themselves aware of CIS and their obligations under the scheme.

Who needs to register

Contractors must register if they pay subcontractors for their work or if the business does not do construction work but has spent more than £3 million on construction in the 12 months since it made its first wage payment. The scheme only covers work done on a site. Employees do not need to register.

Registration for subcontractors in the construction industry is optional. Those that do decide to register need to provide HMRC with:
• their business or trading name;
• their unique taxpayer reference (UTR);
• their VAT number if registered for VAT;
• the date they began trading.

Depending on their circumstances, they may need to submit:
• their national insurance number;
• their company registration number;
• their partner’s details such as UTR and NI number;
• any joint venture agreement.

Someone who is both a contractor and a subcontractor needs to register as both with CIS. People who provide false information can be fined.

Employees and subcontractors

The same person can be an employee or a contractor depending on the job. Registering for CIS does not stop someone from also working as an employee.

Work covered by CIS

CIS covers:
• work on any permanent or temporary building or structure;
• civil engineering projects, for example, bridges and roads.

The types of work covered by CIS include:
• site preparation, including providing access routes and laying foundations;
• dismantling and demolition;
• building work;
• alterations, repairs and decorations;
• installing heating, lighting, power, water and ventilation;
• post-construction cleaning up.

In addition, CIS rules apply to businesses located outside the UK that do construction work in the UK as either a contractor or subcontractor.

Work not covered by CIS

A number of activities closely allied to construction are not covered by the scheme. They include:
• architecture and surveying;
• scaffolding hire (if with no labour);
• carpet fitting;
• making materials and items used in construction, eg, machinery;
• delivering materials;
• on-site work that is not construction related, eg, providing toilets or catering facilities.

Work done on a residential premises is not covered by CIS.

Tax and subcontractors

The purpose of the CIS is ensuring tax compliance. It achieves this by requiring contractors to withhold payments to subcontractors at a rate of 20% if they are registered and 30% if they are not and pass them on to HMRC. CIS contractors must check if subcontractors are registered with HMRC.

Subcontractors should be clear that, even though money is being deducted from their pay as if they were on PAYE, this does not give them the rights of an employee – they retain their self-employed status. They should also register for self assessment in addition to registering with CIS. Their payments under CIS are treated by HMRC as advance payments on their tax bill.

Deductions under CIS are net of direct expenses, so no pay is withheld in respect of costs incurred by way of buying materials or tool hire. Overpayments under CIS will be refunded by HMRC after the tax year ends. Subcontractors should check if they think they may be due a refund: it may not always be generated automatically.

In particular, subcontractors on low incomes may be eligible for a refund as CIS does not take account of the personal allowance of £12,570 or other business expenses.

Subcontractors who are missing one or more monthly payments and deductions schedule (PDS) can obtain them from the contractor or, if that is not possible, HMRC. However, the taxman is not overly helpful here. Requests cannot be done over the phone but must be sent to PT Operations North East England, HM Revenue and Customs, BX9 1BX.

Gross payment status

Subcontractors who are up to date with their tax payments can apply to HMRC to have gross payment status (GPS). This allows them to pay their income tax and NI in the same way as self-employed people.

This is great for managing cash flow and gives subcontractors more control over their tax affairs. Furthermore, it is appealing to contractors as they do not have to deal with all the admin of doing the monthly deductions. The fact that subcontractors have GPS indicates they have good standing with HMRC, thus giving them a competitive advantage over subcontractors who do not have GPS. Some contractors will only work with subcontractors with GPS.

As well as being on top of your tax affairs to achieve GPS there are some financial requirements:
• The business must have a dedicated bank account;
• sole traders must have annual turnover of at least £30,000;
• in a partnership, each partner must have turnover of at least £30,000 or the partnership as a whole must turn over at least £100,000;
• in a company, each director must have turnover of at least £100,000 or the company must have annual turnover of at least £100,000.

If a company is controlled by five people or fewer each must have annual turnover of at least £30,000.

Subcontractors can register for GPS at the same time as they register for CIS.

Material deductions

This is a tricky area in the world of CIS. Subcontractors will naturally want to bump up the part of their invoice that covers materials and expenses to reduce their taxable income.

Where the contractor/subcontractor relationship is new or poorly functioning, it can be difficult for the contractor to gain an accurate idea of a subcontractor’s material costs. The subcontractor may not have the means to prove material costs or may withhold invoices and bills. Furthermore, subcontractors can be unwilling to share details of material costs because that will indicate the profit margin on a job, putting them at a competitive disadvantage with contractors on GPS.

However, an accurate idea of the cost of materials is essential for contractors as otherwise they will not be able to calculate how much tax to withhold. They also need to be on the alert for mistakes in subcontractors’ submissions, for example, including fuel costs in getting to and from the site, which are not claimable, unlike fuel costs incurred on the job.

Regulations require the contractor to check the subcontractor’s claim for material costs is accurate. Where record keeping by the subcontractor has been inadequate, the contractor is entitled to make a reasonable estimate of what those costs were.

This area is a particular focus of HMRC as it is often where underpayments of tax can be found so contractors need to be rigorous in assessing claims for material costs.

Contractors’ responsibilities

Contractors in CIS must:
• verify subcontractors’ CIS status before making their first payment to them;
• deduct the correct amount of tax;
• submit the PDS monthly returns to HMRC;
• pay deducted amounts to HMRC by the required deadlines;
• submit a nil return for months when they did not pay any subcontractors.

Payments are made via HMRC’s CIS service or by means of approved commercial software. Returns should be filed by the 19th of the month after the tax month.

Deadlines and penalties for contractors

HMRC takes a firm line with overdue payments and will issue automatic penalties of:
• £100 if one day late;
• £200 if more than two months late;
• £300 or 5% of the CIS deduction if more than six months late;
• another £300 or 5% if more than 12 months late.

Interest and other penalties may also be levied.

Mistakes in a CIS can be amended and, if done in a timely way, should not incur a penalty.

VAT and CIS

If the subcontractor and subcontractor are VAT registered, the former’s invoice must use the reverse charge mechanism. The subcontractor issues an invoice without VAT that contains wording such as ‘VAT on this supply to be accounted for by the principal contractor’. The principal contractor then accounts for the VAT in its own VAT return rather than paying it to the subcontractor. This is aimed at reducing the scope for VAT fraud in the sector.

Help with CIS

The scheme poses challenges for contractors and subcontractors alike in respect of calculating and managing deductions, and making sure the monthly CIS returns are filed to HMRC in a timely way. CIS registration and verification also need to be done correctly. And expert advice may be needed to ensure the desirable gross payment status is achieved.

If you would like help with these aspects of CIS – or any other – please contact Finsbury Robinson.

We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk