The Construction Industry Scheme (CIS) is a pivotal aspect of tax compliance, setting out specific rules for how contractors must handle payments made to subcontractors for construction work. Kevin Thomas of the Indigo Group explains more.
CIS applies primarily to contractors and subcontractors in the construction industry. However, the definition of who falls under these categories can be broader than anticipated. You must register as a contractor if you’ve spent more than £3 million on construction in the 12 months since you made your first payment – even if your business doesn’t carry out construction work. This includes companies like property developers and building firms, but also extends to government departments and local authorities that engage in construction work.
Even sectors like retail and entertainment, if they spend significantly on construction, fall under the CIS umbrella.
What are subcontractors?
Subcontractors are entities or individuals who agree to undertake part of the work contracted by the main contractor. It’s crucial for subcontractors to register for CIS to avoid higher tax deductions from their payments.
There is no specific turnover threshold for subcontractors. However, their status in terms of tax deductions depends on their registration with HMRC. Those registered under CIS are subject to a standard 20% tax deduction on their invoices, while unregistered subcontractors face a higher 30% deduction.
However, subcontractors who meet specific criteria can apply for gross payment status, allowing them to receive full payment without deductions, though they must pass certain financial and compliance tests to qualify.
Navigating CIS tax compliance
As a contractor, it’s your responsibility to ensure that your business complies with CIS tax regulations. This involves a series of steps, which begins with registering for the scheme. Here’s what you need to know and do:
1. Register for CIS
2. Verify your subcontractors: Before making any payments, it’s crucial to verify your subcontractors with HMRC. This process will determine the tax deduction rate: 20% for registered subcontractors, 30% for those unregistered, or 0% for subcontractors with gross payment status.
3. Deduct and pay taxes: When you pay subcontractors, deduct the tax amount as per their status and pay it to HMRC. This deduction serves as an advance towards the subcontractor’s tax and National Insurance.
4. Record keeping: Maintain detailed records of all the payments and deductions made under the CIS for at least three years. These records are vital for any HMRC inspections and for your tax returns.
5. Submit monthly returns: Submit CIS returns monthly to HMRC, reporting all the payments made to subcontractors and tax deducted.
Subcontractor responsibilities
As a subcontractor, compliance with CIS is equally important. Here’s what you should expect and do:
1. Register with HMRC: Ensure you’re registered with HMRC for CIS to avoid higher tax deductions from your payments (30% instead of 20%).
2. Keep records: Maintain accurate records of all your invoices and the tax deducted by contractors. These records are essential for completing your annual Self-Assessment tax return.
3. Understand deductions: Know that the taxes deducted by contractors are not a final payment of your tax and National Insurance. You need to declare your income and expenses in your Self-Assessment tax return, after which HMRC will calculate your final tax bill or refund.
4. Gross payment status: If eligible, apply for gross payment status. This allows you to receive your payments without upfront tax deductions, but it requires you to pass certain financial and compliance tests.
Further help
For contractors, the administrative burden of CIS compliance can be overwhelming, especially when managing multiple subcontractors. This is where Indigo Group can help with its ‘Contract’ service, tailored specifically for contractors in the construction industry.
As a Commercial Contractor, Indigo takes on all responsibilities for the subcontractor. This means registering them under CIS is Indigo’s responsibility, removing any admin and compliance burden from a business.
The company also takes over the cumbersome process of verifying subcontractors, calculating and processing tax deductions and submitting monthly returns, freeing up valuable time for contractors to focus on their core business activities.
Get more details on Indigo Group and it’s contract service here