As a worker in the construction industry, being an expert in tax systems is not expected of you, especially given the current work climate. However, if you’re using subcontractors you need to have a better understanding of the Construction Industry Scheme (CIS), as it is something you must be compliant with.
The CIS is designed to help HMRC ensure construction businesses are paying the correct tax, which means contractors must deduct tax at source from subcontractors’ pay, somewhat like the PAYE system.
In this article, we will break down the key parts to help you get to grips with CIS
1. What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme provides a set of rules on how you as a contractor must handle payments to subcontractors and some other businesses. Contractors are responsible for registering with the scheme, deducting tax from subcontractors’ wages, and paying these deductions to HMRC. This is all the while, taking into account the subcontractor’s tax status.
2. The Difference Between Contractors and Subcontractors
For Construction Industry Scheme purposes, a contractor is a business, person, or other entity paying subcontractors for construction work carried out.
You must register with Construction Industry Scheme as a contractor, or if your business doesn’t fall under construction work but your average spend on construction is above £1m in a period of three years.
Whereas a subcontractor is a person who has agreed to carry out construction work for a business, person, or entity registered as a contractor under the CIS. The subcontractor may operate in whatever way they see fit, this includes using their own employees or subcontractors.
In many instances, businesses fall under both categories, which means you must register as both and follow the appropriate rules for each respective role.
3. Making Payment Deductions
Contractors will first need to ensure the subcontractors are verified here. Then when contractors make deductions, they must:
- Calculate the deductions
- Deduct the money
- Record details of the materials, payment, and deduction
- Make payment to the subcontractor
- Complete and provide the subcontractor with a pay statement/payslip detailing all deductions
- Pay the deductions to HMRC monthly or quarterly
4. Keeping Records
Much like audits on an employer’s PAYE records, HMRC will sometimes request to inspect a contractor’s records.
For CIS, a contractor must keep records of gross totals paid, cost of materials deducted, amount of tax deducted, and verification number where applicable.
Verification of subcontractors will require a Unique Taxpayer Reference (UTR), account office reference, employer reference number, national insurance number, company name, and registration number.
You will also need to provide a contract agreement signed by both parties.
Once HMRC verifies a subcontractor, they provide them with a verification reference number.
5. What is the VAT Reverse Charge Under the Construction Industry Scheme?
The charge is a measure put in place to stop fraudulent behaviour. It stops subcontractors from charging VAT to contractors, then disappearing before paying the VAT to HMRC – referred to as ‘missing trader fraud’.
The measure shifts liability from the subcontractor to the contractor, for accounting VAT from the subcontractor to the contractor. It prevents the subcontractor from avoiding payment of VAT to HMRC.