The Construction Industry Scheme (CIS)
We take a look at the new Construction Industry Scheme which sets out a series of rules for how contractors should make payments to sub-contractors.
Who/what does it affect?
- Construction work carried out in the UK by contractors and sub-contractors.
- It applies to all types of businesses including companies, partnerships and self-employed individuals. Private householders are excluded.
- Contractors must register for the scheme, subcontractors have a choice although by not registering they will be subject to a higher rate of deduction from payments.
- A body or business will be deemed to be a contractor if they spend over £1 million on construction work over 3 years.
- A contractor must register for CIS when they are about to take on and pay their first subcontractor.
- For companies not resident in the UK that are taking on subcontractors for construction work, they need to register with the Specialist Personal Tax Office.
How does it operate?
- A contractor must deduct UK tax from payments made to its subcontractors and pay this over to HMRC.
- The deducted tax is declared and paid via monthly return. The period for the return runs over tax months i.e. from 6th to 5th.
- Returns are filed online and must be filed 14 days after the end of the tax month. Payment must be made 17 days (if paid electronically) after the end of the tax month.
- The contractor must issue a statement every tax month to each of its subcontractors from whom a deduction has been made that month. The statement will show the deduction calculation.
- If no payments have been made in the month, a nil return must still be filed. Contractors who know they won’t be paying any subcontractors for several months can inform HMRC who will make the scheme inactive for a period of 6 months.
How is the deduction calculated?
- To calculate the net payment to be made to the subcontractor, you take the gross payment less cost of materials, consumables, fuel, and plant hire.
- The rate of deduction is applied to the net payment and this is the amount of tax that must be paid over to HMRC by the contractor.
- When a contractor first takes on a subcontractor, they must verify if the subcontractor is CIS registered as this affects the rate of deduction applied. Verification can be done online.
- VAT is excluded from the calculation if the subcontractor is VAT registered.
For more information click here or contact one of our tax experts on 01534 753777.