The construction industry scheme is framework set out by HMRC and only applies to construction operations. The purpose of this framework is for contractors to deduct money from sub-contractors and pass the payments on to HMRC.

So, who is a contractor and who is a subcontractor?

A contractor is someone who pays subcontractors for their construction work. Usually, business developers and builders who require the aid of other skilled workers.

Either this, or their business does not do construction work but they spend, on average, more than £1 million a year on construction in any 3 year period.

A subcontractor, well, they are just the receiving end. So if you receive payment for construction work you’ve undertaken for a business.

What is included under the ‘construction work’ umbrella?

This isn’t difficult to define and to be honest, it’s kind of common sense, preparing sites, demolition, building work, alterations, repairs, decoration, electricians, plumbers, industrial cleaners… you get the jist.

Obviously, if you run a canteen on a construction site, manufacture the materials used in the industry or deliver the materials you could probably stop reading now. You’re off the hook.

But what does it all mean?

Well, CIS requires the contractor, eg. The business developer to deduct tax at source (not pay the full amount) when paying the subcontractor, eg. Plumber.

The amount deducted is always applied to the labour element of an invoice only.
If the subcontractor has;
– not yet registered with HMRC then the contractor deducts 30% from payments.
– registered then they have 20% deducted.
– registered and qualified for gross status then no tax is deducted at all and is instead accounted for on their annual tax return.

Your eyes may have lit up at the thought on not having any tax deducted. But to qualify for gross status you must meet the criteria of three tests. We’ll go into these more on a later blog.

Who gets to keep the deducted tax?

Well it depends.

Sole trader or a partnership? The amount can be offset against their income tax liability at the end of the year.

Limited Company? The amount can be offset against the tax they’ve had deducted (suffered) – if they have also been a subcontractor- or against any tax liabilities with HMRC for example, against their monthly PAYE costs.

What do you have to do?

Well, if you’re a subcontractor, not a lot. Just do your thing! But make sure your invoice has a clear breakdown of the labour, materials, VAT etc. and the details you give the contractor are correct so they deduct the correct amount of tax. Then simply keep a record of all the deductions you have suffered.

If you are a contractor, ensure you are registered and all the subcontractors who you pay have been verified online, this is very easy through the HMRC website.
As a contractor you must also keep records of the gross amount paid, the amount of materials deducted and verification number of each subcontractor then provide them with a written monthly statement.

Not only this, but monthly (by the 19th) you must submit a return to HMRC stating the payments you have made to subcontractors.
If there have been no payments made, you do not have to submit a return, but you must still tell HMRC this information.

Then (as if this isn’t enough for you to remember already) you have to forward all the deductions you have made from subcontractors to HMRC which you can do through you PAYE scheme if you have employees.

This payment must reach them by 22nd of the following month.

Not too much to remember, right?!

We can assist with all registrations and returns to make sure you don’t miss any deadlines – which is now very important since HMRC brought out financial penalties for doing so.

Not only this, but we are QuickBooks specialists! QuickBooks have now incorporated a CIS function that is so easy to use!
Adopting a cloud based system means you can invoice, do all your calculations and run all the relevant reports in just a couple of clicks!!

All these ‘ifs’ ‘buts’ and ‘maybes’ can mean you’re still a bit confused. If that’s the case, pick up the phone or drop us a line. We will be happy to clear up any unanswered questions you may have.

Speak to us today about accounting for tomorrow.