In this article we will be looking into recent changes that affect the CIS.
The construction sector remains one of the UK’s key sectors, despite the effects of the COVID-19 pandemic.
In September 2021, construction output grew by 1.3% on the previous month. This placed the sector just 1% below its pre-pandemic level – and it’s still worth a decent share of UK GDP.
Despite this change, the Government remains committed to building up to 300,000 new homes a year by the mid-2020s.
The sector employs “more than 9% of the UK’s total workforce”, equating to around 3.1 million people.
Many of these will be familiar with the complexities of the construction industry scheme (CIS). This sets out rules for how payments to subcontractors for construction work must be handled by contractors in the industry. It takes into account the subcontractor’s tax status.
There have been recent changes announced in the last 12 months which affect both the CIS and UK VAT. Not that many would know, given the lack of publicity.
Who does the CIS affect?
All payments made from contractors to subcontractors must take account of the subcontractor’s tax status as determined by HMRC.
This may require the contractor to make a deduction, which they then pay to HMRC. This is taken from the part of the payment that doesn’t represent the cost of materials incurred by the subcontractor.
The CIS covers all construction work carried out in the UK. This includes preparing the site, alterations, dismantling, construction, repairs, decorating, and demolition.
Any type of domestic or overseas construction business working in the UK must register for the CIS. This includes companies, partnerships, and sole traders. It doesn’t matter if they’re a contractor or subcontractor.
Contractors & subcontractors
‘Contractors’ and ‘subcontractors’ have special meanings that cover more than is generally referred to as ‘construction’.
A contractor is a business or other concern that pays subcontractors for construction work. They might be a construction company or building firm. But they may also be government departments, local authorities, and other businesses. These are known in the industry as ‘clients’.
A business or other concern may be treated as a ‘deemed contractor’. This applies if they spend more than £3 million on construction within the previous 12 months. They must monitor their construction spend regularly. Simply put, a subcontractor is a business that carries out construction work for a contractor.
In some cases, it’s possible for a business to be both contractor and subcontractor. This occurs when a business pays another firm for construction work, but also gets payment from another business.
When they’re working as a contractor, they must follow the CIS rules for contractors. Additionally, when they’re working as a subcontractor, they must follow the rules for subcontractors.
How the CIS works
All contractors and subcontractors should register with HMRC for the CIS. Subcontractors will be subject to a higher-rate deduction if they have not registered.
Contractors deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards income tax and National Insurance, similar to PAYE.
A limited company will have deductions taken by the contractor from the income due to the company.
This deduction can then be offset against other company tax liabilities such as PAYE, VAT or corporation tax. Or it can be refunded to the company after the end of the tax year.
Sole traders and partnerships will also have deductions made from the income they receive.
They are required to report their gross income on their self-assessment tax returns. Contractor deductions are also reported on the tax return. They’re then subsequently deducted from any income tax liability which is calculated as being due.
Contractors need to verify a subcontractor’s status with HMRC before payment is made. This is to establish whether they are registered and the correct amount of tax to withhold. Tax can be deducted at source at 0%, 20% or 30%.
Contractors must report all of the payments they have made under the CIS to the tax authority. Or they can report they have made no payments in the tax month, by the 19th of each month.
Penalties apply if the monthly return deadline is missed.
Recent changes to the CIS
New measures affecting the CIS came in for 2021/22, which aim to tackle labour fraud. An example is where a contractor pays casual workers cash-in-hand.
Firstly, HMRC can change the CIS deductions suffered and reclaimed on real-time information via the employment payment summary to an amount matching any evidence it holds.
HMRC can remove the claim completely. This applies if there is no evidence, or a construction firm is not entitled to set-off in this way. This stops you from submitting another set-off claim for the rest of a tax year.
Being on the wrong side of this change could cause significant cashflow disruption. Detailed records should be kept supporting any set-off claims.
The second change is aimed at subcontractors who claim the cost of materials. They avoid a CIS deduction on this amount.
If a subcontractor incurs the cost of materials to fulfil a particular contract, the cost isn’t subject to a CIS deduction.
Under CIS rules, contractors must ascertain how much was spent. And then that it represents the direct cost to that subcontractor for the contract.
The third change updates the rules for operating CIS as a deemed contractor.
Some businesses operate outside the construction sector. They need to apply the CIS when their construction spending is over £3 million over the past 12 rolling months.
Finally, HMRC has expanded the scope for imposing a penalty for supplying false information. This includes payment applications under deduction or gross payment status.
The person or business to whom the registration applied could be penalised up to November. This now applies to anyone who has influence over a person registering for the CIS.
The effects of reverse charge VAT
The VAT domestic reverse charge for building and construction services finally took effect on 1 March 2021.
It affects VAT-registered businesses that operate under the CIS. Typically, those who either take on contracts or subcontract others within a supply chain,
Companies in the construction supply chain no longer receive their 20% VAT payment when they submit bills. Instead, the VAT is paid directly to HMRC by the ‘customer’ receiving the service.
The change is causing cashflow shortages for VAT-registered contractors. Some are owed repayments from HMRC at the end of each quarter dating as far back as last spring.
The tax authority said verification checks are slowing up the process. Some cases are taking 30 days or longer while it waits for customers to supply the information required.
If you have any questions about CIS we have a team of expert accountants that can help you. Use the form below and send us your details. We can arrange a free consultation via teams or in the office.