Construction Industry Scheme: What is it and are you liable?
The Construction Industry Scheme (CIS) applies to contractors, subcontractors and any organisations that have a high annual spend on construction, even if their main work isn't in the industry.
If your firm is involved in construction, it may need to register with HMRC under CIS. When registering you need to indicate whether you're a contractor or subcontractor as different rules apply to each category. Within each category, there are separate terms that define your business:
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Are you a contractor?
- You're a mainstream contractor if you run a business that engages subcontractors for construction operations. Mainstream contractors are usually property developers or speculative builders building or altering properties to sell on for profit. Foreign businesses that carry out construction work in the UK are also mainstream contractors as are businesses that will spend an average of £1m a year purely on construction operations over a three-year period.
- These are businesses whose main source of work is in another industry but they still spend a large amount on construction. If your business becomes a deemed contractor, then it will remain as one until it can prove to the HMRC that its spending on construction is below £1m a year for three years consecutively. Deemed contractors are usually manufacturers, retailers, local authorities, government departments, housing associations.
Are you a subcontractor?
Under the CIS, you are a subcontractor if you agree to complete construction work for a contractor. This will count whether you do the work yourself, get your employees to do it or use your own subcontractors.
Subcontractors include; sole traders, partnerships, companies that carry out construction work for contractors, labour agencies and staff bureaux that use their own workers to do construction work for a contractor.
Are you an Employee?
If you're an employee then CIS doesn't apply you.
You're classed as an employee if your contract is a 'contract of employment'. If this is the case, you'll pay tax through PAYE (Pay As You Earn) rather then through CIS. Your employment status depends on the terms of each piece of work you take on. It's possible to operate as a self-employed subcontractor on one contract and then as an employee on the next. If you're a construction industry contractor it's your responsibility to decide on an individual's employment status when you take them on. To find out if you're working as an employee or a contractor you can use the employment status indicator tool on HMRC's website.
Are you both a contractor and a subcontractor at the same time?
It's common for construction businesses to be paid by a contractor for construction work, while they pay for their own subcontractors to do work for them at the same time.
When you're being paid by a contractor for construction work you are a subcontractor and you must follow CIS rules for subcontractors. However, when you're paying your own subcontractors you must abide by the CIS rules for contractors.
When CIS doesn't apply:
Specific types of work that are related to the construction industry aren't covered by CIS. Professional work carried out by businesses such as architects and surveyors is not covered. CIS also doesn't include carpet fitting but does apply for laminate flooring fitting. There are occasional situations when businesses that would normally be classed as mainstream or deemed contractors may not have to apply for CIS ruling. An example of this is when these businesses pay for construction work on a property that is used for the purpose of the business. This means some offices, warehouses and nursing homes are exempt from CIS.
Other occasions when CIS rules don't apply are:
- When a deemed contractor pays for a small construction contract of less than £1,000 - excluding materials costs - and has authorisation from HMRC to exempt it.
- When a contractor pays a subcontractor less than £1,000 - excluding materials costs - to do construction work on the subcontractor's own property - or on any agricultural property where the subcontractor is the tenant - and has authorisation from HMRC to exempt it.
- If the governing body or head teacher of a local education authority-maintained school pays for construction work on behalf of the local education authority.
- If a charitable body or trust - but not its trading subsidiary - pays for construction work.
- Private householders are never treated as CIS contractors, no matter how much they spend on construction operations.
How to organise your CIS payments
Contractors must make a 20% deduction from most of the value of invoices they pay and give it to HMRC.
However, at the end of the year after looking at all your payments HMRC may ask for an additional amount in view of your eventual tax and national insurance contributions. The deduction is held on account of your eventual tax and national insurance contributions liability. If you are required to pay CIS you have to tell HMRC each month about every payment you've made to subcontractors, to do this you have to make a monthly return.
HMRC expects you to keep records of all the payments you make. One tool that is useful for recording all payments and invoices is QuickBooks CIS deductions. QuickBooks will help you work out how much tax you will have to pay, so you can concentrate on running the business and forget about CIS and the bean-counting it requires.
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