I often have clients ask me to explain CIS to them, as it can be quite confusing if you haven’t had to comply with it before. The Construction Industry Scheme (CIS) is a system for collecting tax from subcontractors in the building industry. The scheme principally applies to mainstream construction work. However, businesses or organisations whose core activity isn’t construction, but have a high annual spend on construction, may also count as contractors and fall under the scheme.
Does It Apply To Me?
You may have to comply to CIS if you are a subcontractor in the building industry or if you a contractor and hire subcontractors in the building industry.
If you are a subcontractor you will be “verified” by the contractor in order to see which CIS rate should be applied, there are three rates:
- 0% is applied for subcontractors that have successfully applied for gross status
- 20% is applied for subcontractors that have been successfully verified but are not registered for gross status
- 30% is applied for subcontractors that have not been successfully verified. This could be because the information supplied is not correct or subcontractor is not registered as self-employed.
The purpose of CIS is to ensure that tax evasion is minimised in the construction industry. The downside is there is a compliance burden for businesses.
Jake is an electrician in Newbury and is registered as self-employed with HMRC. He has won a piece of work for the building company Esmie Construction Ltd. At the end of the job he bills for the work, £1,000 for labour and £500 for materials, he is not VAT registered as he is in his first year, and his turnover is under the VAT registration limit.
Esmie Construction Ltd successfully verifies Jake using his UTR (unique tax reference) and his NI (National Insurance) number. He is not gross registered as yet, so they will need to apply 20% on the labour element.
Jake’s bill is:
- £1,000 Labour
- £500 Materials
- £1,500 Total
Esmie Construction will pay the following to Jake:
- £1,000 less 20% CIS = £800 labour
- £500 materials
- £1,300 Total
Esmie Construction Ltd will give Jake a CIS payslip confirming the £200 deduction at the end of the month.
Jake needs to ensure he records this transaction as follows, for his end of year accounts:
- Sales £1,500 credit
- CIS paid £200 debit
- Bank £1,300 debit
He can then offset the CIS tax already paid against the tax due for that year. If he is working on mainly CIS jobs he could potentially receive a tax rebate.
- Register for CIS as a subcontractor and/or contractor as soon as you start operating within the scheme.
- If you are a contractor ensure that you prepare your CIS returns monthly, as there are hefty penalties for non-compliance.
- If a subcontractor try to complete your tax return as soon as possible, so that you receive a rebate as early as possible if eligible, or know how much tax you need to pay in plenty of time, in case you haven’t put enough aside and need to save.
- Utilise the CIS helpline, as it is generally helpful 0845 366 7899, 8am to 8pm Monday to Friday and 8am to 4pm on Saturdays.
- Ensure subcontractors are truly subcontractors and not employees, you can use the HMRC Employee Status Indicator for this http://www.hmrc.gov.uk/calcs/esi.htm
- Outsource CIS reporting to your accountant/bookkeeper if it becomes too onerous.
- If you are a subcontractor, make sure the contractor gives you your CIS payslips regularly.
- Consider registering for gross status if eligible, as it will improve your cash flow http://www.hmrc.gov.uk/manuals/cisrmanual/CISR42670.htm
- If you are a limited company ensure that you reclaim your CIS deductions via your PAYE annual return – P35.
By setting up your CIS administration process and procedures early and using a good CIS software product it can minimise the stress of complying with the system.