The construction industry is one of the most volatile sectors in the UK economy, and careful planning and advice are needed to maintain efficiency and competitiveness. With years of experience in this sector, we pride ourselves on having an understanding of the specific problems faced by builders, building and civil engineering contractors, and civil engineering consultants, and in being able to recommend effective solutions.
We work with you to help you optimise your performance through advice on appropriate funding, project planning, cashflow planning, payroll services, etc. We guide you through the maze of regulations imposed on the industry, help you to minimise your compliance costs, and help you to build a successful future.
Construction Industry Scheme (CIS)
There was a major reform to the Construction Industry Scheme (CIS) in April 2007. The scheme applies to those who are classed as self-employed for particular contracts and are out with the scope of PAYE. From 6th April 2007 contractors are obliged to verify new sub-contractors with HM Revenue & Customs (HMRC) whereby HMRC will check a sub-contractors employment status and ensure that the sub-contractor is properly registered for income tax and national insurance contributions.
HMRC will advise the contractor as to the rate of tax deduction (if any), to be applied to the payments made to sub-contractors. The contractor will then be permitted to pay a sub-contractor either in full with no tax being deducted or deduct 20% or 30% as advised. Tax must only be deducted from that part of the payment that relates to labour. No tax is deducted for a payment in respect of materials. The contractor must provide a written statement to every sub-contractor from whom a deduction has been made within 14 days from the end of each tax month.
Contractors are compelled to file a monthly return either electronically or in paper form with HMRC, detailing all payments made to sub-contractors including payments where no tax has been deducted. Again, these returns must be filed within 14 days from the end of each tax month that the payments relate to. There are penalties for non compliance and HMRC will penalise a contractor £100 for a late return. An additional £100 is charged where a return contains more than 50 sub-contractors and £100 for each additional batch of 50 sub-contractors or part thereof. These penalties are repeated for each month that the return is late. Other penalties can be charged where errors or omissions have been made on the returns and HMRC believe that the errors or omissions ha been caused by negligence or intent on the part of the contractor. Failure by a contractor to produce records relating to payments made under CIS can incur a penalty of up to £3,000.
New sub-contractors must register with HMRC if they are to avoid deductions at 30%. Contractors will only be permitted to make gross payments when the following conditions have been satisfied by sub-contractors:
- Satisfy HMRC's Business Test where a sub-contractor must provide evidence that he is carrying on a business in the UK in which he is carrying out construction operations or is providing labour to facilitate the provision of construction operations and that his business is substantially carried on through a bank account.
- Satisfy HMRC's Turnover Test where a sub-contractor can demonstrate that in the year following registration with HMRC his net business turnover (after materials) is a minimum of £30,000 per year. The same rules apply for a partnerships and limited companies where the test is £30,000 per partner/director. In respect of "close companies" that are controlled by 5 or less individuals then shareholders who are not directors are also brought into the calculations. An alternative test for partnerships and companies is that the business has a net annual turnover of a minimum of £200,000.
- Satisfy HMRC's Compliance Test where the sub-contractors tax affairs up to date for the 12 month period prior to the application date. HMRC will not accept an application from a subcontractor who has just brought his tax affairs up to date prior to making an application.
The rules surrounding the Construction Industry Scheme are very stringent. Please feel free to contact us if you have any queries regarding the above or if you would like our assistance with any other areas of the Scheme.