Simple Guide to CIS Tax For Construction Pros
CIS isn’t a new tax law; it was enacted in 1971 to address what was considered to be a major tax evasion problem in the construction industry. Several adjustments have been made over the years, with the most current developments being announced by the UK government at the end of 2020 that took effect on March 1, 2021.
The CIS scheme lays out how contractors in the construction industry and certain other businesses must handle payments to subcontractors for construction activity. It works in a similar way as PAYE for employees, except it’s only for subcontractors.
All payments made by contractors to subcontractors under the system must take into account the subcontractor’s tax status as established by HMRC. This means that contractors may be forced to deduct a percentage of the money owed to subcontractors (less materials costs) and pay it to HMRC. This money is then used as an advance payment on the subcontractor’s tax and NI obligations.
How the CIS Tax Affects Those Working in Construction
So, why is it important to grasp the basics of CIS tax , and what does it mean for trade business owners? If you’re self-employed in the building or construction industry, you’ll almost certainly have to pay CIS tax.
Failure to register as a contractor could result in tens of thousands of pounds in fines (irrespective of whether workers are registered as self-employed and have paid their tax bill). Contractors must register for CIS.
Subcontractors are not required to register, but if they are not registered, their payments will be deducted at a higher rate (30%). (versus 20 percent if they are). That’s a lot of money to waste when you could be expanding your trade business in other ways.
The Difference Between Contractors and Subcontractors According to CIS
The CIS clearly defines who is considered a contractor and who is labeled a subcontractor. According to the scheme:
A Contractor: Pays subcontractors for building work, or owns a company that doesn’t undertake construction but spends more than £1 million a year on it in any three-year period.
A Subcontractor: Is paid by a contractor to undertake construction work on their behalf.
Some businesses may find that they fall under both categories, in which case, for CIS purposes, they must register as both.
Types of Work Covered by the CIS Scheme
Contractor is a very broad term, but, once again, the CIS does get specific about just what kind of work is covered by the scheme.
Legally, the CIS tax rate applies to all the following activities:
- Building or erecting a permanent or temporary structure
- Civil engineering projects such as road or bridge construction or repair
- Preparation of the site (e.g. laying foundations and installing access works)
- Dismantling and demolition
- Modifications, repairs, decorating
- Heating, lighting, power, water, and ventilation systems installation or repair
- Cleaning the interiors of structures following construction.
CIS, however, does not apply to any of the following construction like activities :
- Surveying and architecture
- Scaffolding rental (with no labour)
- Manufacturing of construction materials
- Materials delivery
- Work on building sites that isn’t explicitly related to construction, such as operating a canteen or maintaining site facilities in other ways.
CIS in Action: A Practical Example
Fred, a mate, asks you to help him with some repairs on his private residence. You enlist the assistance of another self-employed tradesperson named Phil to complete the job.
Because Fred is a private homeowner, when he pays you, he does not have to pay CIS tax. You then compensate Phil for his contributions to the project.
In this case, you’d have to register as a contractor with the CIS before paying Phil. You’ll also need his UTR number, as well as HMRC’s CIS registration status.
If HMRC tells you that Phil is enrolled under CIS, you’ll set aside the required 20% CIS tax rate and pay it to HMRC on Phil’s behalf. If he is not, it will be up to Phil to either choose to do so or pay that extra 10% mentioned earlier.
You could face fines for failing to keep CIS records, as well as a monthly penalty for each missing CIS return (which are due monthly) if you fail to register as a contractor under CIS and pay subcontractors properly.
The Impact of the New VAT Reverse Charge
The way Value-Added Tax (VAT) works has changed as of March 1, 2021. In the construction industry, VAT is no longer transmitted between VAT-registered enterprises. It is no longer necessary for suppliers to charge or receive VAT from their contractor clients.
Instead, principal contractors essentially charge themselves VAT for the services of subcontractors and pay HMRC the money that would have been paid to the subcontractor in their VAT returns. The new requirements also apply to commodities when they are offered in conjunction with CIS-specified services.
Help with CIS : Why You Might Need It
One minute you’re knee-deep in mud or power wires, the next you’re busy quoting new work, sending out invoices, and pursuing payments as a trade business owner/operator.
Paying CIS tax can make your administrative tasks more difficult. Even understanding it can be a big headache. Yet, it’s crucial you do pay CIS the right amount of attention, or you could end up in serious trouble (and face big fines.) If you don’t really understand who should be paid what, when and by whom, you can also cost yourself money.
Which is why having an accountant on your side who really understands CIS, and can take it off your hands – along with other tax complications like VAT and day to day tasks like payroll – can be an investment that offers excellent ROI while also allowing you to get on with the business of construction, rather than deconstructing piles of paperwork and dealing with HMRC to determine if every subcontractor you hire had a CIS card, or should be employees.
These are accountant hassles, and if you are interested in passing them on to Pearl Lemon Accounting, we’re here to help. Contact us today to discuss just how we can.
How much tax do you pay on CIS?
The amount of tax you need to pay depends on whether you are registered for CIS or not. If you are registered for CIS, the tax rate is about 20%, which is the standard rate. However, the deduction is about 30% if you are not CIS registered.
Who is exempt from CIS tax?
A few things are exempt from CIS tax, including facilities that may be onsite but are not related to the construction, catering, onsite delivery of materials, architecture work, carpet fitting, survey work, etc.
Looking for more information? Let’s chat!
Do you get the CIS tax back?
Yes, you can! However, to do so, you must file a Self Assessment tax return.
What happens if the contractor does not deduct CIS?
If the contractor does not deduct CIS, HMRC will let the contractor know how much CIS is due and will send an agreement detailing the total CIS due.
What happens if you are not CIS registered?
If you are not CIS registered, the tax rate is higher. A 30% tax deduction must be withheld from the overall amount of any work invoices.