What are CIS Deductions and How Do I Make the Right Ones?
Do you operate in the construction industry? Then this post if for you, especially if you have ever been confused by the rules, and practices, surrounding mandatory CIS deductions.
Contractors deduct money from subcontractor payments and send it to HM Revenue and Customs under the Construction Industry Scheme (CIS) If the subcontractor is not registered as a gross certificate holder, the deductions of 20% or 30% are made.
Subcontractors are usually paid for, and invoice the contactor they are working for, for their time, materials, travel, and lodging. If the subcontractor is VAT registered, VAT will be added to the total as well.
The problem is, that when it comes to CIS deductions, too many contractors and their advisors apply the rules incorrectly, allowing only deductions for the labour component of a subcontractor’s bill. And while this may fly under HMRC’s radar for some time, if and when they do determine that CIS deductions have been made incorrectly, to put it bluntly, the s**t will hit the fan.
(And by the way, for the reminder of this informational piece FA stands for Finance Act, not Football Association.)
What is the CIS Scheme Anyway?
Before we outline what is often done wrong, if you are new to doing the books as a construction company then you may need a basic explanation of just what the CIS scheme is.
The Construction Industry Scheme (CIS) is an HMRC scheme that applies to anyone who works for a company as a contractor in the construction industry but is not an employee, such as a self-employed individual. According to CIS rules, the supervising contractor is usually required to withhold tax on these individuals’ payments, at a rate of either 20% if they are “registered” or 30% if they are not.
Other self-employed individuals who are not in the construction industry, on the other hand, usually receive their payments gross, meaning no tax is deducted.
The CIS includes work such as demolition, site clearing, repairs and decorating, and power system installation, in addition to what you might think of as typical building and civil engineering work. The HMRC CIS manual explains what types of work are covered by the Construction Industry Scheme.
Where People Go Wrong with CIS Deductions
As mentioned, on the labour and materials issues most contractors get their CIS deductions right, because the rules are pretty clear and straightforward, and so are the expenses themselves.
Where people usually get things wrong – unintentionally most of the time but HRMC will rarely see it that way – is when it comes to CIS payments for involved expenses relating to travel, subsistence (food and drink) and accommodation.
When a construction contract requires a contractor to pay a subcontractor’s expenses (such as travel and lodging), these payments are included in the contract’s overall value. As a result, they will result in a deduction under the CIS Scheme, according to government rule FA04/s60.
A payment designed to cover a subcontractor’s expenses is covered by FA04/s60, whether the contractor pays or reimburses the subcontractor, pays their expenses directly or through a third party.
The total amount deducted by the contractor should correspond to the gross amount of the contract payments due. This will include paying expenses on behalf of the subcontractor.
When CIS Deductions Should Not Be Made
When a contractor allows a subcontractor to use the contractor’s own facilities, such as vehicles or lodging, CIS deductions are not required. These arrangements, however, are uncommon.
What is the reason for this? Such arrangements could imply a contractor/subcontractor relationship does not exist, but rather it is an employer/employee relationship , which is subject to PAYE which is a very different matter.
Confused yet? We thought so. Here are some practical examples of what we mean:
The Hotel Example
A construction contract is worth £10,000, which includes the payment of the subcontractor’s lodging expenses.
The subcontractor’s hotel room costs £1,000 per night. The contractor makes a direct payment of £1,000 to the hotel, leaving a balance of £9,000 owed to the subcontractor. As a result, the contractor should deduct the CIS at the appropriate rate – in this case, 20%. Based on total payments of £10,000, the deduction will be £2,000.
The contractor should then provide a PDS to the subcontractor that shows a gross payment of £10,000 with deductions of £2,000 for CIS and £1,000 for lodging. £7,000 will be payable in ‘cash’ to the subcontractor.
The Fuel Example
A construction contract is worth £10,000, which includes the payment of a subcontractor’s fuel costs. The subcontractor pays £2,000 in fuel costs using a credit card. The contractor pays the subcontractor’s credit card provider £2,000 directly. The subcontractor is still owed £8,000.
The contractor should deduct CIS at the appropriate rate, which in this case is 20%. Based on a total payment of £10,000, the deduction will be £2,000. The contractor should provide a PDS to the subcontractor that shows a gross payment of £10,000, with £2,000 for CIS and £2,000 for fuel deducted. The subcontractor will be paid £6,000 in ‘cash’ after that.
More Hotel Considerations
A construction contract is worth £9,000. Hotel accommodations are pre-arranged and unrelated to the subcontractor’s construction contract. The contractor pays the entire cost of the accommodation provided to the subcontractor, which is valued at £1,000. In these circumstances, the payment for the accommodation does not result in a deduction and does not appear on the subcontractor’s PDS.
The contractor should deduct CIS at the appropriate rate, which in this case is 20%. Based on a total payment of £9,000, this will be £1,800. The contractor should provide a PDS to the subcontractor that shows a gross payment of £9,000 with £1,800 in CIS deductions. £7,200 will be paid to the subcontractor in ‘cash’.
As you can now see, CIS deductions, especially those related to things considered a bit incidental; like lodging and fuel can be complex and easy to get wrong. If you’re not sure what to do about your CIS deductions, then at Pearl Lemon Accountants we’d love to see where we can help you with this sticky issue. Contact us today to learn more.
FAQS
How do I claim back CIS deductions?
CIS deductions need to be claimed through the monthly payroll scheme of the company. You will need to send two things to the HMRC if you want to claim the CIS deductions:
- The monthly FPS (Full payment submission)
- EPS (Employer payment summary)
If you are still unsure on the procedures you need to take to claim your deduction please reach out to us! We can help!
What is covered under CIS?
The type of work covered under CIS includes:
- Demolition;
- Site Clearing;
- Repairs;
- Decorating;
- Power system installation; and
- Other types of building and civil engineering work.
What do I deduct CIS from?
The CIS deduction amount is removed from the subcontractors’ payments. You will be informed by the HMRC (HM Revenue and Customs) how much the deduction will be. However, the CIS rates are as follows: registered subcontractors get deducted 20%, while unregistered subcontractors get deducted 30%.
What happens if you don’t deduct CIS?
If you don’t deduct CIS, HMRC may reach out either asking to change your claim or requiring evidence for your deductions. They will also give you a deadline; if it is not met, HMRC will take over and correct your claim. If this happens, you won’t be able to make any additional claims during the same tax year.
If you need services regarding HMRC Tax, all you have to do is hire our experts.
