A Guide to CIS Tax Returns
The HMRC Construction Industry Scheme (CIS) sets out special rules for tax and national insurance (NI) for those working in the construction industry. Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. They may be companies, partnerships or self employed individuals.
The CIS applies to construction work and also jobs such as alterations, repairs, decorating and demolition.
Continue reading to find out if you are eligible to make a CIS claim.
Contractors include construction companies and building firms and also government departments and local authorities. Any other business spending more than £1 million a year on construction is classed as a contractor for the purposes of the CIS.
Subcontractors are those businesses that carry out work for contractors.
Many businesses act as both contractors and subcontractors.
Every month before the 19th, contractors must submit a return to HMRC online. This should include information confirming that the employment status of the subcontractor is considered in the deduction and confirming that the verification process has been completed. As well as informing HMRC of the deduction, contractors must also issue Deduction Statements to subcontractors. These statements help subcontractors with accounting when it comes to preparing their taxes at the end of the tax year.
Subcontractors should provide contractors with their name, Unique Taxpayer Reference (UTR) and National Insurance (NI) number when open a new contract of construction work. The contractor must be genuinely satisfied that the subcontractor is self-employed, and therefore the “verification” stage is ok to go ahead.
The distinction between self-employed and employed is essential to the CIS. On a monthly basis a contractor must include a declaration explaining they have considered the status of the subcontractors and that none of them listed on the return could be deemed employees. There are a variety of factors which decide whether or someone is self-employed or employed. Of course, HMRC would always like subcontractors to be classed as employees because it means an increased amount of tax and more National Insurance is owed. If you are unsure of the status of your employment, the McKellar Accountancy team are here to help.
Verification is another step which needs to be completed. To check whether a contractor needs to pay a subcontractor net or gross they must get into contact with HMRC. This verification procedure establishes which monthly payment tax deductions need to be made. The choices are;
- 20% standard rate
- 30% (this rate applies if the subcontractor has not registered with HMRC)
Contractors must supply subcontractors with a monthly payslip. This should include details of the total amount of payments and how much tax has been deducted from those payments. The contractor should issue these at least for each tax month. These payslips should include;
- The contractor’s name and employer tax reference
- Tax month of the payment
- Name of subcontractor, their UTR or specific reference
- Gross amount
- Construction materials which have reduced gross payment
- Amounts of the tax deductions made
- Verification number if the deduction has been at the 30% rate
The following should be excluded when entering the gross amount of payment;
The VAT charged by that subcontractor (if that subcontractor is VAT registered)
Any levy from the Construction Industry Training Board
The following should be deducting from the gross amount when working out the payment amount from which the deduction should be made;
- What the subcontractor is paid for materials (incl VAT if not VAT registered)
- Consumable stores
- Fuel (not including fuel used for travelling)
- Plant hire
Travelling expenses – this includes fuel costs, should be included in the gross payment and the amount from which the deduction is made.
There are the following penalties;
- A standard, basic penalty of £100 is given if the contractor fails submit the monthly return on time. If failure to meet due date of return continues for a second month, a penalty of £200 is given – if this is still the case after 6 months, the penalty amount will rise to 5% of the tax or to £300.
- After a year, the penalty will then increase to be more than £300 or 5% of the tax. If it is found out that the information is being withheld deliberately and concealed, the penalty will be 100% of the tax or £3,000 if greater.
- If the return is 12 months late and the information contained in the return is only concerned with those registered for gross payment, there will be a £3,000 penalty for deliberate and concealed withholding of information. Receive a £1,500 penalty for deliberate withholding without concealment.
- If you have only just entered the CIS, penalties will be restricted to a maximum of £3,000 for certain circumstances.
A subcontractor will need to register for the CIS when they first start working as someone who is self-employed in the construction industry. In order to register with HMRC for the CIS, all it takes is a simple phone call or going online.
In order to qualify to be paid the gross amount, there are a couple of conditions that need to be met;
- Tax and NI must have been paid on time in the past couple of years
- Carry out construction work in the UK
- Run the business through a bank account
In terms of turnover for the past 12 months – disregarding VAT and cost of materials – they must have made at least:
- £30,000 as a Sole Trader
- £30,000 between each partner in a partnership or £100,000 combined
- £30,000 between each director of the company or £100,000 combined
Is your company controlled by 5 people or less? Your annual turnover must be around £30,000 for each.