CIS – Construction Industry Scheme is a tax collection system whereby main contractors, and other organizations undertaking a significant amount of construction work, must deduct income tax from payments to subcontractors, and account for that tax to HMRC as payments on account.
The work that falls under CIS
CIS rules only apply to supplies between contractor and subcontractor, not supplies direct to the general public or services supplied by PAYE employees. Contractors and subcontractors may be Limited Companies, partnerships or sole traders; but anyone who gets a lot of construction work done may also be classed as a contractor e.g. the local council, housing associations.
CIS rules apply to most construction projects including
- New build
- Property repairs and alterations
- Engineering works
- Roads and bridges
And to most jobs on the project including
- Site preparation
- System installations e.g. air conditioning
- Water works
- Professional services e.g. architects, surveyors
- Consultants e.g. designers, site testing
- Plant hire
- Materials including delivery
- Carpet fitting
- Site services e.g. canteen, security
- Mining & related activities
If a job includes a mixture of supplies, then all is subject to CIS e.g. supply and install.
Subcontractors need to register with HMRC as subcontractors, in order that tax payments, deducted by the contractor, can be recorded in their name and hence be available for offset or refund.
Subcontractors should supply their UTR number to the main contractor, along with name and address, and National Insurance number if a sole trader, or registration number if a limited company or limited liability partnership.
Income tax is deductible at a flat rate of 0%, 20% or 30% from the invoice total, before VAT and after deduction of sums charged for materials.
- 0% tax may be deducted if the subcontractor has obtained gross payment status
- 20% tax is standard
- 30% tax may be imposed if the subcontractor has not registered or has bad history with HMRC
Clear invoicing can aid correct deductions. Tax is deductible at point of payment, and certificates should be supplied by the contractor to subcontractors, advising tax deducted and reported to HMRC.
Contractors need to register with HMRC as contractors, in order to report and pay over these sums deducted from subcontractors. This is a subsidiary part of PAYE, the system for reporting payroll taxes, and uses the same references for both reporting and payment, however the reporting regime is totally separate.
Once registered then reports need to be made monthly, even if nil, with penalties for late submission. Submissions must be made electronically via government gateway, for each tax month ended 5th, by 19th of the month.
Details of each subcontractor employed must be taken, before they commence work, and verified with HMRC. This verification process is done via the government gateway, or CIS software, and remains valid for up to 2 years after the last use. HMRC should then inform the contractor if deductions are to be made at other than the standard 20%.
Whenever a subcontractor is paid then tax needs to be calculated and deducted before payment of the net to the subcontractor. Each tax month the contractor needs to report to HMRC for each subcontractor, the total invoiced before VAT, the materials element and tax deducted. The total of tax due is then payable to HMRC by 19th by the contractor.
The contractor is also obligated to provide to each subcontractor a payment and deduction statement with in 14 days of the month end, advising sums reported to HMRC.
Contractor and/or subcontractor
A business may qualify as either contractor or subcontractor or both. This does not change their obligations. However, a limited company who is both contractor and subcontractor, may have interim offset opportunities.
CIS tax offset
Tax deducted under CIS is income tax paid on account and hence is available for offset against tax liabilities, or even refunded if liabilities are lower.
Sole Trader subcontractor – CIS is offset against personal tax and national insurance assessed via a self-assessment personal tax return. Hence CIS tax suffered in the tax year should be reported on the tax return for that year to obtain offset or refund.
Partner as subcontractor – CIS tax maybe offset against personal tax and national insurance liabilities of the individual partners.
Hence CIS tax suffered in the tax year should be reported on the partnership tax return, and allocated to the partners, to be transferred to their individual tax returns for offset or refund.
Limited Company – CIS tax suffered, should be claimed monthly for offset against PAYE and CIS liabilities in respect of staff and/or subcontractors. At the end of the tax year then any excess may be carried forward, refunded or offset against other tax liabilities e.g. corporation tax.
CIS & Value Added Tax
CIS and VAT rules apply independently
- VAT is calculated on the invoice total, ignoring CIS
- CIS is calculated on the invoice total, ignoring VAT
VAT rates and amounts must be recorded on invoices, by the subcontractor. CIS may be recorded on the invoice, but it is not compulsory, as it is the contractor’s responsibility to calculate and deduct the correct CIS tax before payment. However, from 1st March 2021 there are new rules on how to report and account for most VAT charged on invoices subject to CIS rules – the domestic reverse charge VAT rules.
Under reverse charge rules, VAT is not added to the invoice total for payment. The VAT calculated is just noted on the invoice together with instructions that it is to be accounted for, by the contractor, to HMRC, via domestic reverse charge VAT rules. Hence the contractor pays to the subcontractor, a sum equal to the invoice total, excluding VAT less CIS tax payable.
Domestic reverse charge VAT
The Domestic reverse charge is a way of accounting for the VAT on an invoice without cash changing hands between contractor and subcontractor. The VAT on the invoice is just a memo, it is not paid.
Whom does it apply to?
Domestic reverse charge VAT rules will apply from 1st March 2021 to most invoices raised by VAT registered subcontractors to VAT registered contractors.
The exception is if that contractor is also the “end user” i.e. the owner of the building under construction, or a council or housing association. The end user contactor must provide a certificate to the subcontractor confirming their end user status, and then reverse charge rules will not apply; and so the subcontractor must collect the VAT and account for it to HMRC in the usual way.
What exemptions are available?
Certain CIS works are exempted from reverse charge accounting
- Zero rated supplies
- Standard rated new build supplies
- Supply of agency workers
- Mixed supplies where CIS element is less than 5%
How does the contractor account for the VAT?
Firstly, such invoices must be accounted for based on invoice date not paid date, so you cannot use the cash accounting regime. If you are using accounting software, then make sure you choose the right VAT code for domestic reverse charge – standard 20% or reduced 5% VAT and the software should do all the work for you. When the invoice is paid by the contractor, no VAT is paid.
When preparing the VAT return:
- The VAT due on this invoice, under reverse charge rules
- That same VAT is also classed as purchase VAT so should be included in your calculation of VAT to be claimed on purchases
- The purchase cost (before VAT & CIS)
How does the subcontractor account for this invoice for VAT?
The invoice is recorded in the subcontractor’s books as if zero VAT were charged, however, a memo of the actual VAT due needs to be shown on the invoice, as well as a note that the contractor is liable to account for it under reverse charge rules.
If you are using accounting software, then make sure you choose the right VAT code for domestic reverse charge – standard 20% or reduced 5% VAT and the software should do all the work for you. When the invoice is paid by the contractor, no VAT is paid.
When preparing the VAT return
- the subcontractor does not include the VAT on their return
- total sales value (before VAT & CIS)
If you have any query regarding Construction Industry Scheme, Please call us on 020 3500 2646.