Do you understand the Construction Industry Scheme (CIS)?

Please read our guide on what construction workers and businesses are required to know about the Construction Industry Scheme.

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The Construction Industry Scheme (CIS) is an HMRC scheme for subcontractors and contractors. It lays out the tax deduction rules for payments relating to construction work within the industry. If you work within construction or own a business in the construction sector, keeping on top of how it works is essential.

Navigating the complexities of CIS is not always straightforward, and you may benefit from professional advice regarding issues such as employment status, the VAT domestic reverse charge and your overall tax position. BSR Bespoke Chartered Accountants in Tunbridge Wells can provide expert guidance to help you manage your finances as effectively as possible. Here are the nuts and bolts of CIS and how we can help.

How does CIS affect construction workers?

If you are within the UK building or construction industries, then it is likely that you will pay tax under the Construction Industry Scheme (CIS). CIS comes into play with roles from site preparation (including demolition), building, alterations, installing systems such as heating and water, and decorating and cleaning interiors post-completion. However, there are a range of exceptions, including surveying, carpet-fitting and the delivery of construction materials.

If your work is included within the scope of CIS, the first thing to establish is your employment status. If you are an employee, then CIS does not apply to you and your employer will deduct tax and NICs through PAYE. However, if you are self-employed, the CIS rules will apply, and you will need to register with HMRC for CIS. The same applies for limited companies.

If you are working in construction as a contractor or subcontractor in the UK the rules apply even if your business is based outside the UK. It is possible to be a contractor and a subcontractor at the same time. You must register as both if you fall under both categories.

Understanding CIS for contractors

As a contractor, you must register with HMRC and verify the payment details of your subcontractor(s). When you settle their invoices, you make a tax deduction and pay this over to HMRC on their behalf. You also provide them with a deduction certificate, which is normally provided per tax month. This allows contractors to claim the CIS deductions against their tax liability when completing their tax returns. Contractors must ensure compliance with tax obligations by deducting and remitting the appropriate amounts.

Understanding CIS for subcontractors

As a subcontractor, you register with HMRC and provide your contractor(s) with your unique tax reference (UTR) so they can make the appropriate deductions at either 0%, 20% or 30%. The standard rate of deduction for those who have registered is 20%. It represents an advance payment towards your tax and NIC payments, which is passed on to HMRC by the contractor. It is important to keep track of the payments and deductions made by your contractor to maintain accurate financial records.

What is 'gross payment status'?

In CIS, subcontractors have the option to apply for gross payment status. When you have gross payment status, contractors will pay you in full for your services without any deductions. You’ll be responsible for paying all your tax liabilities at the end of the tax year via self-assessment (for sole traders or partners) or your corporation tax return (for owners of limited companies).

You can apply for gross payment status when you register for CIS or at a later date following registration. To be eligible, you must meet certain criteria:

  • Prove that you’ve paid your tax and National Insurance on time in the past.
  • Your business must be involved in the construction sector or provide labour for it in the UK.
  • Your business transactions should be conducted through a bank account.
  • Your turnover (excluding VAT and material costs) must meet specific thresholds:

- Sole traders: At least £30,000.

- Partnerships: At least £30,000 per partner or £100,000 for the entire partnership.

- Limited companies: At least £30,000 per director or £100,000 for the whole company. If five or fewer people control your company, each person must have an annual turnover of £30,000.

How do I recover CIS?

If you are self-employed and the total CIS that you have had deducted exceeds your tax and NIC liability, you can claim back the difference via your self-assessment return.

If operating via a limited company as a subcontractor or as an agent of a limited company and you have paid too much tax, you can claim a repayment of your CIS deductions at the end of the tax year online or by post using the end-of-year PAYE P35.

What is the VAT domestic reverse charge?

The VAT domestic reverse charge was introduced by HMRC in March 2021. It changed the way VAT is handled for certain kinds of construction services in the UK.

If you belong within CIS and are VAT-registered, the domestic reverse charge will come into play. It applies to transactions that are reported under CIS and are between VAT-registered contractors and subcontractors. Those subcontractors supplying construction services to a VAT-registered contractor no longer have to account for the VAT; instead, the contractor accounts for the VAT through a reverse charge mechanism on their VAT return. Invoices must make this clear. The contractor shows the amount as both output and input VAT whilst the subcontractor raises the invoice without VAT.

The VAT domestic reverse charge is not straightforward and, being relatively new, is not universally understood, since there are scenarios where it does not apply, such as if the contractor is the end user. Good planning and effective management are vital to reduce the impact of this arrangement on everyone operating in the construction sector. This is a prime example of when to seek professional advice.

How can BSR Bespoke help you with CIS?

Navigating CIS can be challenging, especially for those who are new to self-employment or the construction industry. Professional accountants such as BSR Bespoke in Tunbridge Wells have extensive knowledge and experience of working with clients in the construction sector, including business owners, contractors and subcontractors. The services we offer include:

  • registering for CIS - sole trader/limited company/partnership
  • tax compliance with all CIS regulations
  • advising on record-keeping and how to handle and account for invoices, deductions and payments
  • recovering CIS
  • advising on the administrative and financial aspects of the VAT domestic reverse charge
  • representing you with HMRC in the event of audits or investigations

By partnering with BSR Bespoke, construction workers can have peace of mind knowing their tax obligations are being handled correctly and efficiently. At the same time, business owners gain the additional benefit of extra time to focus on their core business.

Is there CIS software that can help?

Some excellent integrated software solutions will streamline the CIS process, helping to ensure compliance, reduce errors and save you time. We can offer specialist advice on selecting the right accounting system for any situation involving CIS. Some of the software solutions we might recommend would include:

  • Xero: Cloud-based accounting for small businesses which can manage CIS deductions easily, issue CIS-compliant invoices, and provide real-time visibility of your finances.
  • QuickBooks: This software offers dedicated CIS modules that cater specifically to the construction industry’s tax needs.
  • Sage Accounting: Comprehensive accountancy software for sole traders and small businesses with CIS-friendly features, including automated tax calculations and submissions.

Helping you navigate the Construction Industry Scheme

If you would like guidance on any aspect of CIS, the team of experienced tax advisors at BSR Bespoke is happy to help. We provide tailored advice and a wide range of accountancy services to ensure that the CIS works effectively for you, whether your business is big or small. Don't hesitate to get in touch with us for an initial consultation.