One of the changes announced by the government will implement, in different stages, a package of improvements to the Construction Industry Scheme (CIS). The aim of this measure is to reduce the administrative and related cost burden of businesses operating in this industry. The proposal should improve the cash flow of the parties involved by increasing the number of subcontractors being able to obtain and maintain gross payment status.
On the other hand HM Revenue & Customs (HMRC) has recently introduced higher penalties, including fines, business sanctions and, in extreme cases, imprisonment, for companies failing to comply with the rules of the scheme. Said that, it has become important for all the parties involved to raise awareness of suppliers and/or clients in terms of identifying when certain types of works falls within the scheme and thus taking proper actions.
What is CIS?
The Construction Industry Scheme is a tax regime that applies to Construction Contracts to be subject to tax deduction by the payer. It was introduced under the Finance Act 2004 to govern payments and tax deductions between contractors and subcontractors, and to business that spend above a certain amount on construction, even if it is not their main activity.
The aim of the scheme is to put an end to payments which the payee fails to declare for tax purposes, as the deductions applied on the payments at source (percentage may vary) count as advance payments towards the recipient’s tax and national insurance. Contractors essentially act as tax collectors, with the deductions remitted to HMRC on a monthly basis.
**CIS does not apply to construction activities being carried outside the UK; however, it does apply to overseas individuals or companies carrying out construction work on properties and lands located in the UK. If a business is based in a territory which benefits from a Double Taxation Agreement, it is still obliged to register under the CIS but may be entitled to repayment of any deductions withheld at source.**
Registering for CIS
The registration process can take few days or several weeks, depending on which category you fall into, i.e. contractor or subcontractor, based in the UK or overseas. In some occasion, it is also required to register as both contractor and subcontractor. This is often the case of many construction firms, when a much bigger company contracts them on a project but then at the same time they take on small company/individuals to help them complete the job.
Once registered, contractors are required to follow specific obligations (reviewed in detail in the following paragraph). Subcontractors, instead, do not have any particular recurring compliance duties, while they are paid in accordance with their registration status:
Not Registered 30%
Standard Rate 20%
Gross Payment Status 0%
Monthly Duties & Responsibilities
As mentioned previously, contractors are legally required to follow certain duties on a monthly basis.
Firstly, they are obliged to submit a return to HMRC stating the amount they have paid to subcontractors, and the amount withheld at source, and secondly, they need to provide each subcontractor with a written statement confirming the amount held back in tax. They then makes two payments: one to the subcontractor, who is invoicing for the work, and the other to HMRC.
It is a contractor’s responsibility to work out the correct amount of the deduction, by checking: (i) the registration status of the subcontractor and (ii) the activities that may fall within the scope of the scheme. They are directly responsible for unpaid tax liabilities and can be liable for penalties for failure to correctly follow the scheme.
Get in touch with our London office
If you are a business that works within the construction industry in UK and requires further information, you can get in touch with our consultants at Kelmer London. We can advise you on
- Contractor registration;
- Subcontractor registration;
- Application for Gross Payment Status;
- Application for repayment of deduction under DTA;
- Monthly returns and deduction statements;
- General compliance (subcontractors’ verification, assistance with identifying the operations that fall or not within the scheme, etc.).
You can reach us at:
Telephone: +44 (0)20 7353 9200