Ah, the Construction Industry Scheme (CIS). Few words can evoke that mix of intrigue, trepidation, and bafflement better than this! But, like many things in life, the CIS isn’t something to fear—it’s something to understand and embrace.
The CIS is a set of rules and regulations set out by HMRC that must be strictly adhered to by contractors and subcontractors in the construction industry. This means registering and submitting accurate returns in accordance with HMRC’s requirements. In short, it’s a framework designed to ensure the fairest of practices for both contractors and subcontractors.
Despite being a complex subject, understanding the CIS doesn’t have to be an unnecessarily stressful experience. In this article, we take a look at what the Construction Industry Scheme is, how it works and what both contractors and subcontractors need to know about their obligations under the scheme. Let’s get started!
What Is The Construction Industry Scheme?
Contractors in construction and certain other industries must abide by regulations set out in the scheme for payments made to subcontractors. According to these rules, disclosure of a subcontractor’s tax status by HM Revenue & Customs is necessary for all payments; any amount not representing materials used should be subject to tax deductions taken from contractors and subsequently paid to the government.
This scheme applies to any construction job done within the UK, including: site preparation, changes, taking apart structures, constructing new ones, fixing up and renovating spaces, decorating and demolishing.
The United Kingdom’s boundaries encompass up to twelve miles of its territorial sea. Nevertheless, the regulations concerning this scheme do not cover any construction operations conducted outside these boundaries. All businesses based beyond the UK conducting construction activities within its confines must register with it or risk being ineligible.
What Kinds Of Businesses Are Eligible For The Scheme?
This scheme covers all businesses operating within the building and construction industry, including: companies, partnerships and self-employed individuals. This can include contractors, subcontractors or both at once. Importantly, with this particular scheme the terms ‘contractor’ and ‘subcontractor’ have extended definitions that involve activities outside of just ‘construction’ work.
The term contractor describes a business or other organisation that extends payment to subcontractors to carry out construction works. A contractor may be anything from construction companies and building firms, right through to government departments and local authorities. If their average annual expenditure on construction operations exceeds £1m over a three-year period then the body is considered a contractor for the purpose of this scheme.
It should be noted though, that private householders are excluded from being classified as contractors and thus do not have access to its benefits.
Subcontractors play an important role in the construction industry, taking on various tasks for contractors. They are typically hired to manage specific aspects of a larger project, such as plumbing, electrical work, carpentry or painting.
By engaging subcontractors, primary contractors can swiftly and efficiently complete large-scale projects without being weighed down by excessive staffing needs or having to acquire specialized tools and equipment.
Moreover, they provide greater flexibility on the job site while providing competitive pricing and improved safety standards that could be more difficult for primary contractors to meet alone.
Companies that act both as contractors and subcontractors have to abide by specific guidelines. These entities are paid to carry out construction work for other businesses, but in turn they employ other companies for their services. When working as a contractor, it’s expected of them to conform with appropriate regulations, likewise when performing as a subcontractor – certain standards must be met.
How The (CIS) Scheme Works?
Contractors and subcontractors should sign up for the Construction Industry Scheme. If a subcontractor does not want deductions to be taken from their payments, they must register as well.
Contractors should approach subcontractors to verify their registration status before paying them for construction work.
Following that, it will be determined whether the subcontractor is registered or not, and the contractor will be informed of the appropriate rate of deduction required on such payments, or whether they can be made without deductions.
The contractor must deduce the tax status of their subcontractors when making payments using this scheme. Depending on the facts, a portion of the payment to the subcontractor could require alteration in order to satisfy HMRC guidelines and pay what is owed for tax purposes. In such cases, it will be up to the contractor to extract an applicable amount from their payment.
If no deduction is needed, the contractor can give the payment to the subcontractor without any reduction. In case a deduction is required, however, the contractor has to take into account: the amount of money that should be withheld; details of what has been paid out and how much was deducted; make sure they make only the net payment after all deductions are taken out; issue a statement of deductions to the subcontractor correctly.
Monthly Payment Obligations To HMRC For Contractors And Subcontractors
Contractors must submit monthly details of all of the payments made under the scheme, along with information about the subcontractors, deductions taken and a statement vouching for their employment status.
Additionally, they must confirm that required verifications have been completed. If no payments have been disbursed then this needs to be reported too.
Contractors must make a payment to HM Revenue & Customs on a monthly or quarterly basis, depending on the case, which covers deductions they have taken from subcontractors.
Is The Scheme Applicable To Employees?
All contracts that are part of the scheme must be those of self-employment and not employment subject to PAYE. To ascertain if an individual is seen as an employee or a self-employed subcontractor, one must examine the terms of their particular engagement.
The past engagements held by said individual carry no bearing on their current status unless they were similar in nature or had identical contractual circumstances.
If they meet the necessary requirements, subcontractors can get paid without any money being deducted from their payments. To be eligible for this option, they have to adhere to specific standards.
Each year, after subcontractors provide a return of their profits, their tax liability is calculated. Contractors may have already paid the tax for the subcontractor via payments on account or deductions shown to them in payment and deduction statements.
Payment Requirements For Subcontractors Operating Limited Companies
If the amount already paid or deducted exceeds what is owed, reimbursement shall be given to the subcontractor. If a shortfall exists however, then it must be made up through an additional balancing payment by that individual.
Subcontractors operating a limited company can apply deductions taken from their receipts to the PAYE tax, NICs, Student Loan repayments and CIS remittances they owe.
These four types of payments must be decreased by the total amount of CIS deducted from the subcontractor’s income; if there is an excess in overall CIS deductions any month/quarter, this should be offset against future liabilities during that taxation year.
When the tax year ends, all remaining CIS deductions in excess of Corporation Tax due will either be refunded or utilized to offset Corporation Tax. In-year repayments or set-offs against any other liabilities are not allowed.
The Construction Industry Scheme has been a vital component of the UK’s construction industry since its introduction. It helps ensure that workers in this sector are paid fairly for their hard work and ensures tax is collected appropriately and accurately from subcontractors.
Despite some issues regarding transparency, overall the scheme has generally delivered positive outcomes for employers, employees, and the Government alike. As such it has contributed to a more prosperous construction industry without doing too much damage to businesses or workers’ pay packets combined with fairer taxation processes which allows everyone to benefit from an efficient business environment.
The system needs to continue evolving remain up-to-date with changing legislation as well as developing technology within the wider context of how employment law affects construction businesses in order generate even better outcomes going forward.