The Construction Industry Scheme (CIS) sets out special rules for tax and national insurance contributions for those working in the construction industry: be they companies, partnerships or self-employed individuals.
The CIS applies to construction work and jobs such as alterations, repairs, decorating and demolition. Although the burden of operating CIS is mainly that of the person making the payments, the rate at which tax is deducted depends on the recipient’s status. There are three levels of CIS deduction that contractors must make when they pay a subcontractor:
- 30% if the subcontractor is not registered with HMRC under the scheme
- 20% if they are registered or
- Nil tax deducted (i.e. paid gross) if the subcontractor has a CIS gross certificate.
A subcontractor can apply for a gross certificate if turnover over the last 12 months is at least:
- £30,000 if a sole trader;
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership; or
- £30,000 for each director of a company, or at least £100,000 for the whole company.
Where a payment is made for work within the CIS by a person or firm who is also within the scheme, they must send a report to HMRC whether or not any tax is deducted. CIS submissions and payments must be made monthly to HMRC within 14 days of the tax month end or 17 days if paying electronically. Late payment and/or return submission attracts £100 penalty. Quarterly payments can only be made if the average monthly liability for CIS, PAYE & NI totals less than £1,500 per month however, even if payments are made quarterly, the CIS returns must still be filed to HMRC on a monthly basis.
The CIS scheme is relevant only if a contractor engages another subcontractor to do the work; jobs contracted directly with a private customer are outside of the scheme. However, you can inadvertently fall foul of the CIS rules if you get involved in what could be viewed as a ‘joint contract’. Such an arrangement would apply when one contractor takes on the work and uses another to assist but the invoice is rendered for all the work incurred by both workers. A further complication could arise where a contractor engages a subcontractor and then that subcontractor engages another under the contract with the original contractor to another party. Therefore, in either case, the original subcontractor could be both a contractor and subcontractor under the CIS rules and be required to apply CIS deductions.
Andy and James are both self-employed builders registered under the CIS deducted scheme. They usually work for other builders having CIS deducted at 20%. However, Andy has been approached by a private customer to undertake a project to include construction work that he cannot handle so he contacts James to assist. Andy quotes for the job to include James’ work. Although both will work separately, to simplify the arrangement Andy issued the customer with one invoice to include James’ work although the work is shown separately. On payment Andy deposits James’ share in his bank account.
The problem here is that James’ payment is within the CIS scheme. Andy should have registered as a CIS contractor and deducted CIS tax from the payment made to James at the appropriate rate. HMRC is entitled to take action to recover the tax from Andy that he had not deducted and may also then pursue James for the CIS deduction which had not been received.