Construction Industry Scheme (CIS)
If you work in construction, whether you are a builder, carpenter, plumber, plasterer, painter etc AND you use the services from time to time of other workers in the construction industry you will need to comply with a special set of tax rules collectively known as the Construction Industry Scheme (CIS).
The CIS rules determine the tax and National Insurance treatment for those working in the construction industry and you have no choice but to follow them.
Here’s an example. Say you are a plumber and you need to use an electrician to do some work as you are installing a boiler, you cannot simply ask that electrician to send you an invoice that you pay in full. As you are have “employed” the services of that electrician you become a Contractor and they are a sub-contractor. You must register with HMRC as a Contractor under the CIS scheme and then deduct tax from the sub-contractor as you pay them.
The tax deducted is passed on to HMRC and these deductions count as advance payments towards the sub-contractor’s tax and National Insurance liabilities.
So, Contractors are defined as those who pay sub-contractors for construction work or who spent an average of more than £1m a year on construction over a three-year period. Sub-contractors do not have to register for the CIS, but contractors must deduct 30% from their payments as unregistered sub-contractors.
To avoid the 30% deduction, sub-contractors will need to register with HMRC and qualify for a 20% deduction or apply for gross payment status.
There are special rules if you wish to qualify for gross payment status and these are generally tax affairs all up to date, £30,000 in turnover per sole trader, per partner in a partnership or per Director in a Limited Company. You also need to run your business through a business bank account.
If you do qualify then the Contractor will not make a deduction and the sub-contractor will be responsible to pay all their tax and National Insurance at the end of the tax year.
The CIS covers all construction work carried out in the UK. Exceptions to the definition of construction work includes professional work done by architects and surveyors, carpet fitting, scaffolding hire (with no labour) and work on construction sites that’s clearly not construction. The CIS does not apply to construction work carried on outside the UK.
In addition, from 1 October 2020, if VAT registered, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This will be known as the Domestic Reverse Charge. The new rules will make the supply of construction services between construction or building businesses subject to the Domestic Reverse Charge. These rules were meant to come into effect from 1 October 2019 but have been delayed allowing the industry more time to prepare.
So, please don’t ignore these rules as failure to register could lead to heavy penalties such as a £3,000 fine for not registering and £100 per missed monthly return (monthly returns are required even if nil).