The Construction Industry Scheme (CIS) sets payment rules for work in the Construction Industry. The scheme applies mainly to contractors and subcontractors in mainstream construction work, but will also apply to businesses/organisations not in construction but who has a high annual spend on construction. These businesses are ‘deemed contractors’ within CIS.
It is possible to be both a contractor and a subcontractor within CIS and both have a number of obligations and responsibilities.
A contractor must register for a CIS scheme with HM Revenue & Customs (HMRC) before they pay individuals falling within the scheme. When taking on subcontractors the contractor must establish their employment status. If they are to be employees they should be put on the payroll with relevant deductions for PAYE and NIC made. If a contractor engages a subcontractor on a self-employed basis, the contractor must establish whether the subcontractor is genuinely self- employed (see section on Sole Trader/IR35 for more information on employment status).
Once the employment status is established, the contractor must contact HMRC to ‘verify’ the subcontractor, when paying the subcontractor for the first time. Verification is the process of checking with HMRC to confirm if the subcontractor has registered under CIS and what their tax status is. HMRC will advise whether the subcontractor is registered for gross or net payment status.
Gross payment status (GPS)
It is possible for a construction business to apply to HMRC for Gross Payment Status (GPS). When applying for GPS it is necessary to satisfy the following conditions:
The business test
The contractor to be running a construction business in the UK through a bank account
The turnover test
The business income must be at certain levels in the 12 month period before application.
The compliance test
The business and owner(s) must be up to date with all of their tax obligations. This includes filing of all returns on time (both personal and company), and the payment of all tax due on time (including PAYE/NIC/CIS/Corporation Tax, Self Assessment tax, etc)
No deductions need to be made from payments if GPS is granted. The conditions are regularly reviewed and any breach will, in many cases, result in the withdrawal of GPS. If the subcontractor is registered for net payment, tax at 20% must be deducted from the payment. Tax should not however be deducted from costs for materials or any travel costs included in the invoice. No deduction for tax should be made from any VAT included in the invoice. Once verified, payments to a subcontractor can continue without further verification in respect of payments made in the current or two previous tax years.
Where HMRC are unable to confirm either gross payment status or net payment status of 20%, the contractor will be instructed to deduct tax at 30%.
Contractors are required to make monthly returns to HMRC of all payments to subcontractors.
Compliance within CIS is extremely important, as potentially onerous penalties will be applied for late filing of forms (monthly and annually) and when payments are made late. Also the removal of the GPS is at risk where there is a failure to comply with filing and payment deadlines.
Information on CIS 4
This form of CIS registration applies when the company has been newly incorporated or when the company’s turnover is below a certain level. If your company was only recently incorporated, and will only qualify for CIS 4. What it means is that, if you work through an agency and your agency pays your company for services rendered, they will deduct 20% before they pay your company. For example, if your company invoices for £1,000, the agency will only pay £800 (£200 is deducted as CIS). This 20% is paid over to HMRC under the reference of your company during the year, and counts towards the company’s tax liability for the year. If, at the end of the year, it is found that the company overpaid CIS, then the excess funds will be paid back to the company.
IMS process weekly calculations for clients taking CIS deductions into account and ensuring they take home the right pay.
We will be happy to answer any further queries you may have in this regard. Detailed guidance is held in the HMRC booklet CIS 340.