If you are working in the construction industry, you will have to comply with various HMRC regulations that are particularly crafted for construction businesses. However, we have scoured a detailed HMRC Construction Industry Scheme Guide for beginners who need clear and concise information. So, without further ado, let’s get started.
What is the Construction Industry Scheme (CIS)?
Construction Industry Scheme (CIS) is a tax deduction scheme for people, businesses, or public and private limited companies operating in the construction industry. It regulates the tax deductions on payments made to subcontractors by contractors. If you or your company have registered with HMRC Construction Industry Scheme as a contractor or subcontractor, it qualifies for the CIS scheme.
A client assigns construction work to a contractor; the contractor then hires a subcontractor to carry out the work on the ground.
The CIS applies to all types of construction work in the UK and within its territorial water belt. The definition of “construction work” includes site operations like demolition, repair, and rehabilitation. Some site operations are exempted from the HMRC Construction Industry Scheme, including medical and safety provisions and professional services of engineers, surveyors, and architects.
*Usually, the contractor decides whether the subcontractor qualifies for the HMRC Construction Industry Scheme and verifies that the subcontractor is registered with HMRC.
How does CIS work?
The CIS obligates the contractors to deduct tax on payments made to subcontractors. The tax deduction is a prerequisite for payments to subcontractors under the Construction Industry Scheme. Moreover, the business tax rates are determined according to the registration status of the subcontractor at HMRC.
In case the subcontractor also hires another subcontractor for construction work, he’ll be required to deduct tax (per CIS rules) on payment made to his subcontractor.
The subcontractor is free from all tax liabilities of HMRC once the taxes are deducted from his payments. The contractor is then required to keep the record of all CIS tax deductions and consecutively file them in the annual tax return. These tax deductions can be offset against your liabilities to National Insurance Contributions (NIC) or PAYE.
The process of filing CIS tax returns is made online since April 2016. These returns cannot be filed through papers, and if you are required to make any corrections or amendments, even if the returns are already filed, it can only be done online.
You are required to show your offset against liabilities on the P35 Employer Annual Return. The request for repayment of the same can be made in writing.
What are CIS business tax rates?
The tax deduction rate for unregistered subcontractors is 30% of the total payment. And the subcontractors registered with HMRC are liable to pay tax at a 20% rate. HMRC also have a criterion to determine whether a subcontractor is entitled to gross payment or tax deduction at the rate of 20%.
The criteria for gross payment include three tests:
1. The Business Test: HMRC checks if the business operates in the construction sector and its financial operations are carried out through the bank.
2. The Compliance Test: HMRC verifies the business has a proper tax background and that all the past liabilities are paid.
3. The Turnover Test: HMRC reviews the business’s turnover from the past 12 months, and if the business has an annual turnover less or equal to,
• £30,000 – for an individual business owner.
• £30,000 – for each shareholder in case of multiple owners.
• £100,000 – In total for five or more owners (From April 2016.)
It is eligible for gross payment. Otherwise, the business will be liable to pay tax at a 20% rate.
Why register as a subcontractor with HMRC?
You should register with HRMC for the benefit of your business. The tax deduction rate for registered and unregistered subcontractors has a difference of 10% – get yourself registered and pay less tax.