Construction Industry Scheme - CIS

Whether you are a contractor or a subcontractor, we can help you and your business comply with the complex CIS tax rules.

We understand the burden the scheme places upon contractors and subcontractors who just want to run their business. By appointing Account for it Ltd you will have the peace of mind that the paperwork is in hand.

We will save you time and hassle allowing you to run and grow your business. Below are just some of the tasks that we complete for our contractor and subcontractor clients

CIS for contractors

We will complete the following for your contractor business:

Register your business as a contractor with HMRC
Verify new subcontractors and inform you of the correct tax deduction rate
Send you a reminder every month when it is time to file your CIS return
Check all CIS tax deductions including qualifying materials
Complete payment and deduction statements to provide to your subcontractors
Submit your monthly CIS return to HMRC
Register ourselves as your agent, which authorises us to deal with all your HMRC correspondence
Represent you in any HMRC investigation
Provide ongoing advice and support
File everything accurately and on time ensuring all penalties are avoided

CIS for subcontractors

We will complete the following for your subcontractor business:

Check your tax status to confirm whether you are a subcontractor or an employee
Register your business as a subcontractor with HMRC
Advise on gross payment status and register for gross payment status with HMRC (if preferred)
Reconcile all CIS deductions with your sales invoices
Complete your tax returns on time
Calculate tax refunds ensuring the largest repayment possible
Chase up tax repayments with HMRC
Register ourselves as your agent, which authorises us to deal with all your HMRC correspondence
Represent you in any HMRC investigation
Provide ongoing advice and support
File everything accurately and on time ensuring all penalties are avoided

CIS Payment and Deduction Statement

When a contractor makes a CIS deduction they must provide the subcontractor with a CIS payment and deduction statement. This is the written evidence which the subcontractor can use to prove any tax deductions with HMRC.

The CIS payment and deduction statement must be provided within 14 days of the end of the tax month in which the payment was made. As the tax months end 5th of each month the reporting deadline is therefore the 19th.

CIS payment and deduction statement layout

There is no default template for the CIS payment and deduction statement. Contractors can make up their own templates to send to subcontractors.

The CIS payment and deduction statement must however show the following information:

The contractors name
The contractors employer tax reference
The month to which the payment relates, for example the month end 5th Aug 2020
The subcontractors name
The subcontractors unique tax reference
The verification number provided by HMRC during the verification process – this is only compulsory for higher rate deductions at 30%
The gross amount
The CIS qualifying materials amount
The CIS tax amount

Where subcontractors have gross payment status there is no obligation for a contractor to provide them with a CIS payment and deduction statement. However HMRC do consider it good practice to issue one.

2 or more payments in the same month

A contractor may pay a subcontractor more than once in the same month. As an example some subcontractors may wish to be paid weekly.

When this happens, the contractor can include all of the payments on a single CIS payment and deduction statement. This would therefore cover all the payments in the tax month.

Alternatively the contractor can issue several CIS payment and deduction statements one for each payment.

The choice is up to the contractor and it will typically depend on the software they are using. But, whichever option is chosen it is important to remember that the subcontractor must receive the CIS payment and deduction statements by the 19th.

CIS payment and deduction statement example

As mentioned above there is no default template for CIS payment and deduction statements.

However HMRC have included in their guidance an example of what the statement could look like. We often find that most software use something similar to this example set by HMRC, so we would recommend contractors use it as a starting point.

Payment and deduction statement HMRC example

CIS Materials

Qualifying CIS materials don’t suffer any CIS tax deductions. It is therefore important to know what does qualify as CIS materials. Examples on how different materials and costs affect the CIS tax charge.

Subcontractor costs recharged

The subcontractor typically charges the contractor a labour amount as well as other costs.

The other costs may however not qualify as CIS materials. As well as materials the subcontractor may recharge the following to the contractor:

Plant hire
Fuel
Accommodation costs

Plant hire – This is treated as qualifying CIS materials if the cost was incurred by the subcontractor. The subcontractor must therefore have paid a 3rd party.

Fuel – This is treated as qualifying CIS materials if the fuel was used in plant and machinery. Fuel relating to travel is therefore not a qualifying CIS material.

Accommodation costs – This is not treated as a qualifying CIS material. It is included within the labour charge and incurs CIS tax deductions.

CIS Tax Rates

There are currently 3 different types of CIS tax rates applicable.

The CIS tax rates are 30%, 20% and 0%.

CIS is not an additional tax. Any deductions suffered can be reclaimed from HMRC. Typically a business will use the deductions suffered to reclaim against their year-end tax liabilities.

Subcontractors who are 20% and 30% are therefore receiving less now from their contracts. But they will pay a lower tax liability in the future.

Subcontractors who are 0% receive the full amount from their contracts now. But they have no deductions available to offset against their year-end tax liability (or other taxes).

The CIS tax rate does not therefore affect the overall taxes payable. It does however affect the cash flow of the business.

CIS tax rates – 30% tax deduction

Subcontractors can choose not to register for CIS. But those businesses which choose not to register suffer the highest rate of deduction which is 30%.

Most subcontractors don’t want to and can’t afford to suffer a CIS tax rate of 30%. Therefore they opt to register.

Any business which regularly does work covered by CIS should register as a subcontractor.

By registering as a subcontractor the CIS tax rate then reduces to 20%.

CIS tax rates – 20% tax deduction

Businesses which register as subcontractors will suffer tax deductions at a lower CIS tax rate of 20%.

Subcontractors who suffer the CIS tax rate of 20% are known as net subcontractors.

Typically smaller subcontractors will choose to accept a CIS tax rate of 20%. The reason for this is the deductions suffered can be used to offset against their personal tax liabilities (Individuals or Partnerships) or the corporation tax liability (Limited Companies).

This can be useful for the smaller business as many of these struggle to save for their year-end tax bills.

Once a business expands beyond a certain size, the effect on cash flow of a CIS tax rate of 20% becomes too great.

Fortunately businesses can then register to become a gross subcontractor. They pay 0% CIS tax.

CIS tax rates – 0% tax deduction

Businesses can choose to register for gross payment status.

A business which is registered as a gross subcontractor receives payments in full from their contractors. There are no deductions.

This is great for cash flow in the short term. However it is important to remember that these businesses must be disciplined and put something aside to save up for their end of year tax liabilities.

CIS Tax Tip: Some businesses don’t change to gross status as they are worried about the end of year tax liability. The simple thing to do is when you change to gross status is set up a deposit bank account. Cash flow should improve as contractors pay you in full, therefore use the additional monies received to transfer into the new deposit account. If you suffer from cash flow problems at a future point you can transfer money back from the deposit account, reducing overdraft and bank charges. So long as you continue to save in the deposit account you can use these savings to pay your tax liabilities.

CIS Penalties

Contractors who fail to comply with the requirements of the construction industry scheme can receive large CIS penalties. The CIS penalties can easily be in the £000’s. Businesses could also lose their gross payment status which potentially could be disastrous for cashflow.

CIS penalties for late filing

If a contractor fails to submit the monthly return on time the following penalties are applied:

1 day late – £100
2 months late – £200
6 months late – £300 or 5% of the CIS deductions (whichever is higher)
12 months late – £300 or 5% of the CIS deductions (whichever is higher)
Over 12 months late – potentially an additional £3,000 or 100% of the CIS deductions (whichever is higher)

The CIS penalties are cumulative and they are for each monthly CIS return not filed in time.

CIS penalties for nil returns

Should a contractor fail to submit a nil monthly return a CIS penalty will automatically be issued. When this happens HMRC have confirmed that they will cancel the CIS penalties when the contractor confirms that the monthly return was Nil.

N.b A nil monthly return is simply a tax month in which the contractor has paid no subcontractors.

CIS penalties for incorrect employment status

Contractors must confirm that they have checked the employment status of their subcontractors. This is done when filing the CIS monthly returns.

Contractors have been known to take on workers and treat them as subcontractors for tax purposes. This is to avoid employment taxes which would be paid if taxed as employees. Declaring the wrong employment status can incur penalties of up to £3,000.

To check the status of your workers read our blog employee or subcontractor.

Poor record keeping

Contractors must keep records showing amounts paid to subcontractors and also any CIS tax deducted.

HMRC may at some point request to see the CIS records. Failure to keep these records could incur a penalty of up to £3,000.

The biggest CIS penalty of all

Most businesses are both contractors and subcontractors. Should the business as a contractor file late monthly returns it will have financial penalties to pay. However the much greater punishment if the business is also a subcontractor would be the removable of the gross payment status.

Losing gross payment status would mean the business no longer receives the full sales amount from its customers. Instead as a net subcontractor they would have 20% tax deductions. Potentially this could have a massive impact on cashflow as less money would be received from customers.

Account for it Ltd