A No-Nonsense Guide To The Uber-Complex CIS Scheme
Updated: Mar 20, 2019
When you’re working in the construction industry, there are some things that are worth knowing more than others, like these...
Example A) You probably don’t need to know how to spell pterodactyl, but you’ll probably want to know the difference between an engineering brick and a wheelbarrow.
Example B) You probably don’t need to know Tony Hawk was the first person to land a 900 but, for the sake of getting embarrassed in front a Homebase store assistant, you might want to know that tartan paint isn’t a real thing.
Example C) You probably don’t need to know which entrepreneurs became successful after 40, but you will definitely need to know all about the Construction Industry Scheme (or the CIS, for those who don’t want to type Construction Industry Scheme every single time).
Thankfully, that’s what we’re here for. So, to help you out, engineering bricks don’t have a wheel at the front (or any wheels at all), the tartan paint thing is a first day trick every labourer has fallen for and, last but by no means least, the CIS is basically something Her Majesty’s Revenue and Customs intro’d a few years back to try and clamp down on tax evasion, which construction companies were doing by deducting tax from subcontractors at source whether they meant to or not.
And that’s just the start.
So, without further ado, here’s everything you need to know about the Construction Industry Scheme and how it works.
The Overview Thing
If you’ve been an adult for more than 9 and a 1/2 minutes, you’ll know life is complicated. And the construction industry is no different. If anything, it’s even more riddled with complexities. It’s like hanging out with complexities on steroids - such as the CIS thing.
It’s one of the most complex areas of the construction business to negotiate. Period. Essentially, if you’re a contractor, you need to determine the status of the lads (and girls) you pay to carry out any work for you, which we all know can be more challenging than your first Rubiks Cube. Are they are a subcontractor? Or should they really be thought of as an employee? And why is this so important?
Well, it’s important because the CIS doesn’t apply to everyone, like the *staff employed by your company (*employee tax is deducted under ye olde PAYE scheme).
The CIS & Contractors Thing
There’s a pretty big area of greyness that has led to a lot of misunderstanding about whose considered a contractor in the eyes of the CIS, so here’s what you need to know: if you give money to subcontractors to complete any construction work on your behalf, or you spend an average of more than £1 million a year on construction over any given period of three years, the CIS is gonna look at you and say, “Hey, Mister Contractor Man, how are your tax payments going?”
Don’t panic, though. This shouldn’t cause much in the way of a headache. It just means you need to “verify” any subcontractors you pay and make sure they’ve registered with HMRC — something that can be done on the internet. If they have registered with CIS, simply give them a pat on the back and then deduct tax at a rate of 20%. If they haven’t registered with HMRC, hold back on said back-pat and deduct tax at 30% instead. See. We told you it was simple.
The Keeping Track Thing
Okay, we’re gonna get real for a moment: trying to keep track of your payments and tax deductions and whatnot is a real migraine-maker (which is why we recommend you give us a call and let us take all that stress away like a tasty after-work pint). And the reason it’s a real pain in the youknowwhere is because you need to keep records of everything (and then remember where you’ve kept those records).
These things you need to keep track of are...
1. The gross amount you’ve paid each of your subcontractors
2. The amount of tax you’ve deducted
3. The cost of the materials
4. And the verification numbers of your subcontractors
5. (Oh, and you’ll also want to give your subcontractor a written statement saying you’ve deducted tax under the CIS)
The Three Tests Thing
You know how we said this CIS thing was a bit complex? Well, we meant it. And here’s one of the most perfect examples ever: every so often, you will use a subcontractor that has successfully applied for ‘gross payment’ status. This means you won’t need to deduct any tax from their pay because they’re going to deal with their own tax payments come the end of the tax year. Easy, right? Wrong. For these guys (and girls) to receive no-tax-deducted-payments, they need to pass three tests. Are you ready?
1. The Business Test: The construction work is based in the UK, and the business was run using a bank account.
2. The Turnover Test: The individual subcontractor’s annual turnover is at least £30K, and that’s only if they’re a sole trader. If they’re part of a partnership, or they are a company, there will be a higher minimum requirement.
3. The Compliance Test: To pass the final “gross payment” test, the subcontractor needs to have been organised, by which we mean they need to have no outstanding tax returns and they don’t owe HMRC any money.
And this isn’t just a one-off thing. For a subcontractor to receive gross payments for their work, they need to pass these three tests each and every year.
The Subcontractor Requirements Thing
Okay, so there is nothing to say you have to be part of the CIS as a subcontractor. Nothing. Nada. Zilch. It’s just not a mandatory thing. However, if you do register - BOOM - there’s a nice chunk of tax savings to be enjoyed. The only compromise if you do register is: you must keep proper records of everything so that you can fill in an uber-accurate tax return, including things like the direct cost of your materials (once again, that’s something the Accounts Done team can do for you, just bell us).
And then there are the other hoops to jump through, like providing your contractor with correct information so that your status can be verified. If you don’t, you could wake up to a letter asking for a £3,000 fine for lying about it, and then receive a dollop of other penalties for not providing the appropriate records when required to (seriously, call us!)
The Potential CIS Issues Thing
We touched on the big grey area of working out who’s an employee and who’s self-employed at the beginning of this article-thingy, but we’re going to mention it again because it’s proper important when applying for the CIS. Get it wrong, make your payments late, or do anything like that and you could be slapped with a £100 fine, and that would just be annoying.
Thankfully, we have experience in exactly this area. It’s one of our world-famous expertise (excuse the exaggeration). So, if you’re in the construction industry but aren’t 100% sure whether to register for the scheme - or you just want a friendly chinwag to learn a little more about what you need to be doing - ping us an email and we’ll clear that muddled mind of yours. Sure, it probably won’t be the most exciting email you’ve ever sent or received, but it might be the most helpful, law-abiding and money-saving email, and that’s got to be worth some sort of kudos point, right?
Thanks for reading! For more bookkeeping-slash-accountancy-slash-finance advice, and a few weird-thoughts, please do follow us on Facebook and LinkedIn and then tell all your businessy friends to do the same.