If you work in the construction business as a contractor or subcontractor, you should be aware of your responsibilities under the government’s Construction Industry Scheme (CIS).
In essence, this is a scheme similar to PAYE that compels contractors to subtract 20 or 30% of every payment owed to a subcontractor and pay the difference to HMRC.
The plan has two goals: to prevent fraud and tax evasion in the construction sector, as well as to assist subcontractors in spreading their tax responsibilities over the year.
In 2021, there will be updates to the Construction Industry Scheme (CIS):
We will go through the basics of CIS later in this post, but first, you should be informed of the scheme’s recent and planned modifications.
To tackle abuse, a proposed finance bill is being prepared:
The government issued a draught finance bill in November 2020 that contained proposed reforms to the CIS to combat misuse and ensure HMRC can act promptly when the laws are breached.
The bill will address the following four issues:
- Different interpretations of the present regulation will be eliminated if the cost of materials clause is clarified.
- Changes to the CIS set-off amendment power, which now allows HMRC to remedy mistakes or omissions on sub-contractor deductions.
- Amendments to the definition of a “deemed contractor” are intended to discourage businesses from abusing the present regulations to avoid running the CIS.
- Amendments to the CIS registration penalty to broaden the extent of the punishment for providing false information while applying for GPS or payment under deduction in the CIS.
The changes will take effect on April 6, 2021, following consultation. As the date approaches, we will give you further details.
Reverse Charge on VAT:
HMRC’s new VAT rules for the construction sector, known as the “VAT reverse charge on construction and building services,” go into effect on March 1st.
If you are a VAT-registered subcontractor delivering qualified services to other construction industry contractors, you will have to indicate the proper rate of VAT on your invoices to contractors starting March 1, 2021, but you will not have to charge it. Instead, the contractor is responsible for reporting the VAT to HMRC.
The new system applies to all operations that are subject to CIS payment regulations. It applies to both normal and reduced-rate VAT supplies to VAT-registered contractors who then sell the services to ‘end-users,’ such as landlords, property developers, renters, or owners.
How the CIS performs:
CIS allows registered contractors to take money from subcontractor payments and send it to HMRC. The reductions of either 20% or 30% are considered advance payments for the subcontractor’s tax and NI contributions.
Contractors must sign up for the scheme. Subcontractors are not required to register, but if you are not registered, your payments will be deducted at a higher rate of 30%.
The CIS online tool allows registered contractors to file monthly returns and determine if a subcontractor is registered.
Covered work by CIS:
CIS includes the following sorts of work:
- Alterations.
- Building work.
- Decorating.
- Demolition or disassembly is a term used to describe the process of destroying or dismantling
- Heating, lights, power, water, and ventilation are all installed.
- Repairs.
- Preparation of the site
Contractors’ requirements:
If you are a contractor, you must register with the CIS:
- Construction work is done by subcontractors, who are paid by you
- Your company does not undertake construction work, yet you spend more than £1 million on it every year.
Before you hire your first subcontractor, you must first register with CIS.
You must determine whether or not the subcontractor should be treated as an employee. The HMRC has status guidelines.
Check with HMRC to see if subcontractors are registered with CIS before making any payments to them. The proportion of the money you deduct changes when you register.
Deduct 20% (for registered subcontractors) or 30% (for non-registered subcontractors) from their remuneration and pay the difference to HMRC.
To prevent fines, include all exclusions on a monthly return to HMRC and preserve complete and accurate records of all CIS payments and deductions.
Subcontractor’s requirements:
If you work for a contractor and are one of the following, you must register as a subcontractor with CIS:
- Self-employed.
- The proprietor of a limited liability corporation.
- In a partnership or trust, a partner.
Contractors must withhold 20% from your payments and send the deduction to HMRC each time they pay you. Contractors must withhold 30% of your compensation if you do not register for CIS.
You will not have to make a single huge payment at the end of the year if you pay your taxes in advance this manner. If your records indicate a lesser profit after permitted costs, you may be awarded a refund.
You can request for “gross payment status” when you register for CIS if you do not want contractors to make concessions before paying you.
CBM Accounting is here to help:
This is a quick rundown of the processes required to comply with CIS. If you have any questions about the scheme or the modifications, our team of experienced small company accountants would be happy to assist you. We can assist you with the best guide and decision-making for your business.
Get in contact with CBM accounting to learn more!
