Commission enough building work and the government starts to treat you like a building contractor, making you responsible for ensuring that everyone from the scaffolders to the steel fixers pays their income tax. It probably feels like a long way from your day job but the Construction Industry Scheme (CIS), introduced to stop income tax evasion in the building trade, puts it firmly on your agenda.
Originating as a way to stop builders paying their labourers in cash from which they were subsequently expected to deduct and remit income tax to HMRC (which they didn’t), the CIS requires contractors to deduct money from the payments it makes to subcontractors – the amount equivalent to the income tax due on the labour costs - and pay it direct to HMRC as tax. Subcontractors don’t have to register for the Scheme, but if they don’t, tax will be deducted at the higher rate, so there is a strong incentive for them to participate.
What can put non-construction businesses in the firing line inadvertently is the way the Scheme defines Contractors. CIS will apply to you if you pay sub-contractors for work, or if your business spends more than £1 million on construction works over a three-year period. For a business that spends money looking after its property, that threshold isn’t very high. The exception to this rule, is where work is undertaken to property for your own business use.
The Scheme applies to most construction activity, including permanent or temporary buildings and structures, roads, bridges and other civil engineering works. It also covers typical construction work like preparing building sites, laying foundations and providing access works. Crucially for businesses or property owners it also covers carrying out alterations, repairs and decorating, installing heating, lighting, power, water and ventilation systems, and cleaning up when the work is complete.
If you fall inside the definition of a ‘Contractor’ under the Scheme you have to register with it, because it will be your responsibility to make the necessary deductions of tax from your subcontractors. Before you can do this, you need to verify their status with HMRC. That means establishing whether they are registered ‘Gross’, in which case you don’t need to make any deductions. If they are registered but not Gross you have to make a 20% deduction, if they aren’t registered, a 30% deduction. The amounts you withhold from these payments must be passed to HMRC.
As a Contractor under the Scheme, if you fail to notify HMRC of your payments to subcontractors correctly you could be faced with a fine of up to £3,000.
Returns have to be made by the 19th of each month for the previous tax month - so May’s returns must be made by 19th June. Late returns will incur penalties starting from £100 for one missed day. Even if your business is based outside of the UK, the CIS will apply if you carry out construction work as a Contractor or sub-contractor in the UK.
So how can we help you? For a start we can establish if the Scheme applies to you or not. If it does, we have a dedicated team of payroll specialists, who understand tax law and the day to day application of the Scheme. Currently we advise more than fifty of our retained clients about CIS compliance. In most cases we can deliver a bespoke service for you, handling your registration to the Scheme, establishing the tax status of your subcontractors and processing monthly deductions to ensure your business continues to satisfy HMRC requirements.