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Under the Construction Industry Scheme (CIS), contractors who engage sub-contractors to carry out work under a construction contract have very specific tax and filing obligations.
An example of this type of relationship might be a main building contractor engaging other trades (such as plumbers, electricians or plasterers) to carry out work under a contract with the builder, as opposed to directly with the customer.
In these instances, the contractor has two taxes to consider; VAT (see VAT – considerations for both contractors and sub-contractors below) and CIS withholding tax.
IR35
Contractors should also have an understanding of how the IR35 rules apply to them and their sub-contractors. This is a complex area of taxation, so please reach out if you are unsure.
Broadly, contractors should assess the working relationship with all sub-contractors to ensure that HMRC would not deem the relationship to be akin to that of an Employer; Employee. There can be National Insurance and tax consequences (and penalties) for the contractor if they get this wrong and HMRC raise an enquiry.
HMRC have created a helpful tool (the Check Employment Status for Tax tool; or CEST) to assist in determining how they would view working relationships for tax purposes.
If the tool doesn’t give you the result you were expecting, or you need any further assistance please reach out.
CIS Witholding Tax
When a construction business begins to operate as a contractor, step 1 is to register as a contractor with HMRC. In order do this, the business must first register as an employer. On receipt of the business’ PAYE and Accounts Office reference numbers, you can then begin work as a CIS contractor.
Contractors must then verify all subcontractors via HMRC or appropriate software, to determine their taxation treatment. If sub-contractors are not formally registered under the CIS system, tax must be deducted from their labour costs at the higher rate of 30%, for sub-contractors formally registered as standard treatment tax should be deducted from labour costs at a rate of 20%, and for those subcontractors who are registered for gross treatment there is no requirement to deduct tax at all.
There is a requirement, on a monthly basis, to pay sub-contractors and to deduct CIS withholding tax at the relevant rate (per the above), from the labour element of their invoice.
Each sub-contractor should be issued with a monthly CIS tax deduction certificate, and a CIS return submitted to HMRC, with any tax due also paid over to HMRC. Tax months run to the 5th of each month with the relevant filing deadline for each month being the following 19th. The contractor will be issued with a £100 penalty for every missed monthly filing!
All this sounds like a great deal of admin for busy construction businesses who’s primary focus will always be getting projects over the line.
So why not let us take the headache and uncertainty out of it all by operating your CIS contractor obligations for you?
VAT – considerations for both contractors and sub-contractors
Under construction contracts, the treatment of VAT differs depending on who is being invoiced. If the invoice is being raised between two VAT registered construction businesses, neither of which are the “end user”, the VAT should be ‘reverse charged’ on the invoice (effectively resulting in zero VAT being charged).
The VAT is charged only when the work is invoiced to the end user (so the customer for whom the overall works are taking place).
This is a relatively new area of CIS taxation and is still not very well understood or implemented within the construction industry.
Fail safe bookkepping!
At TaxGem™ we can set up your bookkeeping software (Sage) in a way that makes this process fail safe, by linking the correct VAT codes and treatment to customers or suppliers depending which link in the construction process each entity represents.