The objective behind CIS
The current iteration of the Construction Industry Scheme (CIS) came into effect on 6 April 2007 but it has been refined in the years since its introduction. All permutations have been created to try and overcome the belief that many payments in the construction industry were not reported for tax purposes. CIS prevents this by operating a system which is not dissimilar to PAYE. The payer has an obligation to consider the status of the party to whom payments are made and, in certain circumstances, withhold tax from the payments. As the operation is similar to that of PAYE, it is the PAYE section of HMRC which administers CIS.
What is covered by CIS?
CIS applies to the labour element of a construction contract. Construction contracts are defined in legislation and go beyond simply building structures. Examples of construction operations include painting and decorating and preparative work such as site clearance and scaffolding.
Who is affected by CIS?
The legislation specifically excludes some operations from CIS. Examples include the professional work of architects and surveyors, and security installation. However, if any of those parties take part in the management of construction work then they are within CIS.
For CIS to apply, operations must take place in the UK, including the UK territorial waters, and can include marine construction. The residence of the parties is not relevant; it is the location of the works which are important. This can be overlooked by non-UK businesses seeking contracts in the UK.
CIS applies to the labour component of construction. If there is one contract that covers all construction operations then CIS considerations will be relevant to the entire contract. This applies even if separate invoices are raised for separate parts of the contract. It may be necessary to split the project into separate contracts so that there is a single contract for labour and CIS would only apply to that contract.
CIS responsibilities for contractors
CIS applies whenever there is a contractor and sub-contractor relationship. The legislation defines both and gives an extensive list of those persons who are treated as contractors for its operation. If CIS is relevant, then the contractor has an obligation to verify the status of the sub-contractor and apply the relevant regulations to payments made to them. It is the impact of payments which is particularly important to understand. This is due to the cashflow impact for the sub-contractor.
If the sub-contractor is not registered with CIS then the contractor must deduct tax at 30% from payments to the sub-contractor. If the sub-contractor is registered then the deductions falls to 20% unless the sub-contractor is registered as a gross status party in which case no deduction is required. The deduction is against the VAT exclusive payment and does not apply to the cost of materials of the sub-contractor. If the sub-contractor does not confirm their cost of materials then the contractor should make a reasonable estimate.
There are regulations which define how the contractor must verify the status of the sub-contractor and the frequency of CIS Returns. All of these administrative tasks must be done online.
If the sub-contractor is a company then tax deducted from payments received by it can be offset against its own PAYE and National Insurance Contributions, deductions under CIS from payments made to its own sub-contractors and Corporation Tax on its profits. If the sub-contractor is not a company then tax deducted is offset against its Income Tax liability and National Insurance Contributions. The sub-contractor who is not a company will therefore claim relief for deductions at a later time than a corporate sub-contractor.
Registering for Gross Status
There are obvious advantages to registering for gross status and there are conditions which must be satisfied before gross status can be attained. These include the method of operating in the UK, turnover thresholds, group structure and demonstrating a good compliance history with HMRC. If the compliance history is damaged during construction operations then HMRC can revoke gross status which may have a catastrophic impact on cashflow. Maintaining a good compliance history with HMRC is therefore paramount.
How we can help
We have considerable experience of CIS matters including split contracts, definitions of contractors and sub-contractors, the practical impact of professionals providing project management services and preventing loss of gross status. All of these ensure that the cashflow impact of CIS is minimised.