Explaining the CIS scheme

:: 00:00

The construction sector is one of the largest sectors in the United Kingdom. There are over 3.7 million people that work in that sector, and that's approximately 9% of the UK workforce. That's some numbers indeed. Backing that up, the CIS scheme or construction industry scheme was introduced in 1971, primarily to combat tax evasion within the sector itself.

:: 00:23

In this podcast, I'm going to be covering what the CIS scheme is, what are contractors and what are subcontractors, what the requirements are in terms of reporting, in terms of registration, and more importantly, how tax should be correctly dealt with under the CIS scheme itself.

:: 00:43

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

:: 01:09

Hi folks. Welcome to another weekly episode of I Hate Numbers, the podcast that's there to improve your financial awareness, improve your money mindset, help your business make more profit, save tax, and save time. What a fantastic combination of things we have there. Let's crack on with the podcast. Now, firstly, let's establish what a contractor is and what a subcontractor is.

:: 01:32

Typically, a contractor is an individual or a business, a company that provides services to a client for money under a contract for services. In terms of the regulation requirements here for registration, you must register and notice the word must as a contractor if you either pay subbies or subcontractors for construction work, or your business itself does not do construction work, but you spent more than 3 million pounds on construction in the last 12 months since you made your first payment. Now a subcontractor, or a subbie to give it its working title,

:: 02:04

is somebody who takes on work and supports the contractor in either building that house, building that bridge, building that hospital, take on that construction project, and they take on work that a contractor cannot do because they don't have adequate resources or perhaps the skill sets to perform that task.

:: 02:21

Now, if you are a subcontractor, you must register with HMRC if you carry out construction work for a contractor. Now, it's possible, by the way, to be both a contractor and a subcontractor. If that applies to you, then you must register in both capacities. Now, subbies range from the individual, one-person operation,

:: 02:43

to very large multinational companies, and they carry out work for a building contractor. Imagine somebody who's got a contract to build a hospital, to build a bridge, a highway, it's going to be next to impossible for them to perform all those tasks, so subcontractors will be an important part of that supply chain.

:: 03:02

Now it could be, you could be a subbie who's a plasterer, an electrician, a ground worker. Any of those tasks are going to be fitting the bill. Now, having decided what a contractor and a subcontractor is, and the fact is you must register, please folks, check out the show notes for some links as to how you can do that.

:: 03:20

Let's have a look at the type of work that's covered by the CIS scheme. Now, CIS covers most construction work to a permanent or temporary building or structure, civil engineering work like roads and bridges, and for the purposes of this CIS scheme, construction work includes site preparation, so for example, laying the foundations, providing the access works, any demolition or dismantling the actual building work itself,

:: 03:45

alterations, repairs and decorating, installing systems for heating, lighting, power, water, and ventilation, or cleaning the inside of the buildings once the construction work has been completed. Now, there are exceptions. You may work within the construction industry, but it doesn't necessarily mean that you have to register

:: 04:02

as a subcontractor or a contractor. So, if your job of work involves architecture or surveying, you don't have to register. It doesn't apply to you. If you hire out scaffolding, but there's no labor provided, then you are also accepted. Other things including carpet fitting, making the materials that are used in the construction, delivering the materials,

:: 04:23

and working on construction sites is clearly not a construction activity. Very important, nevertheless. So if you provide canteen facilities or site facilities like toilets, then that is not covered by the CIS scheme. So, wipe your brow and any invoices that you present to your client can be paid in full

:: 04:41

without any deductions. Now, I've mentioned the idea of deductions, and it's really critical that we do them correctly. A subcontractor and a contractor is seen as an unpaid tax collector. The assumption is that ignorance is no excuse, and all the detailed rules and regulations that are covered by the CIS regulations are assumed to be known by the subbie or the contractor or their agents.

:: 05:06

Unfortunately, over the years, I have seen mistakes being made here, and it's quite understandable because it's quite a complex area. But, however, having said that, there are some common mistakes that we can certainly avoid. Now, under the CIS scheme, contractors take off money from their subcontractors' payments and they pass that on to HMRC.

:: 05:26

HMRC, by the way, folks, is Her Majesty's Revenue and Customs tax office for one of a better term. Now, that tax collection responsibility, those deductions are either made at the rate of 20% or 30%. Now, 30% typically is if you are not registered as a subbie. If there are any issues with your tax records or compliance, then that rate will be dictated to, and a contractor must get verification as to whether to apply from HMRC.

:: 05:55

Now, you could also be what's called a gross certificate holder, more of that later on in this podcast. Now, subbies will typically invoice for their time, materials, travel, subsistence, accommodation, and if the subcontractor is VAT registered, then VAT will also be included on that invoice. However, many advisors, many businesses, many companies incorrectly deduct CIS only off the labor element, and that's completely wrong.

:: 06:24

Now, I've come across many people who've made that mistake, and this is one of the reasons that prompted this particular podcast. If HMRC decides to investigate with more vigor, then obviously there could be a lot of problems coming down the line. Any tax that's not being correctly accounted for, by the way, will typically mean pay the tax over, and fines and penalties will follow as well.

:: 06:44

Now let's have a look at the idea in terms of a subbie where payments include travel, subsistence and accommodation. That's quite common. Now where a construction contract requires the contractor to pay a subbie expenses such as traveling and accommodation, then all those payments form part of the overall value of the contract.

:: 07:04

What that means is all those items that are invoiced have to have CIS deductions applied at either 20 or 30. Now, I mentioned something called a gross certificate holder, so the value of your turnover over a six-month period is over a certain value, you can register for what's called a gross certificate, and therefore, what that means, once you get that certificate, you invoice your client,

:: 07:26

no deductions are made accordingly. Now, whether that's a good thing or a bad thing, I'll comment at the end of that podcast. Now, when are CIS deductions not due? Now, effectively, when the subbie is allowed to use the contractor's own facilities such as the vehicles or accommodation, then no deduction will be due.

:: 07:44

However, if the third party facilities are being used, also no deduction will be due. Now, that's not that common. Most of the clients that I deal with, most of the people I come across, they'll be using their own vehicles, they'll be making their own accommodation, provision, they'll charge for their subsistence, and all that is subject to CIS deductions.

:: 08:02

Again, either a 20 or 30, or if you do have a gross certificate, no deductions will be taken off. Now, one way around that, if the subcontractor doesn't want to suffer that tax at source is for the contractor to arrange for that accommodation directly themselves, and they receive the invoice directly, therefore no burden force on the subcontractor.

:: 08:23

Now, a couple of things to note here, folks, in terms of the reporting requirements. So if you are the contractor, when you present your invoice to your client, your client may or may not take off CIS off your invoice. When you pay your subbies, you have to take tax off their invoices as well. So if you imagine you've got a seesaw now, a set of scales where you've got CIS that you've suffered on one side and CIS that you've had to pay out on the other side.

:: 08:49

Now, if you are a registered company, what happens is you are allowed to offset the CIS that you suffered during the month against the CIS that you've had to pay out. Now, if there is an excess, you've suffered more than you've actually deducted, then that excess remains on account until the end of your financial year when you can offset that against any corporation tax or other tax liabilities.

:: 09:14

Now, if you are a sole trader, that offset is not allowed and what will happen is you’ll suffer that and that claim has to be made when you prepare and submit your personal tax return. Now, let's just summarize what we have. We've talked about a subcontractor and a contractor. You can be both, and if so, you need to register separately for both of those as well.

:: 09:34

We've talked about the rates of deduction, which can vary from zero if you're a gross certificate holder to as high as 30% if you're either not registered or if you've got any issues with your tax records. If they're not brought up to date, then HMRC will say that 30% has to be withheld from that. Remember, this is not a discretionary choice for the individual contractor.

:: 09:55

It’s what HMRC will tell you through the verification process. When you invoice your client for your services, whether that's travel, subsistence in your labor, all of that is subject to CIS deductions. Returns have to be made typically on a monthly basis to HMRC and the primary role of the contractor and the subcontractor is going to be acting as the tax collector on behalf of HMRC. Folks, I hope you've got some value from this podcast.

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We look forward to you joining us next week for another I Hate Numbers episode.