CIS (Construction industry scheme) is a tax law relating to work done by subcontractors for contractors in the UK. It involves the contractor deducting CIS before paying each subcontractor invoice.
Work covered by the scheme is all construction and field trade work that is subcontracted. Included are contractors and subcontractors of any type - sole traders/self-employed or companies or partnerships. Any business whose main activity is not construction but spends more than £1m per annum on construction is deemed a contractor and construction/trade work for them as subcontracting e.g. work done for Housing Associations.
CIS does not apply to work done directly for and paid directly by home owners or businesses not engaged in construction. Other work not subject to CIS includes architecture, surveying, scaffolding hire when there is no labour involved, carpet fitting, delivering materials and running a canteen or similar facilities on a construction site.
Contractors are businesses that commission work from other businesses and subcontractors are businesses that do work for other businesses. Contractors and subcontractors, including sole traders, must register under CIS with HMRC and some may need to register as both. Employees of these companies do not need to register individually.
Avoiding CIS is only possible by criminal collusion between a contractor and a subcontractor. If CIS is not deducted when it should be and the subcontractor subsequently fails to pay their tax, the contractor will be liable for payment of the unpaid tax.
How do I register?
Contractors can register online at https://www.gov.uk/register-employer.
Subcontractors can register online at https://www.tax.service.gov.uk/account/sign-in?continue=/forms/form/CIS301302/new or by calling the CIS helpline on 0300 200 3210.
What is verification?
Officially before they start work and absolutely before they pay them the first time, contractors must verify their subcontractors at https://www.gov.uk/use-construction-industry-scheme-online. The verification process will tell the contractor which deduction rate to use. If the status of the subcontractor subsequently changes HMRC will inform the contractor. If a subcontractor is not registered they will be unverified and the contractor must deduct 30% from the subcontractor’s invoices.
Subcontractors may apply to receive gross payment (which means no CIS is deducted from their invoices) and it is up to HMRC to decide whether to allow this. Larger contractors typically receive gross payment. Most smaller subcontractors will have 20% deducted.
There are three tests to achieve gross status 1) Do work in the UK and run through a bank account; 2) Have a pretty clean record on timely tax and CIS submissions and payments and 3) Have the right level of sales which is £30k+ per owner or partner or director alternatively £200k+ total sales.
How does CIS work?
The contractor deducts CIS from the payment they make to their subcontractor at the rate specified by the verification process. This rate is deducted from labour costs plus any markup on materials plus personal expenses e.g. Mileage. CIS is not deducted from VAT or from the cost paid for materials, hire of equipment, pre-fabricating or manufacturing.
Here’s an example:
Labour charge £300 Materials £100 Total before VAT £400 VAT @ 20% £80 Invoice total (before CIS) £480 CIS @ 20% on labour £ (60) Total payable by contractor to subcontractor £420
The CIS is deducted up to and including invoices paid by the 5th of the month and is then paid by the contractor to HMRC by the 19th of the month.
The sole trader subcontractor receives a credit with HMRC for the tax paid and can deduct this from any tax or NI due when they submit their tax return. That’s why subcontractors need to keep track of their CIS credit. Subcontractors who pay employees through PAYE can claim back their deducted CIS each month. Any registered company that does not use PAYE has to write to HMRC to obtain a refund.
The contractor sends the subcontractor a payment less the CIS. The payment plus CIS should equal the invoice total. The subcontractor records the full amount, including CIS, in their books and the invoice is considered fully paid.
Example: Materials £100, Labour £300, VAT £80, invoice total £480. Verification process says deduct CIS at 20%. So CIS would be 20% of £300 = £60. So the contractor would pay £60 CIS to HMRC and £420 to the subcontractor.
Reporting is based on the date that the payment is made.
How does Powered Now help?
Powered Now has the following features:
- CIS must be switched on and then contractors (customers) can be marked as subject to CIS and suppliers (subcontractors) can also be marked as subject to CIS.
- When a sales invoice for a customer marked as subject to CIS is created, Powered Now estimates the amount of CIS that will be deducted.
- When a supplier invoice for a supplier marked as subject to CIS is input, Powered Now estimates the amount of CIS that should be deducted.
- Contractors record how much CIS they have actually deducted and how much they have paid, against each supplier invoice.
- Subcontractors record how much CIS has actually been deducted and how much they have been paid, against each sales invoice.
- Powered Now can electronically send basic information from subcontractors to contractors that enable the subcontractor to be verified.
- Powered Now can electronically send invoices from subcontractors to contractors saving re-keying.
- Powered Now can electronically send details of payments and CIS deductions from contractors to subcontractors saving re-keying.
- Powered Now produces reports enabling reporting mandated by HMRC to be satisfied. Note that the CIS reports are created from the payment records. If the payment records are not input, the CIS reports will not be correct.
What are the details?
Powered Now allows contractors and subcontractors to enter all the extra details needed to calculate and record CIS and produce the necessary reports. Users need to:
- Turn on CIS in Settings.
- Mark contractors and/or subcontractors as subject to CIS on their record in Contacts and then enter all of the CIS related information required (see below).
- Choose a category against all lines entered on invoices (sales and supplier invoices) that will be subject to CIS. Any markup on materials should be entered as a separate line subject to CIS. Powered Now then knows which lines require CIS to be deducted and which lines are exempt from CIS.
For subcontractors, if they are sole traders or partnerships the information required is the NI number and UTR (Unique Tax Reference). Subcontractors who are limited liability companies must provide their company name, company registration number and UTR. Both must input their expected CIS deduction rate.
Powered Now allows subcontractors to issue CIS invoices with the amount of CIS that they estimate should be deducted noted on the invoice. This is based on setting a category for each line on the invoice which determines whether the line is subject to CIS or not. The subcontractor can amend the amount of estimated CIS and give an explanation before sending the invoice.
Powered Now allows contractors to input CIS invoices. Although the amount of CIS to be paid is estimated, the contractor can over-ride this as it is their responsibility to get it right. They decide how much to pay the subcontractor and how much CIS to pay HMRC.
Contractors record against their subcontractor invoices the amount they have paid to the subcontractor together with the CIS they have deducted. Subcontractors record against their sales invoices the amount that they have received from the contractor together with the amount of CIS that the contractor has deducted.
CIS invoices with no payments recorded will not be reported.
The records of the amounts paid along with the CIS deductions allows Powered Now to enable both contractors and subcontractors to comply with mandatory CIS reporting to HMRC and from contractors to their subcontractors.
Sending information electronically using Powered Now
To connect electronically, from the supplier or customer screen, the user looks up the other party and if they are a Powered Now user, requests to link to them.
The recipient of the request to link decides whether to accept the request or not, a bit like Facebook.
When both the subcontractor and contractor are Powered Now users and are linked:
- Details are automatically imported from the other party
- Invoices can be sent electronically to the other party
- Payment records (including CIS payments) can be sent electronically to the other party but this is simply a record, not the payment itself
All information sent must be approved by the receiver before it is allowed into their system.
What reporting has to be done for HMRC?
- Pay CIS monthly to HMRC by the 19th of the month.
- Send a monthly statement to subcontractors stating how much CIS has been deducted.
- Produce a monthly return for HMRC by the 19th of the month. There are heavy penalties for failing to make a return or returning it late and these build up very rapidly.
Reporting is done through the HMRC online portal at https://www.gov.uk/use-construction-industry-scheme-online. Powered Now may automate submission of reports in the future.
When subcontractors report their sales for tax purposes, the full invoice total (ex VAT) is included, ignoring the CIS deduction.
A report from Powered Now can be used to provide subcontractors with their total CIS credit to put on the tax return.
For full details visit https://www.gov.uk/what-is-the-construction-industry-scheme and talk to your accountant.