Today we’re going to talk about the CIS (Construction Industry Scheme) scheme! (Quick note; if your business is not in any way involved in construction then you don’t need to read on. But you can – for fun!)
Let’s start at the beginning shall we? Why does the construction industry have its very own little scheme?
Well, CIS was introduced in the 1970s as a way to reduce tax evasion. More so than lots of other industries, many who work in construction are self-employed (not on a payroll scheme, therefore not having their earnings reported to HMRC for them) and therefore the temptation on April 6th might be to declare a little less income … to avoid that hefty tax bill!
CIS means that 20 (or 30, we’ll get to that in a bit!) percent of the gross pay of a sub-contractor is already taken off of the pay they receive into their bank, and sent over to HMRC for them. The gov.uk website sweetly puts it that ‘the deductions count as advance payments to the subcontractors tax and National Insurance’. Then, it’s much more likely that come the end of the financial year, they’ll be due a refund, than having to pay more over (nice for some!)
Who should be on CIS?
The easier question here is who SHOULDN’T be on CIS? Really, the only specific exemptions within any construction work are the following, and if you’re not falling into one of these categories, then most likely you should be on it;
- Surverying and architecture
- Carpet fitting
- Production of construction materials
- Working on site, but not in a way related to construction eg in the canteen
Next question, are you a CIS Contractor, Sub-Contractor, or both?
- If you are a self-employed worker, and you are hired by companies to work in construction on work for which they invoice the client, then you are a sub-contractor.
- If you are said company who receives directly the payment for work done, you are a contractor.
- And, you may well do a bit of both! Well then, you will need to register as both! (Note; if you are employed by your company, then you personally do not need to have CIS deductions, but the income to your company does)
You said some have 20% deducted and some 30%…?
Oh yeah, that! This is HMRC’s way of giving sub-contractors a little prod up the backside to get themselves registered. Registering will reduce your deduction rate down to 20%. As a contractor (using sub-contractors) you will have to verify with HMRC the sub-contractors oyu use, and at this point, you’ll be told whether they’re on 20 or 30% deductions.
How do I work out how much to pay my sub-contractors?
This is pretty simple (especially with Pink Pig having already set you up nicely on Xero!) Once your bills are correctly set up, you will see that it takes the GROSS (so not including any expenses to be reimbursed) and then deducts off of that figure. Remember that your sub-contractor is self-employed, so his personal mileage travelling to work, his own tools etc, are his own problem on his tax return at year end!
So, what if I’m both deducting and being deducted from, how do I get my money?!
Each month, 2 reports will be filed to HMRC by your lovely Pink Pig team. One will tell them who your sub-contractors are, how much you’ve paid them, and how much you’ve deducted from them. The total deductions are what need to be paid over to HMRC.
The second report tells HMRC how much your company has had deducted from income during the month. You take the incoming deductions away from the sub-contractor deductions. If the sub-contractor deductions are more, you will need to pay that difference over to HMRC. If your deductions are more, then begins your battle with trying to get that back! Jokes… A refund claim can be submitted once the final return(s) for the tax year are submitted. This can either be paid back to you in cash or offset against other outstanding tax bills.
So, it wasn’t really that hard, was it? We are always here to help with any questions you may have, to help you sign up for the scheme if need be, verify a sub-contractor, and file your reports, so you’ve not really got anything to worry about – just complete our quick questionnaire and book a discovery call! Any questions though, as always, feel free to contact us!