What is CIS?
CIS (Construction industry scheme) is a tax law relating to work done by subcontractors for contractors in the UK. It involves deducting tax from the payment to be made for each subcontractor invoice.
Work covered by the scheme is all construction and field trade work. Included are subcontractors of any type - sole traders/self-employed or companies or partnerships. Included are all trade and construction contractors as well as as any company that spends more than £1m per annum on construction.
CIS does not apply to work done directly for and paid directly by home owners. Work not subject to CIS includes architecture, surveying, scaffolding hire (with no labour), carpet fitting, delivering materials, running a canteen or similar facilities on a construction site.
Contractors and subcontractors must register under CIS. Employees do not need to register individually.
Avoiding CIS is only possible by criminal collusion between the contractor and subcontractor.
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 0300 200 3210.
What is verification?
Before they start work, contractors must verify their subcontractors at https://www.gov.uk/use-construction-industry-scheme-online and the verification process will tell the contractor which deduction rate to use. If a subcontractor is not registered they will be unverified and the contractor must then 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. Most commonly subcontractors will have 20% deducted.
How does CIS work?
The contractor deducts CIS at the rate specified by the verification process. This rate is deducted from labour costs, any markup on materials and personal expenses e.g. Mileage. CIS is not deducted from VAT or the cost of materials.
The deducted CIS is paid by the contractor to HMRC. The subcontractor receives a credit with HMRC for the tax paid and can deduct this from any tax due when they submit their tax return. That’s why subcontractors need to keep track of their CIS credit. Subcontractor companies paying employees through PAYE can claim back deducted CIS each month.
The contractor sends the subcontractor payment for the invoice total, but with the amount of CIS deducted from this total. The subcontractor records the full amount, including CIS, in their books and the invoice is marked as fully paid.
The contractor must send a monthly statement to the subcontractor stating how much CIS has been deducted.
Example: Materials £100, Labour £300, VAT £80, invoice total £480. CIS deducted would be 20% of £300 = £60. So the contractor would pay £60 CIS to HMRC and £420 to the subcontractor.
How does Powered Now help?
From Powered Now version 4.2, Subcontractors can enter extra details into Powered Now that are required for CIS. Contractors can enter their details and also details of their subcontractors including the results of verification. Subcontractor details can be sent electronically where both the subcontractor and contractor are Powered Now users.
Powered Now allows subcontractors to issue CIS invoices with the amount of CIS that is to be deducted automatically estimated. 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 CIS and give an explanation.
Powered Now allows contractors to input CIS invoices. Although the amount of CIS to be paid is estimated, they can over-ride this as it is their responsibility to get it right. They how much they are paying to the subcontractor and how much CIS they will pay to HMRC.
Where both the subcontractor and contractor are Powered Now users, invoices and the record of payments can be exchanged electronically.
When all of the information has been provided correctly, Powered Now provides reports that contain all of the information needed to complete CIS returns.
What reporting has to be done to HMRC?
As well as paying the CIS monthly to HMRC, contractors have to send details of CIS deductions monthly to their subcontractors and produce a monthly return to HMRC. 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 this process in the future.
When the subcontractor reports their sales for tax purposes, the full invoice total (ex VAT) is included, ignoring the CIS deduction.
For full details visit https://www.gov.uk/what-is-the-construction-industry-scheme .