Trading Method - Construction Industry Scheme (CIS)
There are special tax rules which govern those operating in the construction industry, known as the Construction Industry Scheme (CIS). The scheme sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.
What type of work falls within the scheme
The scheme covers all construction work carried out in the UK. As a general guide, construction operations cover almost any work that is done to:
- A permanent or temporary building or structure
- A civil engineering work or installation
Commonly the work might include:
- Site preparation
- Alterations
- Dismantling
- Construction
- Repairs
- Decorating
- Demolition
For a full list of activities covered by the scheme see the definition contained within Section 74 of the Finance Act 2004.
Contractor/Subcontractor
The scheme centres round the concept of a contractor and a subcontractor, therefore it is important to determine what these terms mean.
A contractor is any business, or other concern, that pays subcontractors for construction work.
Non construction businesses such as local authorities and governmental departments etc, will also be classed as a contractor under the scheme if their annual expenditure on construction operations equates to more than £1million over a period of three years.
A subcontractor is a business that carries out construction work for a contractor.
When operating as a subcontractor that individual usually has the choice of operating as an employee, a sole trader or a limited company.
Under the employee route, all of the individual’s income will be classed as earned income and as such the contractor will deduct all relevant taxes due by the individual before any monies are paid to him.
Under the sole trader or limited company option the individual must first be able to show that they are genuinely self employed i.e. not an employee of the contractor. There are then specific rules which govern the amount of tax to be deducted by the contractor from the individual or company before monies are paid to them.
To determine how much is to be deducted from the individual, the contractor must contact HMRC who will then verify the individual’s status. HMRC will confirm the subcontractor’s payment status as being either:
Gross - no tax deducted
Net - the contractor must deduct 18% from the gross amount
Higher rate - 38% must be deducted from the gross amount
The verification number issued by HMRC must be noted on all payments to the subcontractor as backup for the type of payment being made.
There are then additional requirements for the contractor to complete specific declarations to HMRC (monthly returns) and to issue the subcontractor with a payslip (in a specific format as detailed in the legislation guidance). If the contractor does not adhere to these rules there are heavy penalties attached.
Further guidance on these rules and additional factsheets can be found on the HMRC website - www.hmrc.gov.uk/new-cis. The main guidance on the new scheme is booklet CIS340.