The Construction Industry Scheme (CIS) aims to combat non-compliant self-employed workers who fail to register their cash-in-hand pay with HMRC. As the name suggests, this is aimed at builders and people working in that business line.
How does it work?
CIS works by having a contractor deduct money from a subcontractor's payments and pass it to HMRC.
The deductions count as advance payments towards the subcontractor's tax bill.
While contractors must register for the scheme, subcontractors are not obligated to; however, not registering would result in subcontractors' deductions being made at 30% instead of 20%.
CIS tax is only deducted on labour. If a subcontractor is paid £300, but £100 was payment for money spent on materials, then CIS tax would be deducted from the £200 labour costs. Seeing as 20% of 200 is 40, the subcontractor would take home £160 and have a prepayment of £40 towards their tax bill.
A CIS contractor must pay HMRC any deductions they've made every month or quarterly in some cases. If you pay them monthly, the payments must be made by the 22nd of each month (or the 19th if you're paying by post).
Problems with CIS
As previously stated, if subcontractors do not register for CIS, their deductions will be made at 30% instead of 20%. However, if a contractor fails to register, there could be a £3000 fine for not keeping CIS records and a £100 monthly penalty for every missed return.
Contractors are the backbone of the CIS scheme; they must fulfil their role correctly because the domino effect could amplify their mistakes. For example, a subcontractor could be expecting their tax to be paid through the CIS scheme via their contractor, however, if the contractor isn't registered for CIS, forgot to make the deductions, or even worse, attempts to pocket the payments for themselves, then the unsuspecting subcontractor may be hit with a massive tax bill that should have already been prepaid and will now have to dispute. The effects of the contractor failing to register their workers' CIS payments to HMRC can be costly and stressful for everyone involved.
Similar scenarios have caused much panic and confusion throughout the industry, so it's important to ensure you go about CIS correctly. We recommend obtaining and keeping all records of paid CIS and choosing Short & Sons Accountants to manage your tax matters.
We hope this comprehensive introduction has helped with your understanding of the construction industry scheme, however if you have any queries, please get in touch!