CIS including The New VAT rules
What is CIS?
CIS stands for Construction Industry Scheme and is a special tax regime imposed by HMRC because there are so many mobile workers in the industry that HMRC do not believe they can track them all to get their taxes.
If the work your business does in any way touches construction (New built, conversions etc) then you will be caught by this regime so you need to know the rules.
The rules only cover hands on construction and relates services e.g electrician, plumber etc. Not consultancy e.g surveyor, architect, or supplies of just materials.
The rules only apply to supplies between businesses, i.e between contractor and subcontractor, not supplies to the general public or by PAYE employees.
When any subcontractor does work for a contractor then that contractor is obligated to deduct tax from the labour element of the payment before paying the subcontractor.
If the person supplying the labour is an employee then full payroll PAYE taxes needs to be deducted – not CIS taxes
If the “person” supplying the labour is in business then they should firstly be presenting an invoice for payment but secondly are subject to CIS. This includes any type of business: – Limited Companies, partnerships and sole traders.
This scheme is only relevant to the construction industry. There is currently a lot of debate about what services are or are not included, but basically if ANYTHING is being CONSTRUCTED then the work is caught – unless the labour is just a very minor installation charge for a product provided by a seller under supply and fit terms e.g. a bath or a boiler.
Those that have to apply the scheme is anyone who gets construction works done by others for others – e.g. councils, building companies.
CIS on your income
If you are the subcontractor working for a builder or council etc. then you may have CIS tax deducted from your invoices before payment. You should notify HMRC that this is likely before hand so HMRC can collate the information, as this tax is paid on your behalf. If you do not inform HMRC then you could be put on penalty rates.
You should receive a certificate to say this tax has been deducted, and for what period.
This certificate can then be used either on your personal tax return as a payment on account towards the income taxes that are due, or claimed against you business PAYE tax liability.
The total amount of the invoice before any deduction still counts as your income, so it is NOT a reduction in your fees.
When you accept this type of work then you will have to supply your National Insurance number and UTR number so the deductions may be properly reported to HMRC and hence appear on you account.
3 levels of tax may be deducted
- 20% if you have been good.
- 30% if you have been bad or the tax man can not place you e.g. not done your tax returns on time.
- 0% – only available to big companies that can prove how big and profitable they are and hence they can and do pay their taxes and will not run away.
Operating CIS on payments to Workers
If you are the contractor, engaging subcontractors, then CIS is much more onerous.
Your business will need to register to operate CIS – either alongside your existing PAYE scheme if you already have employees (using the same reference) or separately.
You will then need to:-
- Verify each subcontractor with HMRC – before you engage them, either online or by ringing HMRC CIS hotline with the subcontractors National Insurance number and UTR number – if not then they will not be on your list to submit a return and if their tax rate changes you will not be notified. Once verified they remain verified for 3 years and each time you use a subcontractor his verification is automatically renewed for a further 3 years. However if you have not used a subcontractor for over 3 years then you will have to call the hotline and verify them again.
- When it comes to payday you need to deduct CIS tax from the invoice presented for payment and only pay over the net amount to the subcontractor. Some subcontractors are helpful in calculating this tax for you but you are responsible for the calculations as well as the tax so you will need to check it. The tax is calculated at the given percentage (0%, 20% or 30% – see notes under CIS on income) on the total of the bill excluding any VAT charged and less any sum charged for parts or materials. If you do not operate the scheme correctly then HMRC can come back to you for the tax you should have deducted and you can end up paying that tax on top of the bill.
- Every month you must then submit an online return– even if nil – reporting the total of subcontractor invoices paid (excluding VAT), the materials/parts element excluded from the calculation and the CIS tax deducted. This return is for a Month ended 5th and is due by 19th or £100 per month penalties will be levied
- But you must also pay the CIS tax deducted from subcontractor payments, to HMRC, by the due date of 22nd of the month – it must be in HMRC’s bank account by that date.
- And finally you must issue each subcontractor with certificates showing the tax deductions (there is an HMRC template but you can design your own).
HMRC’s CIS Helpline: Tel 0300 200 3210
New VAT rules for CIS Subcontractors
If you and your CIS contractor/subcontractor are VAT registered, then new rules will apply to the VAT on those invoices from 1st March 2021
The VAT will be kept back, not paid on the subcontractors. The contractor will then need to add that Vat to their VAT return (in box 1), offsetting the usual claim in box 4 and hence reducing the actual cash claim.
VAT cannot just be missed off these invoices as the rate of VAT still needs to be specified by the subcontractor.
The rule applies to the whole bill – not just the Labour element.
This does not apply to supplies to the property owner/user.
The effect of this is a cash flow advantage to the contractor ( not having to pay out the VAT and claim it back) but a cash flow disadvantage to the subcontractor, as well as lots of extra admin.