Chapter 26 - Construction Industry Deduction Scheme

Question 1

Introduction

Answer 1

CIS requires contractors to withhold tax on certain payments made to sub-contractors.

Question 2

What is a Contractor

Answer 2

Anyone carrying on a business trade which includes construction operations. E.g:
- Builders
- Specified bodies - local authorities, NHS trusts
- Deemed contractors - where annual spend on construction over 3 years exceeds £1 mil
NOT HOMEOWNERS

Question 3

Construction Operations

Answer 3

Wide variety. Includes:

• Construction
• Alteration
• Repair
• Extension
• Demolition
• Work on air con/drainage/plumbing/electrics/painting

Question 4

Sub-Contracters

Answer 4

‘He is under a duty to the contractor to carry out the operations, o to furnish his own labour or the labour of others in carrying out the operations’
They are the people, partnerships or cos:
- actually providing the labour
- painter, decorator, electrician, bricklayer etc
It is possible to be a contractor and subcontracor

Question 5

Tax Treatment of Payments

Answer 5

Payments by a contractor to a sub-contractor will be made:
- gross; or
- under deduction of tax
If tax is withheld by the contractor, it’s done so at:
- 20% - if sub-contractor is registered with HMRC
- 30% if they aren’t; or
- under PAYE if they’re treated as an employee of the contractor

Question 6

Gross Payment

Answer 6

Payments can be made gross if the sub-contractor is registered for gross payment. Registration is granted by HMRC if certain conditions are met:

• business test
• turnover test
• compliance test

Question 7

The Business Test

Answer 7

Two parts to the test:

• sub-contractor must be a UK business which provides labour to carry out construction operations
• the business must be carried on by means of a bank account

Question 8

The Turnover Test

Answer 8

Pass if:

• construction turnover of more than £30k for the 12 months before application (company)
• turnover of £30k per partner in the year before application for a partnership
• alternative: if the company or partnership had annual net turnover of £100k or more in the 12 months before application it will pass.

Question 9

The Compliance Test

Answer 9

Sub-contractor business must have kept all tax affairs up to date during the 12 months before application. Minor non-compliance failures may be ignored.

Question 10

Verification

Answer 10

HMRC will verify if a sub-contractor is verified. They will advice the contractor if they are and whether payment should be made gross or net of 20% tax.
If they aren’t, they will have to be paid under deduction of tax at a flat rate of 30% or via payroll if the sub-contractor is an employee

Question 11

The 20% Deduction Rate

Answer 11

Sub-contractors that are registered with HMRC but not registered for gross payment are paid under deduction of 20% tax on the VAT exclusive costs of:

• labour element
• travelling expenses/subsistence
• profit element only on materials

Question 12

30% Deduction Rate

Answer 12

Where the sub-contractor isn’t registered with HMRC the VAT exclusive cost of labour, travel + sub and material profit is subject to a 30% deduction

Question 13

Returns of Information and Payment of Tax

Answer 13

Contractor remits the 20/30% deductions to HMRC monthly. They’re made 14 days from the end of the tax month, ie by the 19th (22nd if electronic).
250+ employee contractors must pay electronically if total monthly payments are less than £1,500 on average. Payments can be made quarterly.

Question 14

Payment of Tax Cont.

Answer 14

If the amount paid to HMRC is less than the actual amount due, it is treated as the right amount if not underpaid by more than £100.
Contractor must submit a CIS300 monthly no later than the 19th. Will show the amounts paid to sub-contractors, the amount of tax deducted and whether any materials were provided by the sub-contractor

Question 15

Late Submission of Returns and Payment Deductions

Answer 15

£100 penalty if filed late.
£200 if more than 2 months after filing date
£300 or 5% of deduction is more than 6 months after
£300 or 5% of deduction if more than 12 months after
If a return is over 12 months later and the info required to assess the tax has been withheld, the penalty will be £1,500 or 70% of deductions. Increases to £3,000 or 100% where there has been concealment.
Interest is charged from filing date to payment

Question 16

Payment Statements for Sub-Contractors Under Deduction

Answer 16

Statement must be given to the sub where the contractor has deducted 20 or 30%. At least one must be issued each tax month. Must be issued by the 19th, penalty of £300 if not provided plus daily penalties of £60 for continuing failure

Question 17

Employment Status in the Construction Industry

Answer 17

CIS300 must include a declaration that none of the payments included on the return is one in respect of a contract of employment

Question 18

Sub-Contractor’s Tax Position

Answer 18

Subs will file annual personal tax or CT returns at the end of the year in the usual way.

• individuals treat like a POA of income tax on SA
• companies set off against monthly PAYE/NIC or CIS payments (excess is refunded or offset against CT liab)

Question 19

Scheduled Review

Answer 19

HMRC review subs compliance record once a year. If they fail, gross payment is withdrawn unless the sub appeals successfully.
Certain failures are ignored

Question 20

Interaction with IR35

Answer 20

If sub is carrying on construction opps wholly or mainly for one contractor, HMRC will apply the IR35 rules to the intermediary company in the usual way.
The intermediary company may suffer tax at source on payments made to it, and will claim credit for the tax suffered as normal