Since its inception in 1999, the Construction Industry Scheme (also known as CIS) has undergone many changes. The CIS was initially brought in with the aim of applying more rigorous testing and compliance for any businesses that wanted to receive any form of gross payment from a contractor or contractors. Read our Construction Industry Scheme guide to find out more about CIS and the most important terms you need to know.
2007 – CIS verification becomes mandatory
In 2007, the Construction Industry Scheme was introduced in its current format. Thereafter, online subcontractor verification became mandatory and three new classes of subcontractors were implemented. Under these new classifications, new tax deductions were introduced. For ‘Verified Subcontractors’, tax was set at 20% tax deduction, whilst ‘Unverified Subcontractors’ face a tax deduction of 30%.
This means that under the Construction Industry Scheme, greater emphasis is placed on the contractor to consider the employment status of the subcontractor that is working for them.
2021 – Changes to VAT rates
The Construction Industry Scheme saw another significant change in 2021. Value Added Tax (VAT) is no longer charged by subcontractors unless they are working for the end user.
One of the major benefits of this is that it makes things far more straightforward from a cash flow perspective, as subcontractors now tend to be in a refund position for VAT on a regular basis. However, the knowledge required to make the right administerial decision has gone to another level.
To make sure you’re submitting the correct CIS tax returns, you should speak to a specialist accountant who has experience of working with CIS and can advise you appropriately.
Construction Industry Scheme guide and glossary
Read on to find out more about the Construction Industry Scheme and some of the most common terms you will come across when you’re delving into the world of the Construction Industry Scheme.
Whether you’re a seasoned CIS veteran, or you’re about to complete your CIS return for the very first time, our team of expert accountants here at Kirkwood Wilson Accountants can support you with your CIS return.
Contractor
You’re considered a contractor if you bring in workers to help you to complete work for your clients. However, you can of course be both a constructor and subcontractor.
Subcontractor
You are classified as a subcontractor if you get your work from someone else who is ‘higher up’ in the building chain than yourself. For example, you are a part of the building process for a house builder, such as a bricklayer.
Subcontractor Verification
When a subcontractor comes onboard you must verify them with HMRC using their UTR number and National Insurance Number or Limited Company Registered Number, before you even make a payment to them. Upon verification, HMRC will then tell you how much tax to deduct before you can pay them. The subcontractor will either be classified as gross or will have 20% or 30% tax applied.
Tax Deductions
In our Construction Industry Scheme guide we will go into further detail about the specific tax deduction amounts below. However, where a subcontractor has provided you with labour services, you may need to withhold an amount of CIS tax to be paid over to HMRC later in the month. CIS tax is not deducted from the VAT amount charged by a subcontractor or any materials you are reimbursing them for.
Gross Payment Status
Your subcontractor does not need any tax deducting from you. For example, if they send you an invoice for £1,000, you will pay them £1,000 as requested.
Verified Subcontractor
Upon receipt of their verification number, you will be required to deduct 20% from your subcontractor’s invoice. For example, if they sent you an invoice for £1,000, you will deduct £200 and this amount will be paid to HMRC. This means that the subcontractor will receive £800.
Unverified Subcontractor
Here, you won’t receive a verification number for this subcontractor and therefore you will need to deduct 30% tax from them. This means that if they issue you with an invoice for £1,000, you will pay £300 of this to HMRC and will pay £700 to your subcontractor.
Domestic Reverse Charge for VAT (DRC)
This is a relatively new term. This means that subcontractors are required to use the DRC for VAT if they satisfy a certain criteria set out by HMRC. This criteria can be found on the HMRC website here.
CIS Return Period
Each CIS tax return period runs in line with the months of the year for payroll purposes. You may already know that these dates run from the 6th of one month to the 5th of another. For example; the first month of each financial year is 6th April to 5th May.
CIS Filing Deadline
At the end of each return period, you will need to make a declaration to HMRC that includes all of the deductions you have made for each subcontractor. The filing deadline is the 22nd of the month following the end of the period.
Subcontractor Statement
A subcontractor requires a statement from the contractor, which can be provided either monthly or yearly. This is to offset the tax they’ve had deducted against the end of year liabilities. Here at Kirkwood WIlson Accountants, we use digital accounting software such as Xero to make this administration much easier to manage.
CIS tax accountants
We understand that the Construction Industry Scheme can be a bit of a minefield to navigate. The introduction of digital accounting software has helped to ease the burden for contractors and subcontractors alike significantly over the last few years. Xero digital accounting software has helped simplify the entire admin process by making CIS tax calculations and submissions a straightforward task.
The team at Kirkwood Wilson are experts in digital and cloud accounting and would love to have a chat with you if you’re finding returns difficult to cope with. Contact us on 01704 546000 or at enquiries@kirkwoodwilson.co.uk and one of our friendly, knowledgeable team members will be happy to help.
