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Construction Industry Pitfall Number 4: All About The Tax

10 February 2020
Mark Friend
Building & Construction, Accounting & Compliance, Payroll, People, Building a Business

For over 30 years I have worked as a tax and business advisor to countless small and medium-size  building and construction businesses. Many have flourished but unfortunately many have failed. What I have found for those that fail is that the same issues come up time and time again.

This article is the fourth and final article in which I look at the book-keeping.

The previous 3 can be accessed below

  1. Are my workers genuinely self-employed?
  2. Construction failures are on the increase- how can I protect my business?
  3. There is never any cash in the business. How can I improve it?

Poor book-keeping for most industries won’t bring a business down on its own. Usually the accountant will have the opportunity to clean the books up and calculate the company’s tax liabilities with time to spare.

Unfortunately construction is different, primarily due to CIS.

Construction Industry Scheme (CIS)

CIS is similar to a payroll scheme but is specific to the construction industry and covers the deduction of taxes on a company’s self-employed workforce.

Usually, 20% tax is stopped on the labour element of a subcontractor’s invoice for construction-related work.

The payments to the subcontractor and tax stopped are recorded on a monthly return which is reported to HMRC.

As you can imagine the figures involved can be sizeable. 10 subcontractors at £500 per week will have a potential weekly tax liability of £1,000 in total.

A failure to record and report these figures to HMRC quickly results in a substantial tax liability accruing.

In part this liability can be negated if the company itself is stopped 20% tax on the labour element of their invoices,  as this tax can be offset against the company’s CIS liability on their labour (for individuals or partnerships this rule does not apply). If the company has gross payment status (i.e. no tax stopped on the labour element invoice) then the CIS tax liability remains due.

Similar issues also arise with VAT where there are added complications for works which can be charged at zero rate or reduced rates of VAT. More information can be found in VAT notice 708.

If the company’s books are well kept and returns submitted on time then none of the above issues should come as a shock. Unfortunately in practice we have seen a number of businesses come to us with HMRC already breathing down their necks due to the failure to submit the necessary returns.  As soon as the CIS or VAT tax liabilities are calculated and the returns brought up to date the directors are shocked to find that they have accrued substantial tax liabilities.

The tax monies have been used to fund the work in progress or worse still extracted from the company by the directors as “dividend” income. The directors find themselves now looking to raise finances from the bank or privately, or having to negotiate a time to pay arrangement with HMRC. Ultimately, if payment is not forthcoming the company collapses.

It is therefore essential that at all stages of the business’ life the books and records are treated with the reverence they deserve. Not only does it tell the story of the business this information is used to:

  • evaluate the progress of the business,
  • identify opportunities for increased profitability,
  • provide advance notice of potential problems,
  • calculate tax liabilities, and
  • calculate a valuation for the business.

Cloud Accounting Opportunities

The book-keeping also forms one part of the overall operation of the business which when integrated can provide extraordinary efficiency improvements for the business.

Over recent years we have seen the rise of Xero and Quickbooks cloud software in the market which has now displaced Sage as the go to accounting solution for SME businesses. Cloud software now links seamlessly to a stack of other software applications which deal with areas such as stock control,  job costing, CIS modules, quotes & invoices to timesheets, reporting, and job tracking & scheduling. Business software solutions specifically for the construction industry such as Tradify and Simpro link seamlessly with the accounts software and provide a complete solution for businesses which is revolutionising the way construction and building companies operate and helps to increase profitability.

Getting the books right is not only fundamental to business survival but is the cornerstone of the future success of many businesses.

When we speak to construction business owners the two big issues which keep them up at night are always the lack of cash and the books.

If you’re worried about the books it’s easy to rectify – just speak to your adviser. And if you are serious about building a great business discuss cloud business solutions.

Here at Friend & Grant we have built an in house expertise to deal with the construction industry and have a separate department which focuses on providing cloud software solutions to our clients. If there are any elements of this article or previous articles you would like to explore then why not contact us here.

The content in this blog is correct as at 24/01/2020. See terms and conditions.

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