Basically it is a scheme to stop tax on invoices raised by the self-employed or limited companies (called subcontractors) who provide labour within the construction industry to businesses which are also within the construction industry (called contractors).
At Friend & Grant we deal with CIS on a day to day basis and one of the most common occurrences we see when we take on a new client is the failure to recognise when the scheme applies.
Many people assume that the scheme only applies to big construction sites, the reality, however, is very different.
Works that fall under the construction industry scheme are detailed in “A guide for contractors and subcontractors (CIS340)”. The guide is essential reading for anyone who works with in the construction industry as it details who needs to operate the scheme, how the scheme is operated and what activities are covered.
The guide is full of examples, some of which may surprise you.
For example painting and decorating. You are in business and have a painting contract to redecorate two bedrooms. You decide to engage another self-employed person to assist with the works. Painting or decorating the internal or external surfaces of any building or structure falls under CIS.
Similarly, if you are an electrician and you engage a self-employed individual to carry out a rewiring of a property the work again falls under CIS. The legislation states that the following works fall within the scheme: the installation of systems of heating, lighting, air-conditioning, ventilation, power supply and distribution, drainage, sanitation, water supply and distribution, and fire protection works. The legislation however talks about systems. Minor electrical works such as a replacement light switch would be excluded.
One type of business owner who often makes this mistake is the small property developer. That is basically anyone who buys a property and does it up to make a profit. Any subcontractor who provides labour on the development falls within the scheme.
Exceptions include the individual or business that does not as a general rule do any building works. For example if you run a small gift shop and you engage someone to carry out rewiring of your shop, then this does not come under CIS because your business is not within the construction industry. If the electrician you engage subcontracts the work then this would fall under CIS as the electrician would be the contractor and he works in construction.
It is key you get this right, so question your advisor on any activity that looks like building work.
If you are a contractor engaging labour under the scheme then you need to register a scheme and then verify whether the subcontractor should have taxed stopped at 20% or 30% or zero % if they have gross payment status.
The tax stopped is calculated based on the invoice value (before VAT) less materials, plant hire, consumables etc…
To apply for gross payment status you need to pass certain criteria.
HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:
- £30,000 if you’re a sole trader
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
- £30,000 for each director of a company, or at least £100,000 for the whole company
If your company is controlled by 5 people or fewer individuals, you must have an annual turnover of £30,000 for each of them.
- You must be operating your business in the UK through a bank account
- You must have complied with certain obligations such as paid your tax (including company tax) and National Insurance obligations on time in the past
CIS should not be ignored. It isn’t difficult to operate but it is time consuming as it is heavily reliant on good book-keeping and having good systems in place.
If you have queries on CIS or need help with operating a CIS scheme please speak to an advisor such as us who specialises in the Construction Industry.
The content in this blog is correct as at 03/07/2020. See terms and conditions.