Construction Industry makes a sizable contribution toward the overall economic value of the United Kingdom. The UK Government instated the Construction Industry Scheme (CIS) to regulate the tax deduction system for Construction Contractors.
A Brief on the Construction Industry Scheme (CIS)
This Scheme was first launched in the 1970s and has been subjected to its share of amendments over the years. The Construction Industry Scheme deals with regulations for Deductions of money from the payment made to Sub-Contractors by Construction Contractors, which should be deposited with the HMRC (HM Revenue and Customs).
The HMRC has made it mandatory for Contractors involved in the Construction Business to register under CIS. The Sub-Contractors do not compulsorily need to enlist for the Scheme; however, a higher deduction rate is charged on the payments of unregistered Sub-Contractors.
Applicability of Construction Industry Scheme to Businesses outside the UK
The provisions of the Scheme also apply to Foreign Entities, if they are undertaking any Construction work in the UK.
Construction Work falling under CIS
The Construction Industry Scheme includes different Construction work carried out for:
- Any Civil Engineering Project such as Construction of Bridges or Roads.
- Any temporary or permanent structure or building
As per the requirements of CIS, Construction Work means:
- Preparation of Construction Site .i.e. laying Structure’s foundation and access work
- Any Building Work
- Any Alterations, Repairs, or Renovations
- Dismantling and Demolition
- Post-Construction Cleaning of the insides of Buildings
- Installation of Lighting, Heating, Water, Power, and Ventilation Systems
Specific Exclusions as per the Scheme-
A Concern does not need to be registered under the Construction Industry Scheme when it is involved only in any of the following jobs:
- Carpet Fitting Services
- Architectural Jobs and Surveying
- Manufacturing of Materials including Plant and Machinery used for Construction
- Ancillary activities on Construction sites such as Canteen amenities which are clearly demarcated from Construction Work
- Delivery of Materials on site
Types of Businesses Covered under CIS
Construction Industry Scheme applies to all types of businesses in the Construction Industry, such as Self-employed Individuals, Partnership Firms, and Companies.
Meaning of Contractor and Sub-Contractor
The Construction Industry Scheme deals with Contracts between Contractors or Sub-Contractors related to Construction Work.
Contractor under CIS
An Entity needs to get registered as a Contractor under CIS if:
- He Pays Sub-Contractors for Construction Activities
- His Business is not immediately involved in Construction Activities but, he on average of any 3 years spends a sum exceeding £ 1 Million
Sub-Contractor under CIS
A person has to register as a Sub-Contractor if he is carrying out Construction work on behalf of the Contractor.
A Contractor before payment to a Sub-Contractor must get him verified with the HMRC. The HMRC will intimate whether the Sub-Contractor is registered under the Scheme and notify the applicability of any deductions along with the applicable rates.
Applicable Rates of Deduction
A Deduction is an Amount to be withheld by the Contractor from the payment made to a sub-contractor. This Amount represents Tax and National Insurance Contribution. Tax is deductible from the Sub-Contractors payments at:
- Standard Rate for Sub-Contractors registered under the Construction Industry Scheme
- A Higher Rate of Deduction charged for Sub-Contractors who do not register with the HMRC under the Scheme
The Basis for Calculation of the Deduction is the Amount of Payment. This amount should not include payment made for any Cost incurred by Sub-contractors on Materials, for subsistence, and applicable VAT if Sub-contractor is not registered.
The Rate of Deductions may vary from time to time.
Calculation of Deductible Tax
To calculate the Deduction Value:
- Find the Gross Amount from which Deduction will be effected. This will not include VAT charged by the Sub-Contractor, who is registered for VAT.
- From the Gross Amount derived above, eliminate the Amount paid by Contractor for Construction Work such as Materials, Hiring Charges, and Consumable Stores. Also, Deduct VAT Paid if the Sub-Contractor is not registered under VAT laws.
Take into Account the Amount derived after the above exclusions for applying the appropriate deduction rate. The Contractor must maintain proper records before making payments to the Sub-Contractor of the Gross Amount, excluding VAT, Amount of Deduction, and Cost of Materials. It is also obligatory for the Contractor to issue a Statement representing payments made to the Sub-Contractor within 14 days of the Tax Month’s end. Be mindful that a tax month runs from the 6th day of a month to the 5th of the next month. This obligation implies that all Contractors must provide the Statement by the 19th of the following month.
The Contractor must comply with the filing of a monthly return (quarterly return in select cases) with the HMRC. It will specify the full details of all payments made by the Contractor to all the sub-contractors under the Scheme in the tax month. The due date for filing the monthly return is the 14th day of the month succeeding the relevant tax month.
If the Contractor has made no payment to any Sub-Contractor under the Scheme for a given month, he needs to notify the HMRC by the 19th day of the next month following the tax month. This intimation must be made by the Contractor to avoid any penalty. No return is due in such cases.
Initor Global can furnish quality services for Compliance with the Construction Industry Scheme
We have a reputation in the market because of our expert team of Accountants and Tax Specialists. They are at your disposal for all related necessities of your Business. For all Contractors involved in the Construction Industry who need to comply with the Scheme, we will provide the following assistance:
- We will help in the required Tax Deduction at applicable rates from the Subcontractor on your behalf.
- We will assist you in the return preparation and timely filing of the returns under the Scheme to avoid any penalties or interest.
- We will enable Eligible Contractors to seek a refund from HMRC for any overpaid amount.
Hire the premier Outsourcing Service Provider in the field of Taxation and Accounting. Consult Professionals at Initor Global!