The CIS (Construction Industry Scheme) is a tax deduction scheme, whereby tax is removed from payments relating to construction work. The CIS scheme is not applicable to employee payments, as these are protected by the PAYE (Pay As You Earn) structure of deducting tax at source. Though the operation of CIS lies mostly with that of the individual who makes the payments, tax deductions can vary the degree at which tax is subtracted by specialists like Nordens is subject to the position of the receiver. At Nordens, we’re here to help you understand exactly what CIS is and how we can assist you with it.
CIS applies to the payments made between a contractor and a subcontractor. Should the subcontractor pass three assessments – the business, turnover and compliance tests – and is registered with HMRC (HM Revenue and Customs), they’ll receive gross payments via the contractor. The ideal situation is that the subcontractor registers for gross payments. However, if they aren’t eligible due to a failure in one of any of the three tests, they are still able to register with HMRC to certify that tax is only subtracted at the lesser amount of 20%, rather than at the higher rate of 30%.
All very complex – we know. Although not to us, as at Nordens, we are more than happy to take care of this on your behalf. In fact it’s our job! Having spent many years navigating the finances of the construction scene, Nordens are proud to be fully versed in CIS regulations and want to help you get to the bottom of all of the necessary paperwork to finally reap the benefits you deserve. To find out more about CIS – perhaps about deduction statements or reclaim management – call Nordens today!
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Here at Nordens, we know that all of this information can feel overwhelming – in fact – we receive questions almost everyday from business owners who are equally tied up in knots. Here are some of our more common quibbles regarding CIS:
The CIS system relates to each payment made within a construction contract that involves construction operations and that is not an employment contract. CIS is applicable when there are two distinct parties – one party is a contractor, whilst the other is a subcontractor. Contractors can either be public bodies with an average yearly spend of £1 million or more for the last three years, or companies that aren’t within the construction industry, but have paid at least £1 million for construction jobs for the past three accounting periods.
CIS involves the contractor – via experts like Nordens – deducting the tax at source on all the payments made to the subcontractor. The deduction of the tax is dependent on the subcontractor’s registration status. The next three situations are possible:
• If the subcontractor isn’t registered, then the contractor has to have 30% tax deducted from expenses made to the subcontractor (expenses do not include the VAT charged by the subcontractor and the price of materials).
• If the subcontractor is registered – but doesn’t meet the requirements to have gross payments – the contractor should subtract 20% tax from the payments. Should the subcontractor be unable to complete the qualifying tests to be permitted gross payments, it makes more sense that the subcontractor register in order to receive tax deducted at 20%, rather than at 30%.
• If the subcontractor is registered and receiving gross payments, then the contractor won’t subtract any quantities from the payments. The tax will later be accounted for on the subcontractor’s annual Tax Return. This is the most favourable situation for the subcontractor.
So as to qualify for gross payments from a contractor, the subcontractor has to prove it can complete these three tests:
• Turnover Test: This sets a minimum limit on a qualifying subcontractor’s yearly income.
• Business Test: Here, the subcontractor needs to carry on with construction projects in the United Kingdom, and the company has to be operated principally via a bank account.
• Compliance Test: Inside twelve months of the closing date of the application, every individual and partner within the business should have fulfilled all their tax requirements, regarding either Corporation Tax or Income Tax. Furthermore, they have to supply all the data and financial records asked of them regarding the company, or their share in the earnings of that company.
Subcontractors are able to register online for CIS, or, call the CIS helpline through HMRC. Information on registration, useful guides on CIS, and further assistance are all found on the HMRC website, under CIS.
Your preliminary statutory accounts must be filed 21 months after registration with Companies House. From then on, you’ll need to submit your accounts 9 months after the accounting year of your company. If you file past the deadline, you may incur a fine of up to £1,500, depending on the delay of your payment. If you operate a small company, you needn’t submit a full set of your accounts to Companies House. Instead, you can choose to send a shortened form, which will summarise the main ideas, and typically omits the profit and loss accounts. The full-length version, however, will have to be forwarded to HMRC and shareholders, along with the Tax Return for your business.
• The subcontractor will need to maintain adequate records, so as to finalise its Tax Returns and illustrate the direct price of materials.
• HMRC should be told of any changes in regards to the subcontractor’s company. This includes if it stops trading, if it changes business address, and any modifications to the company’s structure or ownership.
• The subcontractor needs to arrange for the contractor both a satisfactory and a precise report. This will allow the contractor to authenticate the subcontractor’s registration.
• Should false documents or statements arise throughout the registration procedure, the subcontractor could be accountable for a penalty of £3,000. For failure to submit records, a £300 fine (on top of daily penalties) can be enforced.
• If the subcontractor is unable to conform with each of the qualifying tests for gross payments, then the registration can be rescinded.
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