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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 lay mostly with that of the individual who makes the payments, the degree at which tax is subtracted by specialists like Norden’s is subject to the position of the receiver.
CIS applies to the payments made between a contractor and a subcontractor. Should the subcontractor pass three assessments – commonly called the business, turnover and compliance tests – and is registered with HMRC (HM Revenue and Customs), they’ll get gross payments via the contractor.
Even though the ideal situation is that the subcontractor registers for gross payments, 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 the higher rate of 30%.
Should the subcontractor then subcontract its duties with the initial contractor to some other party, it will become the contractor in regard to its association with that other party. It will then be necessary for the original subcontractor to include CIS to the payments it makes to that party. Consequently, the initial subcontractor can be equally a contractor and subcontractor in terms of the CIS rules.
When does CIS apply?
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 comprise public bodies with an average yearly spend of £1 million or more for the last three years, builders, property developers and companies that aren’t within the construction industry, but have paid £1 million or more on average for construction jobs for the past three accounting periods.
What is the effect of CIS applying?
CIS involves the contractor, via experts like Norden’s, deducting the tax at source on all the payments made to the subcontractor. The amount at which the tax is reduced by 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, not including 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 – once more, not including VAT charged by the subcontractor, plus the price of materials. Should the subcontractor not be able to successfully complete the qualifying tests to be permitted gross payments, it still makes more sense that the subcontractor register in order to receive tax deducted at 20%, rather than 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 would be the most favourable situation for the subcontractor
When does a subcontractor qualify to register for gross payments?
So as to qualify for gross payments from a contractor, the subcontractor has to give proof to demonstrate it fulfils these three tests:
Turnover Test: The turnover test 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, partner, the business should have fulfilled all their tax requirements, regarding either corporation tax or income tax. Furthermore, they have to supply all data and financial records asked of them, regarding the company or their share in the earnings of that company.
How can a subcontractor register for CIS payments?
Subcontractors are able to register online for CIS or alternatively call the CIS helpline through HMRC. Information on registration, useful guides and assistance are all found on the HMRC website, under CIS.
When do my statutory accounts need to be filed?
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 how long your payment has been delayed.
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 normally will omit 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.
What obligations will a subcontractor need to maintain?
• 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 also any modification to the company’s structure or ownership
• The subcontractor needs to arrange for the contractor, a satisfactory and precise report, so as the contractor is able to authenticate the subcontractor’s registration
• The subcontractor could be accountable for a penalty of £3,000, should any false documents or statements arise throughout the registration procedure. For failure to submit records, a £300 fine plus daily penalties not exceeding £60 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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