Construction Industry Scheme
The Construction Industry Scheme outlines how you, as a contractor, must handle payments to subcontractors and other firms. Contractors must register with the system, deduct tax from subcontractors’ earnings, and remit these deductions to HMRC. This is done while keeping the subcontractor’s tax position in mind.
The Difference Between Contractors and Subcontractors
In many instances, businesses fall under both categories, which means you must register as both and follow the appropriate rules for each respective role.
Contractor
- Business, Person or Other Entity Paying Subtractors.
- Registered with Construction Industry Scheme
- If your average spend is above £1m over 3 years
Subcontractor
- Work for a business, person or entity registered.
- Registered under CIS
- Can use employees or subcontractors
Making Payment Deductions
Contractors must confirm that the subcontractors are verified.
Then when deductions are made, contractors must:
- Calculate the deductions
- Deduct the money
- Record details of the materials, payment, and deduction
- Make payment to the subcontractor
- Complete and provide the subcontractor with a pay statement/payslip detailing all deductions
- Pay the deductions to HMRC monthly or quarterly
Keeping Records
HMRC will occasionally want to check a contractor’s records, similar to audits of an employer’s PAYE records.
For CIS, a contractor must retain records of gross totals paid, cost of materials deducted, amount of tax deducted, and, if required, verification number.
A Unique Taxpayer Reference (UTR), account office reference, employer id, national insurance number, firm name, and registration number will be required for subcontractor verification.
You will also be required to produce a signed contract agreement by both parties.
HMRC issues a verification reference number to a subcontractor after they have been verified.
What is the VAT Reverse Charge Under the Construction Industry Scheme
This fee has been implemented to deter fraudulent behaviour; it prevents contractors from getting charged VAT from subcontractors, then not paying VAT to HMRC, known as ‘missing trader fraud’.
The legislation shifts VAT accounting duty from the subcontractor to the contractor. It prevents the subcontractor from dodging HMRC VAT payment.
Being an expert in tax systems is not required of you as a construction worker, especially considering the present work environment. However, if you’re utilising subcontractors, you’ll need a greater grasp of the Construction Industry Scheme (CIS), as you’ll need to be compliant with it.
The CIS is provided to help HMRC in ensuring that construction enterprises pay the necessary tax, which implies that contractors must deduct tax at source from subcontractors’ income, similar to the PAYE system.