- 0191 447 9119
- office@lscaccounting.co.uk
25 November 2018
In our last blog, we chatted a bit about the Construction Industry Scheme (CIS for short) and how it relates to Subcontractors. In this blog, we’ll deal with the scheme from the Contractors point of view.
Just to recap, the CIS is a system where Contractors make tax deductions from Subcontractors pay. The deducted money is then passed onto HMRC. Basically, it’s a form of advance tax and National Insurance contributions.
From the HMRC website,
“For this scheme, you count as a contractor if you either:
– pay subcontractors for construction work
– your business doesn’t do construction work but you spend an average of more than £1 million a year on construction in any 3-year period”
If you’re still not sure if you’re a contractor you can check out the HMRC website or give them a call. HMRC have a dedicated CIS helpline, details are on their website.
First off you must register with HMRC, whether you’re a sole trader, partnership or limited company. You have to do this before you start employing any Subcontractors.
When you’re registered and you’re preparing to take on a Subcontractor you have to check if maybe you should be employing them instead. If you get this wrong you could be fined so it’s best to make sure you’ve sufficiently covered this.
Once you’re satisfied that subcontracting is the path to follow you’ll need to check if the Subcontractor is registered with HMRC. They don’t have to be registered, but if they have the amount of tax you deduct will be different. It’s typically 20% compared to 30% if they haven’t registered but HMRC will tell you the exact amount to deduct.
If you’ve used a Subcontractor before, but not in the last two years, you need to re-verify them.
There are a couple of ways to verify your potential Subcontractor. You can use the free HMRC CIS online service or you can buy commercially available CIS software. The HMRC free service is limited to 50 Subcontractors, so if you’re looking to register more than that you’ll have to go down the software route.
You’ll need some details to hand when you’re ready to start the registration process:
You’ll also need your subcontractor’s:
When it’s time to pay your Subcontractor there are a few things you need to take into account before you’re left with the net pay. Starting with the gross pay, you need to take away the sums they paid for:
After all that has been accounted for you then take away the percentage given to you by HMRC. What’s left is the amount you pay the Subcontractor.
If any deductions have been made you must provide the Subcontractor with a statement of ‘pay and deductions’ within 14 days of the end of the tax month. This is for their records and allows them to complete their tax assessment forms.
When all the deductions have been calculated, you must make sure you pay HMRC the amount due by the 22nd of the following month. This is another area that is subject to a fine plus interest on monies owed if you’re late.
Along with the monthly payments you also need to file a monthly return, either using the HMRC online service or the software you’ve purchased. An important point, highlighted on the HMRC website, is the declaration of the Subcontractors employment status. You must get this right and declare they aren’t employees. Getting this wrong can land you with a fine of up £3,000!
Your monthly return must be in by the 19th of the month. There are more potential fines if you’re late. A full breakdown of the fines is available on the HMRC website.
Okay, we’re nearly there with your Contractors CIS responsibilities. It’s a time consuming and sometimes-complicated process, but it has to be done.
You need to keep records of the deductions made for at least 3 years after the end of the tax year the deductions were made in. As well as the amount of the deductions, you need to keep a record of the gross amount invoiced by the Subcontractor, excluding VAT. You also need to record the cost of materials the Subcontractor invoiced you for, excluding VAT.
If you can’t show these records on request, there’s another potential fine of £3,000.
Finally, you need to tell HMRC about changes to you, either as an individual or as a business. Changes such as:
You must also tell HMRC if you stop trading or stop using Subcontractors. You need to stop filing your monthly reports too.
There’s a fair bit to take in when it comes to a Contractors responsibilities with the CIS. But by taking a little time and care in getting your processes set up you should be able to reduce the time burden on your accounts department. As always though, if you have any doubts about whether you are doing things correctly, contact HMRC or your financial professional.
LSC Accounting Ltd. is an expert in the area of CIS, with many years of experience and hundreds of happy customers. We provide a friendly, efficient and cost-effective approach to accountancy. To discuss your requirements you can either contact us through our website [ link] or call 0191 447 9119.
Book a free call and get a fixed-fee plan for your company accounts.
