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13th Apr 2024
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Introduction to the new CIS.

by The Editor at 16:51 08/11/06 (CIS News)
Contractors, subcontractors and their advisers are gearing up for the much-delayed implementation of the new Construction Industry Scheme (CIS) in April 2007.
This introduces new procedures for the way contractors are allowed to pay their
subcontractors - and getting it wrong could be a costly mistake.

Hardhatter has a section of its site devoted to helping contractors and subcontractors understand and comply with the new scheme.

Here we give a basic overview of the new CIS.

What is the CIS?
What type of work is covered by the CIS?
Who is covered by the CIS?
....Contractors
....Subcontractors
....Contractor/subcontractor
Registering for the CIS
Verifying subcontractors
Making deductions from payments
Monthly returns
Payments to HMRC
Employment status
How do subcontractors pay tax?

What is the CIS?
The CIS sets out the rules and procedures for how subcontractors in the construction
industry can be paid.

Under the Scheme, contractors paying subcontractors must take into account the
subcontractors tax status, as determined by HM Revenue & Customs (HMRC). Depending
whether the subcontractors is considered - by HMRC - to be self-employed or not, the
contractor may need to make a deduction from the payment to give to HMRC.

What type of work is covered by the CIS?
The CIS covers all construction work carried out in the UK - and its territorial waters up to the 12-mile limit. It doesn't apply to construction work carried out outside the UK, but a business based outside the UK and doing work in the UK is covered and much register.

Who is covered by the CIS?
The CIS covers all types of businesses that work in the construction industry, whether
companies, partnership or self-employed people. These businesses can be contractors, subcontractors and contractors/subcontractors, which have special, wider meanings under their CIS definitions than they would usually have.

  • Contractors

  • A contractor is a business which pays subcontractors for construction work. Contractors can be construction companies or building firms, and can also include government departments, local authorities and other who are more usually described as 'clients'. These non-construction businesses are considered to be contractors if they spend more than 1 million over a three year period on construction.

  • Subcontractors

  • A subcontractor is a business, partnership or self-employed person, who is paid to carry out construction work for a contractor.

  • Contractor/subcontractor

  • Some businesses have a dual role. They pay other businesses for construction work, while also receiving payment themselves from another business. In these cases, when they are working as a contractors they must follow the rules for a contractors and when they are working as a subcontractor they must follow the subcontractor rules.

Registering for the CIS
All contractors must register with HMRC. Subcontractors who do not want to have deductions made at the higher rate should also register with HMRC. HMRC will provide registration details that contractors and subcontractors will need to use when they deal with payments.

For contractors: they need to register when they are about to take on their first subcontractor, regardless of whether the subcontractor is likely to be paid gross or under deductions. To register, or request more information, contract the Employer Helpline on
0845 60 70 143. HMRC will then set up a 'Contractor Scheme' (and a PAYE scheme if
needed) and will send the contractor the information they need.

For subcontractors: they need to register who you or your business is about to start work in the construction industry. To register, or request more information, contact the New CIS Helpline on 0845 366 7899. HMRC will then write to confirm the registration and provide the information needed to give to the contractor before payment can be made. If the subcontractor is not already known to HMRC, they may require an identity check.

Verifying subcontractors
Before a contractor can make a payment to a subcontractor, they may need to verify with
the HMRC that the subcontractor is registered with them. HMRC will then check if the subcontractor is registered and tell the contractor the rate of deductions that must apply to the payment, or whether the payment can be made without deductions.

The contractor must decide whether they need to verify the subcontractor. As a general rule, the contractor does not have to verify a subcontractor if they last included that subcontractor on a return in the current or previous two years.

However, it is slightly different as the scheme gets underway. In the first tax year (April 2007 - April 2008) of the new CIS, the contractor does not have to verify them if they have already included them on a monthly return in that year or if the contractor has paid them since April 6, 2005 and when the contractor last paid them, they had seen either a registration card (CIS4P); a temporary registration card (CIS4T) which expired
after April 2007; or Tax Certificate CIS6 or CIS5, which expired after April 2007.

If a contractor does not have to verify a contractor for the reasons above, they must pay the subcontractors on the same basis ie deduction or gross, as the last payment made to them - unless HMRC has told them otherwise.

To verify a subcontractor, call HMRC on 0845 366 7899 with the details of the tax
references of both parties.

HMRC will then check its records to see if the subcontractor is registered with them and will inform the contractor to pay them in one of these three ways:

  • gross - that is without any deductions taken from the payment;

  • net of a deduction at a standard rate;

  • net of a deduction at the higher rate - because HMRC has no record of that
    subcontractor's registration or they are unable to verify the details.

HMRC will then provide a verification reference number for a subcontractors who have been verified at the same time. If someone has not been verified this number will end with a letter.

Making deductions from payments
Under the CIS all payments made to subcontractors must take account of the
subcontractors' tax status.

If a deduction is required, the contractor makes that payment to HMRC from the money due to the contractor that does not include the costs of materials supplied by the subcontractor.

If a deduction is required, the contractor must:

  • calculate the deduction;

  • make the deduction;

  • record details of the payment, materials and deduction

  • make the net payment to the subcontractor

  • compete and give the appropriate statement of deduction to the subcontractor

Monthly returns
Each month, contractors must send HMRC a complete return of all the payments they have made under the CIS or report that they have made no payments. The return includes:

  • details of subcontractors

  • details of payments made and any deductions withheld

  • a declaration that the employment status of a subcontractors has been considered

  • a declaration that all subcontractors that need to be verified have been
    verified.

Payments to HMRC
Each month, or quarterly in some cases, contractors must send HMRC a payment for the deductions they have made from subcontractors.

Employment status
One of the most contentious areas of the scheme is defining the employment status of the subcontractor.

Employment status depends on general law and it is for the contractor to decide on the individual's employment status when the subcontractors is first engaged. The fact that the subcontractor has worked in a self-employed capacity before is irrelevant in deciding their employment status - it is the terms of the particular engagement at the time For more information about this area, see Sorting out self-employed v. employed status - Hardhatter.

How do subcontractors pay tax?
Subcontractors make a return on their profits each year and their tax bill is based on that return.

A subcontractor may have already paid tax by payments on account or as shown on the payment and deduction statements given to them by their contractors. If the amount paid or deducted is greater than the amount due, HMRC will repay the difference. If there is a shortfall, the subcontractor must pay the balance.

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Susie Hughes
The Editor Hardhatter 2006

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