COMPLIANCE
Don’t get caught out – an overview of the construction industry scheme
Susan Ball, tax partner, and Lee Knight, director, the People Advisory Services at RSM UK, run through the nuances of the construction industry scheme (CIS), to help you understand what your obligations are, if applicable
T he CIS is a tax withholding and reporting regime. It applies to payments from ‘contractors’ to ‘subcontractors’, made under contracts which include ‘construction operations’ undertaken within the UK (and Northern Ireland) or UK territorial waters. CIS can therefore apply to overseas entities as well as those in the UK. The CIS can also apply to more than just UK construction businesses and property developers, for example: l schools l insurance companies l supermarkets
resulted in more focus on the scope of CIS l from 6 April 2021, we saw the rolling assessment of expenditure on construction operations for deemed contractors’ status i.e., the 12 months rolling expenditure on construction operations check for the £3 million threshold. Contractors who don’t operate the CIS correctly can be held liable for any CIS tax underpaid on payments to subcontractors. Where reasonable care hasn’t been exercised, HM Revenue and Customs (HMRC) can go back six tax years to recover the CIS tax due from the contractor, together with penalty and interest charges. Deduction This is the amount of CIS tax a contractor must withhold and pay to HMRC. This will be at either: l the standard rate (20%), or l the higher rate (30%). It isn’t necessary to deduct any CIS tax from payments to subcontractors which are registered for CIS with gross payment status at the time payment is made. Subcontractor The party to a construction contract that carries out, arranges or provides labour for construction operations to a contractor, or is answerable to a contractor for the carrying out of construction operations by others. Subcontractors can fall into one of three categories, namely: unregistered, registered for net payment status and registered for gross payment status. Many contractors will only want to deal with subcontractors who have gross payment status because of the administrative burden and risks associated with making CIS deductions. A subcontractor who pays persons below them in the contractual chain for construction operations will also be a contractor for CIS purposes. Tax month A tax month runs from the 6th of one month to the 5th of the next.
l retail chains l local authorities.
Awareness of, and compliance with, the scheme is key. In recent years, there have been new rules introduced which have impacted the operation of the scheme: l from 1 March 2021 the reverse charge was put into place, meaning a subcontractor in the CIS scheme doesn’t charge value added tax (VAT) on its invoices to a VAT- registered contractor in the CIS scheme. Instead, the contractor will account for the VAT in their VAT return as both output (sales) VAT and as input (purchases) VAT. This has a contractor to a subcontractor (or another party, for example, someone nominated by the subcontractor) under a construction contract. Certain materials costs aren’t treated as contract payments, and some payments are specifically excluded from being contract payments. Contractor The party to a construction contract with a subcontractor, which is either: l a business which includes the carrying out of construction operations such as a construction business or property developer (mainstream contractors); or l a business which isn’t a mainstream contractor but whose cumulative VAT exclusive expenditure on construction operations within the previous 12-month period exceeds £3,000,000 (deemed contractors); or l a type of other body (local authority, housing association etc.), whose cumulative VAT exclusive expenditure on construction operations within the previous 12-month period exceeds £3,000,000 (also deemed contractors); or l a subcontractor who engages other subcontractors to carry out construction works. A householder having construction work undertaken on their own home isn’t a contractor in respect of these works. Charities are exempt from the CIS, but trading subsidiaries aren’t.
Key definitions It is important to understand the following definitions:
Construction contract A legally binding agreement or
arrangement, under which one person (the subcontractor) does work, provides services or labour for another (the contractor), which are construction operations. Construction operations The services to which the scheme applies, including a wide range of work done to permanent or temporary buildings, structures or land. It also includes the installation of key building systems (such as heating and lighting), interior and exterior decorating and cleaning under a construction contract. Identifying which operations constitute construction operations can be complex, as demonstrated by the extensive index of construction operations in HMRC’s guidance at the Construction Industry Scheme Reform Manual (CISR) 14330, which can be found here: http://ow.ly/ mhoi50N7fc0. Contract payment This includes any payment made by
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