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What The Construction Industry Scheme Means For Contractors & Subcontractors

construction industry scheme guide

The construction industry scheme is an important part of the tax system in the United Kingdom. It is designed to ensure that contractors and subcontractors in the construction industry pay the correct amount of tax. The scheme covers a wide range of work, from building new homes to refurbishing offices. If you are in the construction industry or you are planning some construction work, it is very important that you understand how the scheme works.

In this construction industry scheme guide, we will explain how the scheme works, how it applies differently to contractors and subcontractors and how to pay taxes correctly.

What is the Construction Industry Scheme?

The construction industry scheme (CIS) applies to the construction industry in the UK. It was introduced in 1994, and its purpose is to ensure that taxes are paid properly by contractors and subcontractors working in the construction industry. The scheme covers all types of work done in the construction industry, including building, civil engineering, and demolition.

The scheme applies differently to contractors and subcontractors; contractors must register their subcontractors with HMRC, make deductions from their pay for HMRC, and include this information in monthly returns. Subcontractors must set off these deductions against any income tax they owe.

How are Contractors and Subcontractors Defined Under the Scheme?

Under the scheme, contractors are defined as businesses or individuals who work in the construction industry and subcontractors are defined as businesses or individuals who provide services to contractors. This is an important distinction because it determines how the scheme applies to each type of business.

Contractors are responsible for registering their subcontractors with HMRC and making deductions from their pay for HMRC. They must also include this information in monthly returns. Subcontractors, on the other hand, must set off these deductions against any income tax they owe so that they do not end up paying more tax than they should.

What Types of Work Does the Scheme Cover?

The scheme covers all types of work done in the construction industry, including building, civil engineering, and demolition. It may also cover other types of work, such as refurbishing offices or homes. If you are not sure whether your current or planned project is eligible for the scheme, you should check with HMRC.

how to register with HMRC

How Do Contractors Register Their Subcontractors with HMRC?

Contractors can register their subcontractors with HMRC online, by phone, or by post. Once a contractor has registered their subcontractor, they will be given a reference number that must be used when making deductions from their pay. This is very important because it ensures that the deductions are made correctly and that the subcontractor does not end up overpaying on their taxes.

How Do Contractors Make Deductions from Subcontractors’ Pay?

Contractors must make deductions from their subcontractors’ pay and must then include this information in their monthly return to HMRC. The tax authorities will then use this information to calculate the subcontractor’s income tax liability which will be set off against the deductions that have been made.

What Should be Included in Monthly Returns?

In order to make sure that the scheme is run correctly, it is important that contractors include all relevant information in their monthly returns. This includes the name and address of each subcontractor, the amount of money paid to each subcontractor, and the amount of money deducted from each subcontractor’s pay.

It is also important that contractors keep accurate records of all payments made to subcontractors and all deductions made from their pay. This will ensure that the scheme is run smoothly and will help to avoid any mistakes being made.

How Do Subcontractors Set Off Deductions?

Subcontractors must set off the deductions that have been made from their pay against any income tax they owe. As explained above, this is to make sure that they do not end up paying more tax than they should. They can do this by including the deductions in their annual tax return or by contacting HMRC. If a subcontractor feels that their deductions are incorrect, they can contact HMRC to request a review.

Who is Exempt from the Scheme?

There are some businesses and individuals who are exempt from the scheme. These include:

  • Businesses that only employ family members
  • Businesses that only carry out work for domestic customers
  • Businesses that have an annual turnover of less than £30,000
  • Individuals who are self-employed with an annual income of less than £12,500

Again, if you are not sure whether your business is exempt from the scheme, you should get in touch with HMRC as soon as possible to make sure you don’t make any mistakes.

Other Entities Who May Be Deemed Contractors

There are other entities that may be deemed to be contractors for the purposes of the scheme. These include:

  • Businesses that carry out work for the government or a local authority
  • Businesses that are registered with the Health and Safety Executive
  • Businesses that are registered with the Environment Agency

How to Get Out of the Scheme

If you are a business or individual that is not exempt from the scheme, there is no easy way to get out of it. The only way to do so would be to stop carrying out construction work altogether. This could have severe financial implications for your business, so it is not advisable to do so unless you are absolutely sure that you will not be carrying out any more construction work in the future.

What is a CIS Suffered Report?

A CIS Suffered Report is a report that is used to calculate the amount of tax that a subcontractor has paid. It takes into account the deductions that have been made from their pay and any reliefs that they may be entitled to. The report is used to make sure that the subcontractor does not end up paying more tax than they should. The report is compiled and issued by HMRC and is available on their website.

Subcontractors can use the report to calculate their tax liability and to set off any deductions that have been made from their pay. They can also use it to check that they have not been overcharged for any work that they have carried out.

If you are a subcontractor, it is important that you keep a copy of your CIS Suffered Report so that you can check your tax liability and make sure that you are not being overcharged.

What Happens if a Subcontractor Doesn’t Register

If a subcontractor does not register with HMRC, they will not be able to set off any deductions against their income tax liability. This means that they will end up paying more tax than they should. In addition, if a subcontractor does not register, they will not be able to claim any reliefs or allowances that they may be entitled to such as the construction industry scheme allowance.

It is therefore in the best interests of subcontractors to register with HMRC as soon as possible.

How do Subcontractors Register with HMRC?

Subcontractors can register with HMRC by completing a self-assessment tax return or by contacting HMRC directly. Once a subcontractor has registered, they will be issued with a unique tax reference number. This number will be used by the contractor to identify the subcontractor when making deductions from their pay.

What Happens if a Subcontractor Stops Carrying Out Work?

If a subcontractor stops carrying out work, they will no longer be liable for income tax. However, they will still be liable for any National Insurance contributions that they have not paid. In addition, if a subcontractor stops carrying out work, they will no longer be able to claim any reliefs or allowances.

It is therefore important for subcontractors to keep up to date with their National Insurance contributions so that they do not end up paying more tax than they should.

contractors and subcontractors

What is the Construction Industry Scheme Allowance?

The construction industry scheme allowance is a deduction that can be made from a subcontractor’s pay. The allowance is used to cover the costs of materials, tools and equipment that are used in the course of carrying out work. The allowance is also used to cover the cost of travelling to and from the site.

To claim the allowance, subcontractors must keep receipts for all of the expenses that they incur. They will then be able to set off the allowance against their income tax liability.

What if Subcontractors are Incorrectly Paid By Mistake?

If subcontractors are incorrectly paid by mistake, they can claim back the overpayment from HMRC. To do this, they will need to contact HMRC and provide them with proof of the overpayment. Once HMRC has received the proof, they will refund the overpayment to the subcontractor.

If they are underpaid by mistake, they will need to contact the contractor and request the outstanding amount. If the contractor does not pay the outstanding amount, the subcontractor can take legal action against them.

It is therefore important for subcontractors to keep accurate records of all payments that they receive so that they can claim back any overpayments or chase up any underpayments.

Does CIS Apply to Employees?

The construction industry scheme does not apply to employees. This is because employees are already subject to PAYE (Pay As You Earn). Employees do not have to register with HMRC or submit their tax returns.

PAYE is a system that deducts tax and National Insurance contributions from an employee’s pay before they receive it. This means that the employee does not have to worry about paying any tax or National Insurance themselves.

A construction industry employee is defined by HMRC as someone who is paid under PAYE. This includes employees of contractors and subcontractors. It also includes people who are self-employed but have elected to be taxed under PAYE.

It is up to their employer to deduct the correct amount of tax and National Insurance from their pay. If an employee is unsure of how much tax they should be paying, they can contact HMRC for advice.

What Trades are Excluded from CIS?

The construction industry scheme does not apply to certain trades. These trades are known as ‘exempted trades’. The most common exempted trade is roofing. Other exempted trades include plumbing, gasfitting and drain laying.

Other people who work on construction sites but aren’t actually involved in the construction process are also exempt. This includes owning or running the site canteen, working as a clerk of works or providing security.

People who work in these trades can still register with HMRC and pay tax under PAYE. They will not, however, be able to claim any of the allowances or reliefs that are available under CIS.

How Has CIS Changed?

Since its introduction, the construction industry scheme has undergone a number of changes. The most recent change was in April 2014, when the rules regarding deductions from subcontractors’ pay were changed.

Previously, contractors could deduct up to 30% of a subcontractor’s pay without their permission. This meant that subcontractors could end up paying more tax than they owed if they were not careful.

Under the new rules, contractors can only deduct money from a subcontractor’s pay if the subcontractor has given their permission in writing. This permission must be given before any work is carried out. The subcontractor can also withdraw their permission at any time.

The new rules also state that contractors must provide subcontractors with a statement of account every month. This must include details of any deductions that have been made from their pay.

The changes were introduced to make the construction industry scheme fairer for subcontractors and to help them keep track of their tax affairs.

guide to construction industry scheme

Final Thoughts

CIS is a vital part of the construction industry in the UK. It ensures that contractors and subcontractors are both taxed correctly and that the correct amount of money is paid to HMRC. If you are involved in the construction industry, it’s very important that you understand all the relevant information in this Construction Industry Scheme guide to avoid any problems.

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