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Construction Industry Scheme

The Construction Industry Scheme (“CIS”) is a mechanism making it easier for HMRC to collect tax from certain classes of construction workers by making contractors responsible for deducting tax from payments to subcontractors and making payments to revenue.
CIS payments collected are treated as a deduction when calculating corporation tax or self -assessment income tax and national insurance.

Who needs to register for CIS?

Contractors are required to register for CIS. Subcontractors do not need to register however deductions will be at the higher rate if they are not registered. You can register for the Construction Industry Scheme on the HMRC website.

What is the CIS rate?

The rate of CIS deducted depends on the registration status of the subcontractor. Here are three CIS rates. Please note that CIS is charged on payments net of VAT and the cost of any materials supplied.

  • If the subcontractor has not registered for CIS, then the tax will be deducted at a rate of 30%.
  • If the subcontractor is registered for CIS but does not qualify to receive gross payments, the contractor will be required to deduct CIS at a rate of 20%.
  • If the subcontractor qualifies to receive gross payments, they should not have any CIS deducted from the income at source. Instead they will be required to pay tax through an annual tax return.

How does a subcontractor qualify for gross payments?

The two tests that a subcontractor must pass to qualify for zero rate CIS are:

Business Test – the following are the business tests that a subcontractor must pass to qualify:

  • Construction work must be carried out in the UK
  • Tax and National Insurance must have been paid on time in the past.
  • The business must operate a bank account for lodging revenue and paying costs

Turnover Test – HMRC will assess turnover over the preceding 12 months to ascertain eligibility. It will also be dependent on how your business is arranged. To qualify for gross payments turnover must be at least:

  • £30,000 for sole traders
  • £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
  • £30,000 for each director in a company, or at least £100,000 for the whole company

For the avoidance of doubt the above amounts do not include VAT or materials supplied.

Are all Construction activities covered under the Construction Industry Scheme?

CIS covers all UK based construction activities, including jobs such as:

  • Construction – the objective of the scheme is that all construction activities are included. This includes activities that are permanent, temporary and offshore and including building, making and assembling.
  • Site preparation – any preparatory works to get the site in a condition to allow construction works to commence
  • Alterations – any alterations to an existing structure regardless of the size or scope of the alterations undertaken
  • Decorating – this includes painting and decorating but also other fit-out and other elements of finishing of construction works. Some activities which might not be deemed to be construction works on their own but are part of the overall construction plan should be included, for example landscaping. This excludes carpet which should be excluded from the scheme.
  • Repairs to the buildings and structure including parts of the buildings and structure
  • Dismantling and Demolishing – including taking down and taking apart buildings where the materials are expected to be used again. This can cross over with alterations which are sometimes included.

Are all Construction activities covered under the Construction Industry Scheme?

The following actives are excluded from CIS. However, it is worth noting that where a contract includes a mix of operations that are included and some that are excluded all works are deemed to be part of the construction industry scheme.

  • Drilling and Extraction with the primary purpose of mineral extraction
  • Manufacture and delivery of components don’t form part of a construction operation
  • Professional works – this includes work done by architects and surveyors. It also includes the production of designs, plans, technical assessments and reports relating to construction projects including site testing.
  • Security systems – Installation of security systems that are dedicated to security only is excluded from the scheme.
  • Seating, blinds and shutters
  • Artistic works including sign-writing

MJH Accountancy provides a full range of construction industry accounting services. Please contact us if you would like more information.

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