Contractors are required under the Construction Industry Scheme (CIS) to pay a portion of each subcontractor‘s earnings to HMRC.
Below we’ve compiled the key terms that you may hear in relation to CIS, so you can get up to speed with all that you need to know…
Construction contract
This is a contract under which one party is paying the other for construction services.
Contract Payment
This term refers to payments made by a contractor to a subcontractor or other party under the terms of a construction contract. The payments may be made using cash, cheque, or credit. Exceptions include the following forms of payments:
- Payments made under a contract of employment under the labour ‘agency’ obligations
- Payments obtained for the services of an individual, and where the off-payroll working rules apply.
Construction operations
These are the services that the scheme covers, like work on permanent or temporary buildings, structures, or land.
Tax deduction
This is the amount of tax a contractor must deduct from a contract payment and pay to HMRC. The deduction will be made at either the ordinary rate of 20% or the higher rate of 30%.
The breadth of the CIS
HMRC treats international contractors and subcontractors similarly to their UK counterparts. If a building project is carried out in the UK, the CIS may be required.
Common pitfalls associated with CIS
The following are, but are not limited to, some of the most often encountered problems with the CIS:
- Failure to promptly apply for and register with the CIS
- Failure to recognise when the contractor threshold has been crossed
- Failure to recognise the presence of a subcontractor in construction activities
- Error in deducting the proper amount for a CIS
- ‘IR35’ regulations and employment intermediaries are ignored.
What should you do?
Maintaining compliance is essential for subcontractors who have been granted gross payment status, losing it might have devastating consequences for the business.
Additionally, contractors might be held accountable for CIS tax on under-deducted contract payments to subcontractors, making any mistakes very costly. That CIS tax, plus interest and penalties, may be claimed by HMRC for up to six years.
When dealing with issues like the ones listed above, it is important that you get help and advice from qualified professionals. Get in touch with us at enquiries@aitaccountants.co.uk
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