Under the Government’s Construction Industry Scheme (CIS), contractors must deduct money from the payments they make to subcontractors to go to HMRC. These are treated as advance payments for tax and National Insurance contributions.
CIS applies to businesses involved in the construction industry, and can affect businesses that are not actually in the industry but who spend large amounts on construction work.
The Issue of Status
“It can still end up being contentious, deciding whether a contractor is genuinely self-employed or an employee. Where a construction company is unsure of the status of its workers, it’s more likely to make mistakes under CIS, which could prove costly.”
The way the industry is structured leads it to favour using subcontractors rather than employees.
“Construction is generally transitory and project-based, and fluidity in employment is very much seen as the norm.”
Along with this aspect of work culture is the whole issue of contractors often being themselves subcontractors.
“Under CIS, you can be a contractor and a subcontractor if, for example, you have your own small company, but then be contracted to work on a larger project”
To further complicate things, large contractors can also register as multiple contractors, separating themselves into smaller divisions, each of which acts as a contractor for CIS purposes.
The contractor is responsible for:
- Providing a statement to the subcontractor confirming payments and deductions
- Checking the subcontractor’s invoices
- Deducting tax at a standard rate of 20% (or 30% if the subcontractor is not CIS registered).
Alongside the issue of a subcontractor’s status, there are other things that can cause a headache for construction firms when it comes to CIS.
“There’s the definition of a construction operation itself. This can be much broader than providing building services. Therefore, companies and contractors can find they are subject to CIS without realising it.”
One such example is providing door access systems. This comes under CIS, whereas installing entry phones on their own does not.
Similarly, project management services can come within CIS.
“Architects wouldn’t normally come under CIS, but if, as an architect, you’re providing project management services on a construction project, then these services can be subject to CIS rules”
Another grey area is around mixed contracts. This is where some of a subcontractor’s services to a contractor may fall within CIS, but some may not.
“Here, the contractor needs to set up separate contracts, otherwise all the work the subcontractor carries out will be subject to CIS, regardless.”
In the end, ignorance is no excuse as HMRC routinely runs checks on companies within the construction sector. It does not accept misunderstandings as valid excuses for non-compliance.
“The whole system includes penalties. Mistakes can be costly, even if they are genuine.”
CIS Umbrella Solutions
For subcontractors, one solution is for a reliable third party to look after their finances, to ensure compliance with CIS.
“An umbrella solution means that you control your expenses with easy access to professional support and advice, to help ensure you’ll always be compliant”
“Not only this, but contractors hiring you benefit too, as they will have full clarity about your status, and therefore won’t find themselves liable to penalties.”
“One aspect of this clarity is IR35, the HMRC legislation designed to tackle tax avoidance by contractors when, for all intents and purposes, they are performing as employees in disguise,” Mike concludes.
One Click Group has published a Complete Guide to IR35 Legislation, to help contractors and hirers gain a full understanding of the implications surrounding these regulations. Click here to discover more.