Construction Industry Scheme

Contractors

These fall into two groups:

Mainstream contractors

• A mainstream contractor carries on a business that engages subcontractors for construction operations. The business can be conducted as a sole trade, partnership or limited company.

Deemed contractors

• Where the main source of work is in another industry, but where an average of over £1,000,000 per year on average is spent on construction work over three years.

Works not included in the scheme

Certain kinds of work, such as professional services provided by businesses such as architects and surveyors are not included in CIS, even though related to a construction project.

Appendix C of HMRC’s Guide to CIS lists operations that are typically included or excluded from the Construction Industry Scheme.

Other situations may be excluded from the scheme.

There are occasional situations when businesses that would normally be classed as mainstream or deemed contractors may not have to apply for CIS ruling.  An example of this is when these businesses pay for construction work on a property that is used for the purpose of the business.

Businesses that are not mainstream contractors, but are brought into the scheme because they spend an average of more than £1m on construction operations each year, do not need to apply the scheme to expenditure that relates to property used for the purposes of the business itself; or, if the business is a company:

• other companies within the same group
• any company of which 50% or more of the shares are owned by the company

The types of properties covered by this exemption include:

• offices
• warehouses
• nursing homes
• leased property used by the business’ group, including property leased by one company to another within the same group
• any other facilities used for the business

Other occasions when CIS rules don’t apply are:

• A deemed contractor pays a construction contract of less than £1,000 after materials costs. (HMRC must approve this).
• A contractor pays a subcontractor less than £1,000, after materials costs, for construction work on the subcontractor’s own property, or agricultural property tenanted by the subcontractor.(HMRC must approve this).
• A local education authority maintained school, via the head teacher or governors, pays for construction work on behalf of the local education authority.
• A charitable institution (not any trading subsidiary) pays for construction work.
• Private householders are never treated as CIS contractors, irrespective of the amount they spend on construction work. However, should the builder further subcontract any of the work, that, and any other stage not directly involving the householder, would be within the scope of CIS.

Subcontractors

Subcontractors within CIS must register with HMRC. They may do so and be authorised to receive payments gross, or net of 20% tax.

When a contractor contacts HMRC to verify a subcontractor, they will be instructed on the amount of tax to be deducted from payments to the subcontractor.

If the subcontractor is not known to HMRC, a 30% tax deduction will be made.

If receiving payments net of tax, the deductions suffered are treated as a credit available against the tax and Class 4 National Insurance Contributions calculated when a Self-Assessment Tax Return for the year has been submitted.

If the subcontractor is a limited company, any deductions suffered under CIS for a particular month may be offset against any PAYE deductions from employees due that month. If, at the end of the tax year, there is still a balance of CIS tax in favour of the subcontractor, that will be repaid to them.

In certain circumstances, a subcontractor business may be allowed to receive CIS-related payments gross.

The business must:

• Do construction work in the UK and be run largely through a bank account.
• Have a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and most companies).
• Have complied with all its tax obligations.

The tests that HMRC requires in order to obtain gross payment status are:

The Business Test

Demonstrating that the business:

• Carries out construction work, or provides labour for construction work, in the UK.
• Is run largely through a bank account.

The Turnover Test

Looking at the business turnover from construction work for the 12 months before the application for gross payment status. Ignoring VAT and the cost of materials, the construction turnover must be at least:

• £30,000 for a sole-trader.
• £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership.
• £30,000 for each director of a company, or at least £100,000 for the whole company.
• If five or fewer people control the company, it must have an annual construction turnover of at least £30,000 for each of these individuals.

The Compliance Test

The directors or partners in the business, or beneficial shareholders (where the company is controlled by five or fewer persons), must have submitted all tax returns and paid all tax due on time in the 12 months before the application for gross payment. If HMRC has asked for any information about your tax affairs in that period, it will have had to be provided to them.

In the 12 months prior to the application, some lapses or compliance failures may be ignored.

HMRC will ignore any, or all, of the following failures:

• Three late submissions of the CIS contractor monthly return, including ‘nil’ returns – up to 28 days late.
• Three late payments of CIS/PAYE deductions – up to 14 days late.
• One late payment of Self-Assessment tax – up to 28 days late.
• Any employer’s end of year return made late.
• Any late payment of Corporation Tax – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
• Any Self-Assessment return made late.
• Any payment not made by the due date, where it is less than £100.

As from April 2016, the director’s individual Self-Assessment obligations no longer form part of the initial or annual compliance tests which are considered when establishing whether or not a company qualifies for gross payment status.

After gross payment status is granted

If gross payment status is granted, the business will be under constant review and will be subject to the Tax Treatment Qualification Test (TTQT), generally on a 12 month cycle.

HMRC will check whether the sole trader, partners (if trading via a partnership) have, or the limited Company has, complied with their obligations as a taxpayer or employer/contractor in the 12 months leading up to the review.

During that period, the sole trader, the company and any partners must have done all the following:

• Completed and returned all required tax returns (but note April 2016 changes as above regarding directors).
• Supplied any information to do with tax that HMRC may have requested.
• Paid by the due dates:
  • All tax due from the business owners or the business.
  • All personal National Insurance contributions.
  • All PAYE tax and NIC due as an employer.
  • Any deductions due from the business as a contractor in the construction industry.

When considering whether the business’ compliance history is satisfactory during the 12-month period of the review, HMRC will ignore any, or all, of the following failures:

• Three late submissions of the contractor monthly return, including ‘nil’ returns – up to 28 days late.
• Three late payments of CIS/PAYE deductions – up to 14 days late.
• One late payment of Self-Assessment tax – up to 28 days late.
• Any employer’s end of year return made late.
• Any late payments of Corporation Tax – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
• Any Self-Assessment return made late.
• Any payment not made by the due date, where it is less than £100.

Any of the following will result in failure of the Compliance Test, and gross payment status will be withdrawn on 90 days’ notice, unless HMRC accepts any appeal or explanation given:

• The contractor monthly return (including a nil return) late on four or more occasions.
• One of the contractor monthly returns is more than 28 days late.
• CIS/PAYE deductions are late on four or more occasions.
• One payment of PAYE/CIS deductions is more than 14 days late.
• One payment of Self-Assessment tax is  more than 28 days late.
• One payment of Corporation Tax is more than 28 days late.

Or, at the date of the review, you have still outstanding an overdue:

• Employer’s end of year return (form P35).
• Self-Assessment return (Income or Corporation Tax).
• Payment of £100 or more.

Reapplying for gross payment status

If, following a review of the business’ compliance history, HMRC cancels the gross payment status, the business cannot reapply until one year from the date that the cancellation of the gross payment status takes effect.

If an appeal had been lodged against the original decision and the appeal was eventually decided against the business, it will not be possible to reapply until one year after the date the gross payment status was cancelled, following the conclusion of the appeal.

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