The construction industry has been in the news a lot recently with shortages of both staff and materials being an issue. Although building sites were allowed to keep working during part of lockdown, like many businesses they experienced shutdowns, staff absence and delays to projects.
But behind the scenes, many subcontractors and traders have a unique arrangement in terms of their pay and taxation and there is a special scheme to manage it. As we look after a number of these, we thought it would be an interesting topic for this month’s blog.
Why does construction need a special scheme?
Because construction is such a project-based industry and many of the people working on sites are self-employed, it needs a special way of paying people and helping them manage their tax liabilities.
HMRC administers the Construction Industry Scheme (CIS) and it has two elements – contractors and subcontractors; although somewhat confusingly, a person can be both a contractor and subcontractor.
All contractors must register with the scheme. Subcontractors don’t have to register but if they don’t, their deductions will be at a higher rate that if they were.
Anyone who pays subcontractors to do construction work is classed as a contractor and so must register for CIS. A contractor can be a sole trader, limited company or in a partnership and they must register before they can start working with subcontractors.
Once the scheme is set up, contractors need to verify each subcontractor they take on with HMRC to check whether they are also registered and to confirm what the correct rate of deductions is. They’ll also need to show that the subcontractor couldn’t have been an employee instead and there are penalties to pay if this isn’t the case.
Contractors have to keep records of their scheme and file monthly returns as well as deducting the money and paying it over to HMRC.
It’s not compulsory for subcontractors to register with CIS but doing so means deductions are taken at a lower rate. It also helps subcontractors to keep on top of their tax liability and manage cash flow. In addition, many contractors specify CIS when they are advertising vacancies.
As for contractors, a subcontractor can be an individual, limited company or partnership. It is possible for any one entity to be both a contractor and a subcontractor and so must register as both with the scheme.
Once a subcontractor is registered, the contractor they’re working for must deducted 20% of their payments and pass it to HMRC as a contribution towards their tax and national insurance. Then, when the subcontractor comes to do their self-assessment tax return, they can record the amounts already deducted which will go towards the overall tax bill.
Getting help with a CIS scheme
The good news is that if you are a contractor, you don’t have to do all this by yourself. If you have a CIS up and running already, we can administer it for you – verifying new subcontractors, calculating deductions and keeping records.
If you don’t yet have a CIS scheme and think you’re going to need one, just get in touch. We can register your business with HMRC for you and ensure everything is done correctly from day one.
Either way, let us help you and then it’ll be one less thing you’ll have to worry about when on site or project planning.