Are you working in the construction industry and don’t understand the CIS scheme?
If you are working in the construction industry, you already have problems, as the cost of materials and labour has increased drastically, and understanding tax obligations in the industry just adds to this.
In this article, I will explain what CIS Tax is and why it is important to you as a construction industry individual.
Who Needs To Register?
If you’re an entity or a company, you must register immediately. So, when you’re starting, or if you haven’t done yet, please make sure you register for CIS immediately.
If you’re an actual contractor and you’re a sole trader, there’s no need initially to register for CIS. But please bear in mind if anyone that’s unregistered as a subcontractor will initially have a higher tax deduction.
What Is Covered Under The Construction Industry Scheme?
The Construction Industry Scheme covers most construction work, but be mindful that not everything is included. So make sure, whether you’re a new start-up business or an established one, have a check to see what services you are providing and make sure that they are in line with what you’re declaring under the CIS scheme.
Why this scheme is in place?
Let’s deal with the elephant in the room: there was a lot of cash going on in the construction industry, and there was lots of tax that was being unpaid.
So, the government decided to set up this scheme and basically tax at the source so that contractors will be paying their tax upfront, and companies are dealing with their tax as the year goes on.
In summary, the reason for this scheme being in place is the amount of cash that was going on within the industry.
CIS Deductions From the customers Perspective
Firstly you should determine who your customers are and place them in two categories.
- The end customer – who you are doing the project for and paying you for the work, but not a construction company. In this case, there is no CIS deduction needed.
- Subcontracting – If you are subcontracted to another company, they will need to deduct CIS tax from your labour element, which means you will get less money as they will pay this CIS Tax to HMRC.
If you have a construction business and hiring contractors, you will also deduct CIS Tax from their payments. This can be a complex admin exercise for construction companies, as this involves a lot of paperwork, and it’s very important to get this right.
You are entitled to keep a monthly copy of these and give your contractors an annual summary, which will help them prepare their personal tax returns.
CIS Tax Rates
The primary CIS Tax rate is 20%. 20% is deducted from all labour elements covered under the scheme.
Also, remember that when you take on a subcontractor, you need to verify whether they are registered under the scheme. If they are not registered, the CIS deduction is 30% for their labour element.
This is very important because people sometimes deduct the wrong amount, which can lead to various problems later on.
The benefits of CIS
You might be thinking right now, what are the benefits of this scheme when it seems like you are paying your tax upfront?
Yes, you are, but what is really beneficial is that you haven’t got to save up for your taxes throughout the year.
So, if you did your self-assessment, and it was, let’s say, £5000, you have paid some of this already up front. Many subcontractors end up with refunds, which can also be a boost to your cash flow.
So if you struggle with budgeting, putting money aside, this can be really beneficial for you.
The same can happen for your construction industry company too. If you’re getting tax deducted from your income, you can offset this against your corporation tax, or you can also offset this against any tax that you’re deducting from your subcontractors. So you are not paying it twice and building up a buffer if you need to.
Dont Leave it Last Minute
Dealing with CIS deductions is a massive admin exercise. Do not leave all this to the year-end when everyone’s forgotten things and rushing to submit their accounts. The best construction companies keep on top of their books and records at least monthly, so they know exactly what their tax position is.
If you don’t feel like you’re in control of this, or the people around you haven’t, then please reach out to someone because there are great products out there, like a bookkeeping package called Xero, which can really help you maintain and keep hold of your construction company without getting into problems.
I hope this video has helped. If there are any questions that I can help with, please book a free call with me on my Calendly link below. I promise I’ll do my best to answer the questions and get to understand you, and I promise there’ll be no pushy sales pitch.
