Construction Industry Scheme - getting it wrong can be costly
October 04, 2013
Are you involved in construction in the UK? The Construction Industry Scheme (CIS) is a way of administering tax for subcontractors in the construction industry. Features of the industry include short-term engagements, a fluctuating subcontractor population, and questions about employment/self-employment status. A contractor's obligations can be onerous. As a contractor you’ll be required to obtain various details about each subcontractor when you take them on, and check with HMRC as to whether you can pay them gross or must make deductions from the payments. The deductions are designed to ensure that subcontractors pay an appropriate amount of tax each year. For an individual subcontractor providing labour, the deductions are akin to PAYE.
Although the CIS is a UK scheme there is an international angle. The CIS applies to construction work in the UK, and therefore if you’re a UK contractor paying a non-UK subcontractor you’ll still need to verify their deduction status (gross or net) and remit any deductions to HMRC. It will then be for the overseas subcontractor to reclaim this tax if it is not due. We’re seeing an increase in the cases of overseas companies requiring assistance to recover CIS tax deductions or receiving penalties for failing to register as contractors.
It's not only construction companies and building firms who may be contractors though. If you're a Government department, local authority or another business outside the construction industry (such as a manufacturer, retailer, hotel, financial services provider, property investor) you may also be a deemed contractor if you incur significant expenditure on construction work on your own premises or investment properties. As contractors are required to make returns on a monthly basis, penalties for late returns can mount up very quickly.