Subcontractors are the backbone of the construction industry, but all too often, there are discrepancies and oversights between contractors and the myriad rules and regulations of the Construction Industry Scheme (CIS).
Sometimes, this can be due to an oversight by the contractor, but unfortunately, it can also point to instances where proper CIS scheme deductions have not always been reported correctly.
Special tax rules apply to the construction industry (including site preparation, demolition, building, alterations, repairs, decorating, installation, and cleaning on completion). CIS is a scheme designed for construction workers (contractors and self-employed subcontractors) that, once they register, means advance payments of tax and national insurance contributions (NICs) to HM Revenue and Customs (HMRC). Employees must be paid via the Pay As You Earn (PAYE) system as they fall outside the rules of the construction industry scheme. Most subcontractors fall within the CIS tax initiative, whereby the contractor must deduct CIS.
The Construction Industry Scheme places the obligation for compliance on the contractors themselves. Failure to follow the scheme correctly by making the correct CIS scheme deductions can carry very significant financial penalties.
The accounting team at CloudCo Accountancy Group regularly handles issues and concerns that can arise with CIS statements, deductions, and tax refunds with HMRC.
Let’s take a closer look at how these issues can affect a subcontractor’s dealings with HMRC and ways in which our professional advice can help.
What happens if a contractor does not follow Construction Industry Scheme guidelines?
Most importantly, you must check if you are obliged to work under the construction industry scheme (CIS), and if you are, you must register. It’s not necessary to register under the CIS scheme if work is only undertaken directly for private customers, as they are not liable to operate the scheme.
The consequence of not registering under the scheme, if you are obliged to do so, is that a 30% tax deduction will be made from any payments received for your supply of labour. Benefiting from gross payment status (without the deduction of tax and NICs) will involve satisfying several additional compliance tests.
Construction industry scheme (CIS) registration can be obtained by contacting HMRC and providing your national insurance number. You’ll need to visit a tax office in person with proof of your identity if you don’t have a NI number.
Contractor Fails to Make Deductions
When a subcontractor receives payment from which tax has been deducted, the contractor must provide a “pay invoice” advice showing gross pay and the money deducted. This can be issued either monthly or for each payment.
It’s important to retain payment advice records for MTD compliance, as well as records of the tax deducted that can be offset against your income tax liabilities.
If you are self-employed in construction work, your CIS returns will need to reflect your self-employment status as well as your registration with the construction industry scheme.
The deduction statement is also a declaration by the contractor that verification of the subcontractor has been confirmed, employment status has been checked, and that the subcontractor is not listed is an employee.
Repeated late returns can result in the loss of gross payment status, and employing subcontractors who need verification can lead to penalties.
Contractors not expecting to make payments under the scheme for at least six months should register as inactive, but forgetting to notify HMRC of changes before the six months expire can result in a fine.
Do I have to pay my subcontractors’ tax?
Whether you are liable to pay subcontractors’ tax depends largely on whether you are CIS registered or are just reconciling paying your tax from standard self-employment.
The contractor should pay CIS tax directly to HMRC and prepare a CIS statement each month showing all the applicable invoice income and taxation applied.
If any discrepancies are not corrected, such as business name and applicable details, your tax payments could rise from 20% within the scheme to 30%.
Consequences of not deducting CIS
Failure to follow the rules of the construction industry scheme (CIS) results in an extremely stressful situation for both subcontractor and contractor, with the potential for the loss of gross payment status for subcontractors and the contractor liable for a heavy fine (not to mention reputational damage).
The path of address for both parties is clear documentation, communication, and, importantly, knowledge of HMRC regulations. Effective engagement with HMRC over late filing of returns and unpaid CIS deductions by contractors, reassuring HMRC of compliance with the tax framework of the CIS, is imperative.
CloudCo’s professional advice has resolved numerous incidents of this nature for both contractors and subcontractors.
Penalties and fines
Contractors that fail to file monthly returns and pay on time will receive a notice from HMRC detailing unpaid CIS and requesting an agreement with their figures. Where they apply, the penalties and interest charges for late filing, incorrect, or overdue payments can be punitive.
Late CIS returns attract financial penalties, even if the monthly return is a day late. The later the returns, the higher the penalty.
The initial fixed penalty if the monthly return is a day late is currently £100. HMRC applies an additional penalty two months after the due date. A further penalty after six months and another after 12 months if the return has still not been submitted. The increased penalty percentage rates are based on a percentage of the contractor’s liability and depend on why the return is late.
Full payment responsibilities
Every business finds cash flow events challenging at some point. Having a system in place to budget for CIS and other payments of this nature is key. Beware the temptation to dip into CIS or VAT repayment reserves.
Responsible contractors run a separate bank account for all their taxes, setting aside CIS payments until payment is due (on which they can earn interest). CloudCo recommends this because transparency and organisation are key to running a successful business, and a responsible business will realise that deductions from subcontractors under the CIS are being collected on behalf of HMRC, and it is an offence to treat it otherwise.
HMRC investigations
A CIS investigation by HMRC involves a detailed review of an individual or business’s compliance with the regulations. Where a CIS contractor fails to make subcontractor’s payments is not HMRC’s only concern and includes disguised employment breaches. The nature of the investigations varies:
Random CIS investigations select contractors or subcontractors for CIS investigations to assess overall compliance without specific suspicions.
Targeted compliance checks focus on specific areas of compliance with CIS, e.g., subcontractor verification processes or payment documentation.
Fraudulent scheme investigations relate to suspected cases of CIS fraud, e.g., false invoices, non-payment of tax, and misuse of the scheme, e.g. tax compliance.
An HMRC CIS investigation is serious for its potential repercussions and consequences, including:
Financial penalties can vary based on the severity of the compliance breaches and may significantly impact the finances of the business or individual involved.
Fines and tax liabilities, in addition to penalties, can quickly accumulate, leading to financial hardship and potential long-term consequences.
Legal action will probably be taken for fraud or evasion, having implications that can result in criminal charges and even a custodial sentence.
Reputational damage
Businesses that are the subject of CIS investigations are likely to suffer damage to their reputation. The negative publicity often results in ruined business relationships, possible curtailment of current contracts, cancellation of future contracts, mistrust of other stakeholders, and subcontractors’ reluctance to work with the business.
How far back can you claim CIS deductions?
The standard period for claiming CIS deductions is four years, but this depends on a few key details:
- You have worked at two or more construction sites for the same company you are seeking to claim a return on.
- You provided your own transport or used public transport to get to and from work.
Be mindful that you can only reclaim for the last four tax years; you should subtract four years as of 5 April of the current tax year.
How do I report CIS suffering?
A CIS suffered report shows a breakdown of what the contractor has paid to HMRC and across what categories such funds were attributed. It also shows the corresponding deductions made, if any.
At CloudCo, we prepare the report using cloud accounting software that all our clients also benefit from.
Any discrepancies within the report can be automatically reported to HMRC; CloudCo can also find the origin of the discrepancies on your behalf.
A standard CIS suffered report details the contractor(s) name and a breakdown of all the categories for which pay records have been entered.
If your records show a different amount than the contractor statement, report it to HMRC, who will investigate each transaction to discover the reason.
Tax rules for contractors and subcontractors
Let’s understand tax deducted, tax deduction, and other details of cis regulations, which it’s essential you’re aware of.
When a subcontractor’s gross payment statement is registered, there is no need to make any CIS deductions for tax purposes. However, the payments must not be made to anyone else, including a nominee, at the request of the subcontractor. Always check the nominee’s CIS status to determine if they owe tax.
For net-payment registered subcontractors, the CIS deduction rate at 20% should be taken off gross subcontractor payments, less materials costs.
Tax deducted from any profit element on materials must be reported; the same applies to travel allowances. If a subcontractor is VAT-registered, don’t deduct the VAT element from the subcontractor’s invoice.
If unable to verify a subcontractor, they are treated as “unmatched”, at which point a 30% tax charge applies for their supply of labour. It is worth checking the subcontractor’s details again in case there is a verification error. When a 30% deduction applies, record the verification number against each pay period and provide both HMRC and the subcontractor with details of the pay when you file CIS returns.
Contractors must issue a monthly statement to each subcontractor detailing their tax on payments. The statement may cover all payments in a tax month or each individual pay allotment. Although there is no prescribed format, pay statements must include certain information. See the suitable format provided by HMRC.
Note that there are penalties for failure to submit payment statements to subcontractors.
Frequency
Contractors must file a monthly CIS return of all payments to subcontractors, including those that did not pay income tax on payments.
The return must be submitted online within 14 days of the end of the tax month (i.e., by the 19th of each month). For accounts with no payments, “nil returns” are no longer required.
Note that there are penalties for late returns.
Why Choose CloudCo Accountancy Group?
At CloudCo, our dedicated subcontractor accountancy services are tailored to deliver affordable and faultlessly efficient, comprehensive online services, which our customers can rely upon completely.
After you contact us and we have onboarded you, we will begin looking after your subcontracting income and deductions to ensure 100% compliance. We’ll proactively make the most of any benefits, credits, allowances, rebates, incentives, and transfers of assets HMRC allows to help you pay less tax compliantly.
In short, our dedicated experts will provide peace of mind by offering expert advice and support and correcting any taxation discrepancies in your construction work finances.
Frequently asked questions about CIS deductions
Will a subcontractor be penalised if CIS isn’t deducted?
Should you discover that a contractor has not deducted CIS from your payments as required, review your documents detailing payments received and communicate with the contractor for clarification.
If you have received a notice from HMRC of unpaid CIS deductions, review their calculation for accuracy: does it accurately reflect your earnings and the tax paid on CIS deductions made by the contractor?
Under CIS Regulation 9, HMRC may consider exemptions or reductions in CIS liability, particularly if the subcontractor has paid tax independently.
Subcontractors can appeal HMRC’s CIS deductions notice by providing evidence of their CIS liability.
Can you fix CIS errors without HMRC penalties?
Use HMRC’s CIS online service to change or correct something on your CIS return. Depending on the nature of the error, this may mean you avoid a penalty or fine. If in doubt, you can contact the CIS helpline.
Can you appeal fines and penalties?
If you disagree with a penalty, you can appeal within 30 days of the date on the penalty notice through HMRC’s online service, where you can also track the progress of your appeal.
