Subcontractors are the backbone of the construction industry, but all too often, there are frequent discrepancies and oversights between both contractors and the myriad rules and regulations of the Construction Industry Scheme (CIS).
Sometimes this can in fact be an oversight on the part of a contractor, and unfortunately, there can be instances where proper CIS scheme deductions are not always reported correctly.
There are special tax rules affecting the construction industry, which are designed to ensure that tax is paid by workers who are self-employed. Employees must be paid under PAYE tax obligations, and do not fall within the Construction Industry Scheme. But for subcontractors, the majority generally within the CIS tax initiative.
The Construction Industry Scheme places obligations on the contractors themselves, and failure to follow the scheme correctly through a lack of CIS deductions, can carry very significant financial penalties.
At CloudCo Accountancy Group, our accounting team regularly handles issues and concerns that can arise with CIS statements, deductions, and tax refund issues with HMRC.
Let’s take a closer look at how these issues can affect a subcontractor with HMRC, and ways in which we can help.
What happens if a contractor does not follow Construction Industry Scheme guidelines?
First and foremost, you must make sure you are registered or obligated to work under the scheme. It is not necessary to register under the Construction Industry Scheme if work is only undertaken directly for private customers, as they are not liable to operate the scheme.
Otherwise, the consequence of not registering under the scheme is that 30% tax will be deducted from any payments received in respect of the supply of labour. In order to receive payment without deduction of tax, it will be necessary to satisfy a number of additional tests.
Registration can be initiated by contacting HMRC. You will need to provide your national insurance number to obtain registration. If you do not have a national insurance number, then you will need to visit a tax office in person with proof of your identity.
Contractor Fails to Make Deductions
Whenever a payment is received from which taxation has been deducted, the contractor has an obligation to provide a pay invoice advice showing the details of the pay and the tax deducted. This can be provided for each payment, or otherwise on a monthly basis (for each tax month).
It is important that these payment advices are retained, as they include details of the tax deducted which is then available for offset against your income tax liabilities.
If you are self-employed, CIS returns will have to reflect both your self-employment status as well as your registration with CIS.
The deduction statement also includes declarations by the contractor that all subcontractors needing verification have been confirmed, and that employment status has been considered, and that none of the subcontractors listed is an employee.
Repeated late returns can result in the loss of the gross payment status.
Contractors who do not expect to make payments under the scheme for at least six months can register as inactive, but will be fined if they forget to notify HMRC if this situation changes before the six months expires.
Do I have to pay my subcontractors tax?
This largely depends on whether you are registered with the CIS scheme or are just reconciling paying your tax from standard self-employment.
The CIS taxation money will be paid directly to HMRC by the contractor and a CIS statement will be prepared for you every month showing all the applicable invoice income and taxation applied.
If any discrepancies are not corrected, such as business name and applicable details, your taxation rate could rise from 20% within the scheme to 30%.
How far back can you claim CIS deductions?
The standard amount of time at which you can claim CIS deductions is 4 years, but this does depend on a few important key details:
- You need to have worked at 2 or more construction sites with the same company you are seeking to claim a return on.
- You have provided your own transportation or used public transport to get back and forth to work.
Always remember that can only claim back within the last 4 taxation years, so subtract 4 years from 5 April from the current year you are in.
How do I report CIS suffering?
CIS suffering is a tool that can be used to check exact reports showing a breakdown of what the contractor has paid to HMRC and across what categories such funds were attributed. It will also show the corresponding deductions made, if any.
This report is prepared using accounting software, which is also something that we can provide to our clients.
Any discrepancies within the report can automatically reported to HMRC, and at CloudCo, we can also take care of this on your behalf to get to the bottom of the discrepancies.
A standard CIS suffered report will show the name of the contractor(s), as well as a breakdown of all the categories for which pay records have been entered.
If your records show a different amount reconciled than what is shown on the contractor statement, you can then report this to HMRC who will look into each transaction to discover the reason.
Tax rules for contractors and subcontractors
Here we will explain tax deducted, tax deduction, and other details that you should be aware of!
When a subcontractor is registered for gross payment there is no need to make any CIS deductions from payments; but payments must not be made to anyone else, including a nominee at the request of the subcontractor. You should always check the nominee’s CIS status to determine if they owe tax.
Where a subcontractor is registered for net payment, CIS deductions at a rate of 20% should be deducted from the full amount of the payment made, less a deduction for the cost of materials.
Tax deducted from any profit element on materials must be reported, and also from allowances for travel. However, if the subcontractor is registered for VAT, no deduction is made from the VAT element of invoices.
Where a subcontractor is unmatched, tax at 30% will apply to the pay in respect of the supply of labour. However, it is worth checking the details used, as it may be that an error was made when asking for verification. If a 30% deduction applies, then the verification number will need to be recorded against each pay period and provided to HMRC and the subcontractor with details of the pay.
Contractors must issue a monthly statement to each subcontractor who has suffered 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, and HMRC provide a suitable format on the internet at www.hmrc.gov.uk.
There is a penalty for failure to submit payment statements to subcontractors.
Each tax month, contractors are required to make an online, monthly CIS return of all payments to subcontractors, including those that did not suffer tax on payments.
The return must be made online, and must be filed within 14 days of the end of the tax month – that is by the 19th of each month. Nil returns are no longer required when no payments have been made on an account.
The penalty for late returns is a minimum of £100, and this is charged when the return is one day late. A further penalty is issued when it is 2 months late.
After six months the penalised portion is a percentage of the tax on the return, subject to a minimum of £300. Note that the penalties will apply even if no subcontractor has been paid in the period (a nil return).
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.
When you contact us, we will start looking after your subcontracting income and deductions to ensure 100% compliance, while proactively helping you make the most of the benefits, credits, allowances, rebates, incentives, and transfers of assets HMRC allows, in order to pay less tax compliantly.
In short, we can assure you that our dedicated experts can provide you peace of mind by offering the best advice to support you and correct any taxation discrepancies in your construction work finances.