The Construction Industry Scheme (CIS) is a set of special rules requiring contractors to deduct tax from payments they make to subcontractors, and pass them on to HMRC as advance payments towards the subcontractor’s overall income tax liability.
If your business undertakes work related to the construction industry, we have two key questions for you:
Q1: Does Your Business Need to be CIS Registered?
The CIS scheme can apply to sole traders, partnerships and limited companies, and it encompasses a broad range of trades and professions within the construction industry. A business might need to register as a main contractor, a subcontractor – or quite possibly both, and the flexible, project-based nature of the industry can sometimes lead to confusion about which businesses should register, and in what capacity.
Not being CIS registered if you need to be, or failing to apply the CIS rules correctly can have serious consequences, but despite this, we regularly come across businesses in this position – particularly in the property sector.
Non-registration may be due to ignorance of CIS regulations, or a consequence of failing to recognise a change in status – for example when a main contractor disengages from a project, and responsibility transfers to another business. But these excuses won’t carry any weight with HMRC. It’s your responsibility to register when you need to, and if you don’t, HMRC can backdate any tax and fines due.
Within CIS there are two categories:
- Contractor: Registering your business as a contractor creates an ongoing, monthly reporting responsibility to HMRC, and you must file CIS Contractor Monthly Returns even during periods you don’t use subcontractors (although if this becomes permanent, you can formally de-register).
If your business does need to register as a contractor, you should consider engaging the services of an accountant or bookkeeper to assist you with your CIS monthly returns. Unfiled returns incur immediate penalties which increase each month, and overlooking these even for a relatively short period can be costly – failing to file for just 3 months will rack up a cumulative penalty of £600 – with no right of appeal.
- Subcontractor: If you’re a subcontractor, you don’t have to be CIS registered, but if you’re not, HMRC will calculate deductions from your payments at a higher rate of 30% instead of the more usual 20%. The registration process will be slightly different depending on whether you are self-employed or operate your business as a limited company.
Check if You Need to be CIS Registered By Downloading The Relevant Guide Below
CIS Guide for Subcontractors CIS Guide for Contractors
Q2: If You Are CIS Registered, Is Your Year End 31st March?
If your business is subject to CIS, it makes sense to have your financial year end on 31st March – especially if you operate as a limited company.
As a self-employed sole trader, any deductions made by your customers under CIS are allocated to your personal tax account, to be offset against your end of year tax bill, but if you run a limited company, your CIS deductions will be allocated into your payroll account. As well as PAYE and NI for your direct employees, this account will include any CIS you deduct from subcontractors, immediately offsetting any CIS you have to pay out, and at the end of the year, any overpayment (if you work mainly for commercial clients you could even be in credit) can be used to help settle your Corporation Tax bill.
As payroll follows the tax year though, unless your business year end is 31st March, there will be a mismatch between the date your business has to pay corporation tax, and the date you will be refunded any CIS overpayment.
For this reason, we recommend any limited company registered for CIS brings its year end in line with the tax year, so it will have a full 12 months of CIS deductions to set against Corporation Tax liability for the same period.
Need to Change Your Year End?
If you run a limited company in the construction sector, and your current accounting period doesn’t follow the tax year, contact us now on 01235 868888 or click here to arrange a call back. The process of changing year end is relatively straightforward, and it’s not something for which we charge existing Inca clients.
Get in Touch With Us Now for Help & Advice on CIS
At Inca, we work with numerous clients in the construction sector, from trade professionals operating micro businesses, through to small specialist companies providing building works and property maintenance services. Our in-depth understanding of CIS and taxation in relation to construction, makes us the ideal choice of accountants for any business owner operating in this area.
If you have any queries relating to CIS and how it applies to your business, please get in touch now on 01235 868888 for an initial chat!
You can also find more details about CIS in HMRCs guide for contractors and subcontractors here.
