Tag: CIS

How do you reclaim CIS deductions?

two man holding white paper

If you don’t have Gross CIS status you may have Construction Industry Scheme (CIS) deductions to reclaim and you will be probably be trying to reclaim now as we have concluded a tax year (5th April and submitted returns due on the 19th April).

Sole traders and partners

At the end of the tax year, send in your Self Assessment tax return as usual. You should record:

  • the full amounts on your invoices as income
  • any deductions contractors have made in the ‘CIS deductions’ field

HM Revenue and Customs (HMRC) will work out your tax and National Insurance bill and take off any deductions made by contractors.

Limited companies

The process for companies is different, companies may well have offset Subcontractors deductions and payroll against deductions made by their clients using CIS132 How to offset Construction Industry Scheme deductions – CIS Offsetting (CIS340 4.13) – Steve J Bicknell Tel 01202 025252

So the first step to work out the net amount to reclaim and check it to the HMRC Government Gateway.

You can choose to:

  1. Form R38 to claim the Refund – Claim an Income Tax refund – GOV.UK (www.gov.uk)
  2. Claim online via your government gateway (agents will use their Agent Services Account) – Claim a refund of Construction Industry Scheme deductions if you’re a limited company or an agent – GOV.UK (www.gov.uk)
  3. Claim by Post

Claim via the Government Gateway

When you click this option ad log in you will get an access code xxx-xxx-xxx, keep a not of this code, the next screen asks you to enter it.

The you can choose

  • New Claim
  • Amendment

I think the amendment option is very helpful in case you make a mistake (shame we don’t get this for other taxes like VAT or PAYE)

Then the questions are

  • Name
  • Agent details and address (if its being claimed by an accountant)
  • Business details
    • Name
    • UTR
    • PAYE reference
    • Tel No
    • Business Address
  • Tax Year for the claim ie 6th April 2021 to 5th April 2022
  • Estimated overpayment (note the word estimated) this the net amount from the CIS132
  • Do you want to offset against other taxes Yes/No
  • Would you like a Cheque or Bank Transfer
  • Bank details for bank transfer
  • E Mail for confirmation

Then you will get a confirmation via E Mail ‘Claim repayment of deductions from your Construction Industry Scheme payments’ it will have another reference xxx-xxxx-xxx

You’ll normally receive a response within 25 days.

Claim by Post

Write to us and make sure that you include:

  • your full company name
  • your PAYE reference numbers
  • the reasons for the overpayment
  • a completed R38 form if you want your refund to be paid to an agent or other representative

If you want us to pay the refund into a bank account, you’ll need to provide the:

  • bank account number
  • sort code
  • account holder’s name

If you want us to deduct your repayment from other amounts you owe for:

  • Corporation Tax — include your Corporation Tax unique tax reference and either the end date of your accounting period or accounting period number
  • VAT — your registration number and the VAT Return period
  • other liabilities — include type of charge, year or period it refers to and any reference numbers you have

You do not have to send any supporting information with your claim, but we may request further details if your claim does not match their records.

Mark your claim ‘CIS’ and send it to:

National Insurance Contributions and Employer Office
HM Revenue and Customs
BX9 1BX
United Kingdom

steve@bicknells.net

How to offset Construction Industry Scheme deductions – CIS Offsetting (CIS340 4.13)

If you have suffered deductions from your income its generally reclaimed

  1. The Self Employed enter the CIS suffered on their self assessment return, its then part of their tax calculation
  2. Companies reclaim via their Payroll – Companies can also offset

Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340) – GOV.UK (www.gov.uk) – Section 4.13

Companies that have deductions taken from their income as subcontractors should set-off these deductions against the amounts payable monthly or quarterly for PAYE, National Insurance contributions and Student Loan repayments due from their employees and CIS deductions from their subcontractors. This should be done monthly (or quarterly, as appropriate) and the calculation should be shown on the company’s EPS.

Companies should simply reduce the amount of PAYE, National Insurance contributions, Student Loan repayments and any scheme deductions they pay over to our accounts office by the amount of CIS deductions made from their income.

CIS132 – Construction Industry Scheme (publishing.service.gov.uk)

The CIS132 is used to keep a record of the offsets, you could create a spreadsheet to keep these records.

Steve@bicknells.net

What counts as Labour under CIS (Construction Industry Scheme)?

Under the Construction Industry Scheme (CIS) if you use subcontractors who don’t have Gross Status the contractor has to make a deduction of 20% or 30% and pay it to HMRC.

In the CIS340 guidance, the deduction is applied as follows

There are 2 steps that contractors must follow.

Step 1: Work out the gross amount from which a deduction will be made by excluding VAT charged by the subcontractor if the subcontractor is registered for VAT, read the examples in CIS 340 Appendix D.

The contractor will need to keep a record of the gross payment amounts so that they can enter these on their monthly returns.

Step 2: Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor is not registered for VAT:

  • materials
  • consumable stores
  • fuel (except fuel for travelling)
  • plant hire
  • the cost of manufacture or prefabrication of materials

The bit that is left after following the steps above is the Labour to which tax deduction of 20% or 30% is applied.

What is the Labour if the subcontractor has its own subcontractors?

The subcontractor needs to show the amount of labour inclusive of the subcontractors they have used!

They are charging the main contractor for all labour costs even if some of their subcontractors may be gross status.

steve@bicknells.net

Are you a Property Developer or Investor for CIS Tax purposes?

Property developers

Property developers are included within the meaning of mainstream contractors for the Construction Industry Scheme (CIS) because their business activity is the creation of new buildings, or the renovation or conversion of existing buildings, or other civil engineering works. The same is true of a speculative builder.

Property investment businesses

A ‘property investment business’ is not the same thing as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental; it need not be involved in the construction, alteration or extension of buildings. Even so, if its property estate is substantial enough, its expenditure on construction operations may well cause it to fall within the meaning of a ‘deemed contractor’ (see CISR12050).

The Badges of Trade

There are also we established indicators which help determine whether you are an investor or a developer (trading), the factors below would indicate that you are a developer (which includes property flipping)

  • Profit Motive – did you buy the property with the selling it quickly for a profit
  • Property Finance – developers have loans and development finance (not long term mortgages)
  • Frequency – a company regularly buying and selling properties is likely to be trading and to be classed as developer
  • Duration – it the period between buying and selling is short that would indicate that you are not an investor
  • Work Carried Out – If major works are undertaken with a view to sale that sounds like a developer
  • Agreements – have you asked agents for sale prices or rental

Example from CISR12080 – Construction Industry Scheme Reform Manual – HMRC internal manual – GOV.UK (www.gov.uk)

A property investment business acquires a number of properties which it intends to let, but before letting, minor refurbishment is required to bring the properties up to a suitable standard to be able to let them. For CIS purposes we would see this as the normal activities of a property investor, and where the expenditure on such activities exceeds £3million in a rolling 12 month period then CIS applies.

The property investment business then acquires a large dilapidated hotel to add to its portfolio, and decides to convert the building into a series of flats which it will then individually let out. As a result, substantial development is required to the property to change the building to its new use. In respect of this particular development and contract we would regard the property investment business as having taken on the mantle of a mainstream contractor as its business activity is now that of construction operations.

steve@bicknells.net

How do you register for CIS?

You may need to register as a contractor or a subcontractor or both, let’s look at what you need to do.

Registering as a Contractor

If you are within the Construction Industry and you pay Subcontractors, you will be a Contractor.

What are Mainstream contractors

If your business is construction and you pay subcontractors for construction work, you’re a ‘mainstream’ contractor. This applies if you’re a:

  • builder
  • labour agency
  • gangmaster (or gang leader)
  • property developer

What are Deemed contractors

You count as a ‘deemed’ contractor if your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment. This could apply to:

  • housing association or arm’s length management organisations (ALMOs)
  • local authorities
  • government departments

How do you Register

You register as an employer but tick the box to say you will be paying subcontractors (you can also register by phoning the HMRC Helpline 0300 200 3210), I generally use the gateway.

It can take 5 working days to register (longer at the moment), you can’t register more than 2 months in advance and you need to register before you make payments.

You register on Government Gateway, its registering for taxes, you need to choose PAYE.

You then need to know:

  • Business UTR
  • Business Contact Details
  • Your NI Number
  • Start date
  • Tick the Subcontractor Box

When done, you’ll get a letter from HM Revenue and Customs (HMRC) with the information you need to start working as a Construction Industry Scheme (CIS) contractor.

Contractors need to:

  • Verify Subcontractors – checking deduction status
  • Deduct tax from payment at the rate stated by HMRC
  • Pay tax to HMRC
  • Complete a Monthly CIS return
  • Provide Subcontractors with a Deduction Statement

Registering as a Subcontractor

To register for the Construction Industry Scheme (CIS) as a subcontractor you’ll need:

  • your legal business name – you can also give a trading name if it’s different to your business name
  • your National Insurance Number
  • the unique taxpayer reference number (UTR) for your business
  • your VAT registration number (if you’re VAT registered)

If you’re a subcontractor and a CIS contractor (you pay subcontractors to do construction work), you’ll need to register for CIS as both.

You can register by phoning the HMRC Helpline

Telephone:
0300 200 3210

Monday to Friday: 8am to 6pm

Closed on weekends and bank holidays.

You can also register using the goevrnment gateway – register for CIS online. You’ll need the Government Gateway user ID and password you used when you registered for Self Assessment (or another government service).

You can apply for gross payment status at the same time.

If you do not have a UTR, register as a new business for Self Assessment and choose ‘working as a subcontractor’ when prompted. You’ll be registered for Self Assessment and CIS at the same time.

Companies can use form CIS305 to apply.

How do you qualify for Gross Status

You must show HM Revenue and Customs (HMRC) that your business passes some tests. You’ll need to show that:

  • you’ve paid your tax and National Insurance on time in the past
  • your business does construction work (or provides labour for it) in the UK
  • your business is run through a bank account

HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:

  • £30,000 if you’re a sole trader
  • £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
  • £30,000 for each director of a company, or at least £100,000 for the whole company

If your company’s controlled by 5 people or fewer, you must have an annual turnover of £30,000 for each of them.

Gross Status means you can be paid without any tax being deducted.

steve@bicknells.net

Construction Industry Reverse Charge from October 2019

New VAT rules are coming into force from 1st October 2019 to create a domestic reverse charge for Construction, known as Construction Services Domestic Reverse Charge.

HMRC are introducing the change to combat missing trader fraud.

VAT registered construction clients will need to account for reverse charge as it was a self supply, the supplier won’t charge them VAT. This then removes the risk of deducting input tax when the output tax has never been paid.

The new system will not apply to Zero Rated Supplies.

Unlike some other “reverse charge” schemes, amounts accounted for under the CSDRC will not count towards the VAT registration limit. This means that if a customer is not already required to be registered for VAT, the CSDRC “deemed self-supplies” will not change this.

Subcontractors will see a loss of cashflow under the scheme and its likely to cause issues for customers as they need their Making Tax Digital systems to be able to cope with the change.

Subcontractors also need to be sure that their services are within CSDRC before agreeing not to charge VAT.

CSDRC will follow the CIS rules to determine what is within the scope of CSDRC.

In the first 6 months HMRC has suggested they will apply a light touch to the new rules.

steve@bicknells.net

 

 

How do you de-register for CIS?

Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).

The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered.

HMRC make it easy to join CIS but its hard to find the instructions on how to leave or cancel CIS.

For those who have struggled to find the instructions here they are

https://www.gov.uk/what-you-must-do-as-a-cis-contractor/tell-hmrc-about-changes

If you stop trading or using subcontractors

You must:

tell HMRC

stop filing monthly CIS reports

Do this even if you’ve stopped using subcontractors temporarily, for example because you’re using your own employees to carry out work.

In general I find a letter works best as you can send it recorded delivery and prove it was sent, you write to this address

National Insurance Contributions and Employers Office
HM Revenue and Customs
BX9 1BX

steve@bicknells.net

What if you fail to register for CIS

The Construction Industry Scheme (CIS) applies to anyone who carries out construction work as a trade, in other words developers, contractors, building maintenance and repairs, decorating, property conversion, basically if you use sub-contractors to work on a building its probably within CIS. It does, however, exclude property investors (although this could change soon) and domestic householders.

Tax Aid have a good example of how it works

Rob is asked to undertake some repair work on Ben’s private house. He asks Wendy to help him with the electrical work. Wendy is working on a self-employed basis for this contract. Ben pays Rob without deduction of tax as Ben is a private householder. Rob then pays Wendy.

Rob should register under CIS as a contractor before making the payment to Wendy. Rob should ask Wendy for her UTR and check her CIS status with HMRC. He should then pay Wendy net of 20% tax or net of 30% tax depending on her status with HMRC (exceptionally, if Wendy is entitled to register with HMRC for gross payment, then HMRC would tell Rob that he can pay Wendy without deduction of tax; gross payment will only apply to larger businesses).

If HMRC advises Rob that Wendy is registered under CIS (but not for gross payment), then Rob will keep back 20% tax and pay this CIS tax across to HMRC on Wendy’s behalf.

If Rob failed to register as a contractor under the CIS scheme he could face very big penalties. These include a £3,000 fine for not keeping CIS records, and a £100 per month penalty per missed return (and returns are due monthly).

Failing to register for a number of years could lead to penalties in the tens of thousands of pounds. This can happen even when all the workers are registered as self-employed and have paid the tax due on their income.

In summary the penalties are:

The maximum penalty is currently £3,000 for failing to register then there are late filing penalties

How late the return is Penalty
1 day late £100
2 months late £200
6 months late £300 or 5% of the CIS deductions on the return, whichever is higher
12 months late £300 or 5% of the CIS deductions on the return, whichever is higher

For returns later than this, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.

There is no lower limit for CIS registration and the penalties can be harsh as demonstrated in the cases below

Brian Parkinson a gardner and lanscaper who used occasional subcontractors and got £31,500 in CIS Penalties!

The FTT heard evidence that little or no loss of tax resulted from this omission, as the amount of tax Parkinson ought to have deducted under the CIS was put at £837.90. [Brian Parkinson and the Commissioners for Her Majesty’s Revenue & Customs TC04526; Appeal number: TC/2013/00224].
This comprised £6,000 (5 x the £1,200 maximum) charged under the Taxes Management Act 1970 (TMA 1970), s98A(2)(a) and also month 13 penalties of £25,500 charged under TMA 1970, s. 98A(2)(b). – See more at: https://www.accountancylive.com/partial-win-gardener-over-%E2%80%98excessive%E2%80%99-cis-penalties#sthash.zJA59Gjv.AfCNNGRJ.dpuf
Or how about CJS Eastern an installer of lightning conductors

INCOME TAX – subcontractors – appellant company contracted with a third party provider to supply “operatives” – third party provider “net” for CIS purposes – company’s failure to make CIS returns  – fixed monthly penalties of £28,500 – Month 13 penalties of £56,500 – whether reasonable excuse – held, no – whether disproportionate as a breach of A1P1 – Tribunal’s jurisdiction and interaction with mitigation –  Bosher followed – fixed penalties upheld – Month 13 penalties set aside as excessive – appeal allowed in part

https://cases.legal/lang-en/act-uk2-156151.html

If you work in construction make sure you register and comply with CIS!

steve@bicknells.net

How do you complete a Monthly CIS Return?

Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).

The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered.

Every month contractors have to file a CIS return online and issue Deduction Statements to Subcontractors.

But many people are confused as to what to put in the boxes on the return, below is the official guidance.

Deductions at the standard rate

Examples D1 to D3 show deductions at the standard rate of 20% which was the rate in force at the time of writing this guide.

Example D1

Where no materials are supplied (‘labour-only’)
A labour-only subcontractor does work on site for £200
Total payment £200
Amount deducted at 20% = £40
Net payment to subcontractor £160

The contractor calculates the deduction (£40), which has to be paid to our accounts office. The labour-only subcontractor receives the balance of £160.

Entries on the contractor’s monthly return

In example D1, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £200
Direct cost of materials used £0
Amount deducted £40

Example D2

The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’) and the contractor has paid the subcontractor’s expenses.

Where the subcontractor isn’t registered for VAT, any VAT they had to pay on materials should be included in the cost of materials when calculating the CIS deduction.

Where expenses, for example accommodation, mobile phone and fuel costs are paid to the subcontractor, the amounts should be included in the subcontractor’s gross payment.

A tiling subcontractor, who isn’t VAT-registered, agrees to tile a wall and to supply the necessary materials for a total payment of £535. The materials cost the subcontractor a total of £235 (£200 + £35 for VAT). The subcontractor is also paid accommodation costs of £50 and fuel of £10.

Labour charge £300
Materials £235
Accommodation and fuel £60
Amount due (invoice amount) £595

Calculation of deduction

Total payment £595
Less cost of materials (inclusive of VAT) £235
Amount liable to deduction £360
Amount deducted at 20% £72
Net payment to subcontractor £523

The contractor deducts the cost of materials from the price for the whole job and calculates the deduction on the difference of £360. The contractor has to pay £72 to our accounts office and pays £523 (£595 – £72) to the subcontractor.

Entries on the contractor’s monthly return

In example D2, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £595
Direct cost of materials used £235
Amount deducted £72

Example D3

The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor is registered for VAT, any VAT they had to pay on materials should be excluded from the cost of materials when calculating the CIS deduction.

For the total cost of £600, a subcontractor who is a taxable person for VAT purposes, agrees to paint the interior of a building and to supply the materials. The painter pays £235 for the materials, which includes VAT of £35.

Labour charge £400
Materials £200
Total payment £600
Add VAT £105
Amount due (invoice amount) £705

Calculation of deduction

Total payment (exclusive of VAT) £600
Less cost of materials (exclusive of VAT) £200
Amount liable to deduction £400
Amount deducted at 20% £80
Net payment to subcontractor £625

The subcontractor is paid £625, which is the invoice amount (£705) less the deduction (£80).

Entries on the contractor’s monthly return

In example D3, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £600
Direct cost of materials used £200
Amount deducted £80

Deductions at the higher rate

Examples D4 to D6 show deductions at the higher rate of 30%. This rate is used for illustration purposes and may or may not be the rate in force at the time of reading this guide.

Example D4

Where no materials are supplied (‘labour-only’)
A labour-only subcontractor does work on site for £200
Total payment £200
Amount deducted at 30% £60
Net payment to subcontractor £140

The contractor calculates the deduction (£60), which has to be paid to our accounts office. The labour-only subcontractor receives the balance of £140.

Entries on the contractor’s monthly return

In example D4, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £200
Direct cost of materials used £0
Amount deducted £60

Example D5

The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor isn’t registered for VAT, any VAT they had to pay on materials should be included in the cost of materials when calculating the CIS deduction.

A tiling subcontractor, who isn’t VAT registered, agrees to tile a wall and to supply the necessary materials for a total payment of £535. The materials cost the subcontractor a total of £235 (£200 + £35 for VAT).

Labour charge £300
Materials £235
Amount due (invoice amount) £535

Calculation of deduction

Total payment £535
Less cost of materials (inclusive of VAT) £235
Amount liable to deduction £300
Amount deducted at 30% £90
Net payment to subcontractor £445

The contractor deducts the cost of materials from the price for the whole job and calculates the deduction on the difference of £300. The contractor has to pay £90 to our accounts office and pays £445 (£535 – £90) to the subcontractor.

Entries on the contractor’s monthly return

In example D5, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £535
Direct cost of materials used £235
Amount deducted £90

Example D6

The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor is registered for VAT, any VAT they had to pay on materials should be excluded in the cost of materials when calculating the CIS deduction.

For the total cost of £600 a subcontractor, who is a taxable person for VAT purposes, agrees to paint the interior of a building and to supply the materials. The painter pays £235 for the materials, which includes VAT of £35.

Labour charge £400
Materials £200
Total payment £600
Add VAT £105
Amount due (invoice amount) £705

Calculation of deduction

Total payment (exclusive of VAT) £600
Less cost of materials (exclusive of VAT) £200
Amount liable to deduction £400
Amount deducted at 30% £120
Net payment to subcontractor £585

The subcontractor is paid £585, which is the invoice amount (£705) less the deduction (£120).

Entries on the contractor’s monthly return

In example D6, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:

Total payment £600
Direct cost of materials used £200
Amount deducted £120

https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340#appd

steve@bicknells.net

 

What’s happening to CIS after April 2016?

at a construction site

The changes are outlined in this document – CIS Link

Key Changes

  • Reducing the Gross Status minimum turnover threshold to £100,000 a year for businesses with multiple directors (from April 2016)
  • Initial and annual compliance tests will focus on fewer obligations
  • There will be further amendments to the need to submit Nil returns
  • It will be easier for Joint Ventures to obtain Gross Status if one party already holds Gross Status
  • Online verification will be mandatory from April 2017
  • Earlier repayments can be made to liquidators in insolvency proceedings. Currently where a subcontractor is a company, no repayment of any amount deducted and paid over to HMRC by a contractor can be made to the subcontractor until after the end of the tax year in which the deduction was made. These rules will be amended so that in certain cases where the amount deducted by the contractor is excessive, a repayment can be made during the tax year.
  • Mandatory online filing of CIS returns will be introduced with the offer of alternative filing arrangements for those unable to access an online channel by reason of age, disability, remote location or religious objection.
  • The directors’ self assessment filing requirements will be removed from the initial and annual compliance tests.
  • You must re-submit returns for any period that you amend

We await the budget on 16th March 2016 for full details.

steve@bicknells.net