Steve J Bicknell Tel 01202 025252
Helpful Comments on Tax and Finance – Bicknell Business Advisers Limited www.bicknells.net
Reverse Charge for the Construction Industry starts in October 2019, its complicated and will be confusing!
Read our 2 page fact sheet to understand how you need to account for VAT.
The new rules will affect Subcontractors and Contractors.
Click here to get the factsheet
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
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
If you work in construction make sure you register and comply with 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.
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.
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.
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.
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
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
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.
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
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
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).
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
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.
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.
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
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
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.
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
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
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).
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
The changes are outlined in this document – CIS Link
Key Changes
We await the budget on 16th March 2016 for full details.
![fotolia_1931265[1]](https://i0.wp.com/stevejbicknell.com/wp-content/uploads/2015/01/fotolia_19312651.jpg?ssl=1)
CIS covers most construction work to buildings, including site preparation, decorating and refurbishment.
You don’t have to register if you only do certain jobs, including:
The changes are outlined in this document – CIS Link
Key Changes
steve@bicknells.net
It’s a very common question, the client pays you and keeps a retention of 5% reducing to 2.5% on completion to be released after the end of the defects period.
You do the same with your sub-contractors.
The retentions need to be held in balance sheet accounts as they can’t be invoiced to client and aren’t due to the sub-contractors. But they should be included within sales and sub-contract costs.
HMRC’s guidance is in BIM51520
In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.
In their accounts, builders will generally deal with retentions in one of the following ways:
- include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
- defer recognition of retentions until their receipt becomes virtually certain.
Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.
In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.
A challenge will only be appropriate in worthwhile cases. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect (compared with the alternative provisions method).
There is guidance on VAT in VATTOS5170
……the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.
steve@bicknells.net
This case involves a Project Manager who tried to limit his liability on a Construction Project
http://www.bailii.org/ew/cases/EWHC/TCC/2012/2137.html
In summary the dispute was between the Project Manager and the employer over the building of new boarding accomodation the quality of work was not disputed but there were delays.
The Employer claimed that if the Project Manager had acted with care and skill, it would have ensured the Contractor execute the building contract (rather than letters of intent) and that would have produced a more advantageous outcome in the dispute with the Contractor for delay, as the Contractor would have been liable for liquidated damages.
When submitting its fee proposal for this project, the Project Manager attached its standard terms and conditions, including a limitation of liability which had not formed part of the Project Manager’s appointment on two earlier projects at the college. A limitation on liability incorporated into the Project Manager’s retainer, on this third project was found to be unenforceable as it did not meet the requirement of “reasonableness” as set out in the Unfair Contract Terms Act (UCTA) 1977.
Had the limitation been enforceable, the Project Manager’s liability would have been limited to the amount of its fee, which totalled £111,321. The Employer was instead awarded damages of £226,667.
The case has been circulate and written up by Law Now
http://www.law-now.com/DirectMail/%7B2E6BA698-284E-44D6-B906-CBA2DE28F3C8%7D_profapptmpfsept12.htm
Well worth a read
steve@bicknells.net
