The construction industry is the only industry in the UK where self-employed subbies are taxed at source.
This is done under the construction industry scheme (CIS). Under construction industry scheme rules, the main contractor must make CIS deductions from a subcontractor’s pay and pass this on to HMRC.
If your CIS returns are filed late and CIS payments are not made on time, you will face a financial penalty. Further penalties will be applied if your CIS return is still not filed after two months, six months or 12 months.
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How do construction industry scheme deductions work?
Under the construction industry scheme, contractors make CIS deductions from a subcontractor’s pay. They then pass these payments on to HMRC on behalf of the subcontractor. The CIS collected under the scheme is offset against the subcontractor’s end-of-year tax bill.
Contractors must submit a monthly CIS return to HMRC and make payment. They should also issue subcontractors with a monthly CIS statement so they can keep track of how much CIS has been deducted under the scheme.
When subcontractors complete their tax returns, they will need to pay income tax and NIC. This can be offset against the CIS they have already paid. If their CIS total does not cover their tax bill, they must pay the difference. If they have overpaid CIS, they can claim a CIS refund.
Who needs to register for the CIS scheme?
Contractors must register for the construction industry scheme (CIS). Failure to register means they will be unable to pay subcontractors correctly, and this will result in fines and penalties.
CIS registration is not compulsory for subcontractors, but there are benefits to registering for the scheme.
How much are the CIS deductions?
The amount deducted from a subcontractor’s pay will depend on their CIS status. If the subcontractor is CIS registered, the deduction is 20%. If the subcontractor is not registered, the rate of deduction is 30%. If the subcontractor is granted gross payment status, they do not have any deductions made from their gross pay.
What are the consequences of missed CIS payment?
Late CIS returns result in penalties. These penalties are imposed even if the monthly return is only one day late. The later the returns, the more penalties you will incur.
Failure to make CIS payments on time can be very costly to businesses. You must take reasonable care to ensure you file returns and pay any CIS tax you owe for the subcontractors listed on your return.
Initial fixed penalty
Late returns result in a financial penalty. The first penalty is issued if the monthly return is one day late. The initial fixed penalty is currently £100.
Further penalty
An additional penalty will be applied if HMRC has not received your CIS return two months after the date it was due. A further penalty will be applied six months after the date it was due, and again after 12 months if it has still not been submitted. The amount of the second further penalty will depend on why your return was late.
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How to avoid missing CIS payments
As a main contractor, you have an obligation to follow the rules of the construction industry scheme (CIS). If you fail to meet your obligations, you will face penalties, and in some cases, legal action.
To ensure you are meeting your obligations, you should ensure you deduct CIS at the correct rate, complete monthly returns accurately, and make payments to HMRC in a timely manner.
Plan and budget
Managing cash flow can be tough and it’s tempting to dip into CIS money or VAT to cover urgent costs. This is a really bad habit to fall into and can lead to all kinds of problems.
The best way to ensure you don’t miss CIS payments is to set the money aside until the payment is due. Some companies have a separate bank account for tax liabilities. They transfer any CIS deductions and VAT from their main account into the tax account until it needs to be paid.
You do not have to do this, but you should have a system in place to ensure you are budgeting for CIS and other tax payments. The money deducted from your subcontractors for CIS is not your money. You are collecting it on behalf of HMRC.
Communicate with HMRC
If you are unable to file your monthly return on time or make CIS payments, you should notify HMRC as soon as possible to explain your situation. Contacting HMRC early can prevent the issue from escalating. If you have a reasonable excuse for failing to file your return, you may be able to avoid a penalty.
Ensure effective subcontractor management
CIS payments are not the only thing HMRC are concerned with. They don’t like it when contractors try to disguise employees as subcontractors working on a self-employed basis.
It’s unlikely HMRC will open an enquiry into the employment status of your subbies out of the blue. All too often, these enquiries stem from a tax or CIS query. But if they do decide your subbies are actually employees, you will be held liable for any unpaid tax or NIC.
The best way to protect yourself from confusion around the employment status of your subbies is to get a bespoke subcontractor agreement in place.
This is where HardHats comes in.
We specialise in creating robust subcontractor agreements that remove ambiguity around employment status. We are the only UK company to offer a subcontractor guarantee specifically for the construction industry.
And all our clients get access to our subcontractor management software. This allows you to keep all your subcontractor information in one place including details of their CIS registration.
Book a call with us to get started.