The Construction Industry Scheme has a very simple goal – to prevent self-employed subcontractors from avoiding tax. The so-called ‘Self-Employment Switch’ has helped construction firms take on full-time employees as self-employed subcontractors. The contractor avoids paying the tax and employee benefits and the subcontractor who likewise doesn’t need to tell the exchequer about their earnings. The CIS scheme was designed to thwart this behaviour within the UK’s growing construction industry.
The Construction Industry Scheme allows contractors to deduct money from a subcontractor’s payment to directly pass it to HM Revenue & Customs. The Government is clear about the purposes behind this scheme:
‘’The deductions count as advance payments towards the subcontractor’s tax and National Insurance. Contractors must register for the scheme. If you are not registered, as a Subcontractor, you’ll see a high-rate deduction from your pay.’’
Before a contractor can qualify to pay any sub-contractor, they must first register with HMRC. An online service exists for this purpose and the process of registration takes approximately 2 weeks. Even after registration, a contractor must still ensure the following before they can make any payment to a sub-contractor.
- Confirm that the sub-contractor they’re dealing with has registered for self-employed as their current employment status.
If the particular sub-contractor in question is an employee of any organization, then the CIS scheme rules don’t apply to them and they’re paid via their payroll under PAYE regulations.
- ‘Verify’ subcontractors with HMRC in order to see which CIS rate should be applied, there are three rates:
- 0% is applied for subcontractors that have successfully applied for gross status
- 20% is applied for subcontractors that have been successfully verified but are not registered for gross status. Most subcontractors will fall under this.
- 30% is applied for subcontractors that have not been successfully verified. This could be because the information supplied is not correct or subcontractor is not registered as self-employed.
At the end of the year any tax deducted is taken off of any liability owed. If you have had more deducted than you owe – you get a refund!
- Deduct relevant rate from subcontractor’s fee, report it and pay the deduction to HMRC by the 22nd (or the 19th if you’re paying by post). You may be charged interest and penalties if you pay late.
What happens if you fail to pay?
As the contractor, it’s your responsibility to deduct the right amount of tax from your subcontractors and if you fail to correctly notify HMRC of your subcontractor payments then you may be faced with a fine of up to £3,000.
Returns must be made by the 19th of each month for the previous tax month – so May’s returns must be made by 19th June. Late returns will incur penalties starting from £100 for one missed day.
Is there an easy way to eliminate all of this?
Yes. Here at Outsourced ACC we are happy to do the work for you.
We carry out all the administration to make sure you’re fully compliant with HMRC and won’t come unstuck. We make sure that the status of every sub-contractor is correct and pay the correct tax to HMRC on your behalf.
Outsourced ACC clients cut out the administrative burden of CIS – along with all the risks.
Written by Irina Stucere