The Construction Industry Tax Deduction Scheme (CIS) was overhauled in 2007. We are covering the scheme in two articles. Our first article dealt with the overall concept of the CIS and registration. This second article of the two deals briefly with the following areas:
- deduction under CIS.
- separate scheme election options for contractors.
- verification of registered subcontractors.
- the treatment of amounts deducted for other tax purposes.
1. Deductions under the Construction Industry Scheme
There are two rates of deduction of tax from contract payments. The deduction is set by Treasury Order and does not include the cost of materials.
All payments have to consider the subcontractor’s tax status. If a deduction is required, the contractor must:
Calculate and make any deduction.
Record payment, materials and deduction details.
Pay the net amount to the subcontractor.
Give the completed statement of deduction to the subcontractor.
The normal rate for an unregistered, self-employed subcontractor is set at 20%.
Small Payment Exemptions (Regulation 18)
“Small payments” not exceeding £1,000, are not counted as a contract payment, so ignored for deductions. The payer must be an HMRC approved “subcontractor”.
Land Owner Exemption
Contract payments not exceeding £1,000 made to a recipient in respect of construction operations carried out on land owned by them may be exempted.
Charity Exemptions (Regulation 24)
Charities making payments are excluded from the terms of contract payments.
The following are also excluded by the Regulations from being treated as contract payments:
Regulation 20 – Reverse premiums (schedule 6 Finance Act 1999).
Regulation 21 – Payments made by a governing body or head teacher of a maintained school.
Regulation 22 – Payments made in respect of construction operations relating to property used for the business of that person or another company in the same group.
Regulation 23 – Payments by public bodies made under a private finance transaction.
3. Election By Contractors for Separate Schemes
Contractors may choose to be treated as separate contractors. This means larger contractors can operate consecutive schemes easily; each deals with a separate group of subcontractors working on separate projects.
Notice to revoke a scheme may be given before the start of the tax year in which it is to take effect or be revoked before they take effect.
Where a contractor acquires the business of another contractor, (s)he may elect within 90 days of the acquisition to treat this acquired business as a separate contractor scheme, or may add subcontractors “acquired” to existing scheme(s) within the year the acquisition takes place.
4. Verification of Status of Registered Subcontractors (Section 69)
The sub-contractor verification procedure obliges the payer to check whether the payee is registered for ‘gross payment’ or ‘payment by deduction’. Thereafter, HMRC is responsible for notifying payers when a person changes their status.
Verification is achieved by the contractor providing HMRC with the name, National Insurance number or company registration number and the Unique Taxpayer Reference (UTR) of the person whom she / he is to pay.
However, a contractor need not verify if:
(i) The person whom he / she is paying has been included in a return under regulation 4 in the current or previous two tax years
(ii) The payment is made within two years of the appointed day, if the person to whom (s)he is making the payment has been included in a return under regulation 4 or a return under regulation40A of the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993(a) for the current or previous two years, or
(iii) The contractor is a company and the payee has been included in a return under regulation 4in the current or previous two tax years made by another company in the same group.
5.1. Returns by Contractors (Section 70)
Regulations outline returns requirements briefly as follows:.
Periods covered and frequency of payment returns.
Payment record keeping obligations.
Information required from contractors about payments.
Contract returns delivered for each tax month must be made within 14 days after the end of the tax month. It also sets out what specific information should be contained in the contractor’s return.
Paragraph 3 of Regulation 4 specifies the precise, detailed information required about each Sub-contractor who is paid.
The declaration on the return is described by paragraph (5) of Regulation 4. This declaration must make clear that:
(i) None of the contracts to which the return relates is a contract of employment.
(ii) The contractor has complied with the requirements of regulation 6 in the case of each person to whom a payment is made.
(iii) The return contains all the supporting information required.
The contractor must also give the information to the relevant subcontractor within 14 days after the end of the tax month.
Where no contract payments have been made in a tax month, the contractor must actively make a nil return within the period.
5.2. Electronic Submission of Monthly CIS Returns (Para 4 of Regulation 4)
Regulations 39 to 43 deal with the procedures to recognise electronic filing. Delivery is deemed to be made on acceptance by the HMRC computer. Electronic submissions by agents filing on behalf of a contractor are permissible.
5.3. Payment of Sums DeductedSection 62 (1)(a)
Amounts deducted under CIS must be paid to HMRC.
Section 71sets out the basis for collection deducted amounts, the right to assess the amounts, if necessary, of the contractor and it also provides for interest on amounts in accordance with Regulations to be made. The interest is disallowed for tax purposes because of s71(3)(b).
Large contractors are subject to mandatory electronic payment in the same way as large employers are for the purposes of PAYE. These provisions are contained in Regulations 45 to 49.
The payment provisions apply once an e-payment notice has been issued to a contractor.
5.4. Tax Period(Regulation 2)
This is defined as a tax quarter if quarterly tax periods apply; otherwise these are tax months. Tax quarters end on 5thJuly, 5th October, 5th January and 5th March.
If a contractor prefers quarterly payment, this is covered by Regulation 8. The amounts due for both CIS tax and net PAYE, National Insurance Contributions (NIC) etc. are less than £1,500 on average.
5.5. Due Dates For Payment
If an electronic payment is preferred, this is due 17 days after the end of the tax period (by 22nd of the relevant month). Otherwise it is due 14 days after the end of the period. (Regulation 7).
6. Treatment of Amounts Deducted For Other Tax Purposes
The amounts deducted do NOT reduce the amount of the payment. They are simply amounts deducted for tax purposes. Amounts deducted assume that the amounts have been paid by the contractor to HMRC.
If the subcontractor is not a company, the amount is treated as being Income Tax paid in respect of subcontractor profits. If the sum is more than sufficient to cover the Income Tax, it is then to be applied against the Class 4 contributions on the same profits.
If the subcontractor is a company, Section 62(3) sets out the process. Here, amounts are treated as paid on account of any “relevant liabilities” of the subcontractor i.e. any liabilities arising before or after the deduction is made, to make obligatory payments to HMRC as either an employer or a contractor.
Any excess beyond liabilities is treated as CorporationTax on the subcontractor’s relevant profits.
The application of the sums deducted and the order of set off of those sums for a sub-contracting company is set out in Regulation 56.
This series of two articles on the Construction Industry Scheme can only be treated as a simple introduction to what is essentially a highly complex area of taxation. We recommend that any areas we have not covered in more detail for which you need more information, seek the advice of specialist tax advisory company.