Contractors’ Responsibilities Under the Construction Industry Scheme (CIS)
Only those who are truly self-employed should pay tax under the CIS. Contractors are responsible for determining the employment status of their workers. Although contractors may prefer to hire workers as self-employed to save costs, being self-employed is a matter of fact, not a choice, except for when they qualify for CIS exemption.
Contractors’ Responsibilities Under the Construction Industry Scheme (CIS)
This article explores all the responsibilities you need to know as a contractor.
Register as a Contractor
To register as a contractor like Boom & Bucket, you need to follow the process for setting up as a new employer, the same as setting up a payroll scheme. You can access the HMRC website to complete the registration process for both. You will then be asked a series of questions, and at the end of the process, you will be asked to create an HMRC online account.
Once completed, HMRC will send you a letter with the necessary information to begin working as a CIS contractor. It is necessary to register as an employer with HMRC before your first payday, even if you are only employing yourself. It can take up to 15 working days to receive your employer PAYE reference number, and you cannot register more than two months before you start paying employees.
If you need to pay an employee before receiving your PAYE reference number, you should run payroll, store your full payment submission, and send a late full payment submission to HMRC. Note that HMRC only deals with applications that relate to the current tax year.
Verify Your Subcontractors
Verifying a subcontractor involves checking if they are registered under CIS and determining their payment status. This is mandatory for new subcontractors, but also for existing ones if they haven’t been included in a monthly CIS return in the current or previous two tax years. Incorrect identification may lead to CIS penalties of up to £3,000.
To verify a subcontractor, you can use the free HMRC CIS online service or commercial CIS software. You will need various details including your Unique Taxpayer Reference (UTR) and the subcontractor’s UTR or National Insurance number. HMRC will check the details and provide a verification reference number along with the rate of tax to deduct when paying the subcontractor.
The verification number acts as proof of correct tax deduction, and the rate may vary depending on the subcontractor’s registration status. You should keep verifications up to date and submit a new verification if the information changes, as the tax deduction rate may change as well.
Work Out Deductibles and Pay Subcontractors
When you deduct CIS tax, you must give the subcontractor a payment and deduction statement (PDS), which serves as written evidence for any tax deductions with HMRC. The statement must be provided within 14 days of the end of the tax month, which ends on the 5th of each month, with a reporting deadline of the 19th of the same month.
Include the required information in the PDS, such as the contractor’s name and tax reference, the payment month, gross amount, CIS qualifying materials amount, CIS tax amount, subcontractor’s name and tax reference, and the HMRC verification number (only for higher rate deductions).
To make a CIS deduction, start with the subcontractor’s gross amount and subtract VAT, unusable equipment, fuel for travel, hired equipment, manufacturing or prefabricating materials, and materials paid for directly by the subcontractor (with evidence or an estimated cost). Finally, deduct the CIS percentage rate provided by HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance bill and must be paid to HMRC. Subcontractors are usually paid directly but can be paid through a third party if requested.
Pay HMRC the Deductions
You are required to remit any deductions made to HM Revenue and Customs (HMRC). When you register as a contractor, HMRC will establish a payment scheme under the Construction Industry Scheme (CIS) for you. If you already have employees, your current PAYE Scheme will be converted to a PAYE/CIS scheme.
To cover your PAYE tax, National Insurance, and CIS deductions, you should make one payment each month or quarter. Payment should be made to HMRC every month by the 22nd (or the 19th if you’re paying by post). Late payment may result in interest and penalties. CIS deductions should be paid to HMRC in the same manner as PAYE and National Insurance payments.
File Your Monthly Self-Assessment Tax Return
CIS monthly tax returns contain information about all subcontractors paid during that tax month. Contractors need to file the monthly returns within 14 days of the end of the tax month, which is always on the 5th day of the month. This means that the monthly return must be filed by the 19th of the month.
The return must include details of all subcontractors paid in that tax month, regardless of the CIS tax rate applied or if no tax was deducted. The contractor needs to provide the subcontractor’s name, verification number, gross amount, materials amount, and tax deducted. The return can be filed online through the HMRC CIS online service or some commercial CIS software.
If no payments were made during the tax month, the contractor needs to inform HMRC that no return is due. If the contractor temporarily stops using subcontractors, they can make an ‘inactivity request’ that lasts for six months. The return must not include any negative values when using commercial CIS software, and any entries that come to less than 0 should be replaced with ‘0’.
Keep Your Records
After the verification process is finished, you will need to maintain comprehensive records and file monthly returns. You can use the CIS online service to submit monthly returns, check your list of subcontractors, view previous returns, and update any information as necessary.
Keep records of the gross payment amount for each subcontractor invoice (excluding VAT) and any deductions you’ve made from subcontractor payments. If you made deductions, you must also keep records of the costs of materials invoiced by the subcontractor (excluding VAT).
Be sure to preserve these records for at least three years after the end of the tax year to which they relate. HM Revenue and Customs (HMRC) may request to see your CIS records at any moment. Failure to provide them can result in a fine of up to £3,000.
Juggling your business whilst settling taxes can be very burdensome, not to mention that CIS rules per se are complicated. Legend Financial is here to help with your CIS needs. Reach us today!
