Anyone working in the construction industry will be familiar with the Construction Industry Scheme (CIS). Essentially, where a contract for work falls within the scope of CIS contractors are required to report and deduct tax from subcontractors at the rate stipulated by HM Revenue and Customs (HMRC).
The onus is on contractors to operate the scheme correctly, yet errors are commonplace. And they can prove costly, especially if a subcontractor doesn’t have gross payment status, since the contractor is liable for the additional tax due and any penalties.
Contractors – the scope of CIS
Although most construction work falls within the scope of CIS, there are exceptions, such as professional services (surveyors and architects), carpet fitting and delivering materials.
Where a job is initially provided by a private householder or a landlord, the contract will fall outside the scope of CIS. However, if the contractor decides to subcontract any of the work, for example electrical work, this will fall within the scope of CIS. There is no requirement to report to HMRC if arrangements and payments for work are agreed between the householder and the electrician direct.
Check the verification number
To establish the correct rate of deduction contractors should always verify a subcontractor prior to making payment. A standard verification number from HMRC will always contain numbers and will advise the correct rate to be deducted.
Errors tend to arise where an alpha character is shown as part of the verification number, for example V167897301A. In such cases a deduction at the higher rate of 30% should be applied. In these circumstances, the contractor should always check that the subcontractor has provided the exact details that he has registered with HMRC.
Agencies – are they subcontractors?
Where subcontractors are engaged through an employment agency, then the agency itself should be treated as the subcontractor. Contractors will still need to verify the agency and deduct any tax due at the correct rate.
Accurate materials costs
Where subcontractors provide materials, such as bricks or paint, to complete a job, these costs do not have to be treated as tax-deductible from the subcontractor’s payments. As a consequence, subcontractors will often overstate the cost of materials.
It is the contractor’s responsibility to ensure that materials costs are correct, either by requiring the subcontractor to confirm the actual cost or, where this information is not available, by making a reasonable estimate of that cost.
Contractors should be aware that, if challenged by HMRC, they may have to demonstrate that the amount is reasonable. As a point of principle, it pays to advise subcontractors that they may be asked to prove the cost of materials to avoid any deduction on this cost.
Expenses – the rules are not the same as those for employees
Sometimes subcontractors will ask for reimbursement of expenses incurred. Typically, they will claim travel (fuel for vehicles), meals and overnight accommodation, as a material cost or a non-taxable payment. When expenses are refunded to a subcontractor, they are always subject to deduction at the rate advised by HMRC.
Is plant hired or owned?
For CIS purposes, scaffolding is treated as plant. When a contractor employs a scaffolding subcontractor who erects the scaffold, unless the scaffolding is hired by the subcontractor, it doesn’t matter if they charge by the week to ‘hire’ the scaffolding because the total cost will be subject to deduction at the correct rate. The same applies for contracts for a digger with a driver.
In a nutshell, if a subcontractor shows a breakdown of labour and plant costs on their invoice, the contractor must ask to see the plant hire agreement before committing to pay this cost without deduction at the correct rate.
As we can see, it is easy for contractors to make mistakes when reporting and deducting tax from subcontractors under the scope of CIS. Yet, these deductions are deemed to be
advance payments towards the subcontractor’s tax and National Insurance, so contractors have a duty of care to get them right.
Help is at hand in HMRC’s online guide and webinars, available at https://www.gov.uk/guidance/help-and-support-for-the-construction-industry-scheme, but if in doubt, contractors should seek professional advice.