As bookkeepers for tradespeople based in Chichester, clients frequently ask us to explain CIS. So, in this article, we thought we’d do that in our usual jargon-free manner. Read on to discover everything you need to know about the Construction Industry Scheme (CIS).
Bookkeepers for Tradespeople – Demystifying CIS:
The Construction Industry Scheme (CIS) is a scheme where contractors must deduct tax from subcontractors’ invoices (for the labour element only) and pay it to HMRC.
Registration & Verification:
Contractors must register for the scheme. (A contractor is any business that contracts labour from a subcontractor).
Subcontractors (a business undertaking contract labour) don’t need to register for the scheme. However, if you do register, you suffer 20% deductions; if you don’t, you suffer 30%. So, it’s financially beneficial to register.
Furthermore, you can register as both a contractor and a subcontractor if you fit both categories.
When a contractor engages with a subcontractor, they will verify that subcontractor to determine how much tax they need to deduct.
If a subbie is verified as ‘gross’, they don’t need to deduct any tax (as the tax liability falls solely on that subbie). If they are CIS registered, the deduction is 20%. However, if they are unregistered, the deduction is 30%.
The Numbers & Record Keeping:
- A contractor must submit a monthly return to HMRC by the 19th of each month.
- The CIS months run from the 6th of month 1 to the 5th of month 2.
- The submission is due on the 19th of month 2.
- You must submit a monthly CIS return if registered in the CIS scheme. Even if you did not pay contractors for the returns period. HMRC calls this a Nil submission.
- The returns must show all your payments to subcontractors in the tax month. This isn’t just those with CIS deductions; it must include gross, 20% and 30%.
As a contractor, you should always keep your stubbie invoices and the monthly CIS submission details showing how much you charged for labour, deducted for CIS, and paid to HMRC.
Keep all CIS details for at least three years after the end of the tax year they relate to. HMRC can ask to see your CIS records at any time, and they can fine you up to £3000 if you cannot show these.
If this seems too taxing (pun intended), we can help. As bookkeepers for tradespeople based in Chichester, we use the CIS function in Xero to keep copies of the subcontractor invoices, split the labour from the materials, verify the subcontractors and make the live HMRC submissions each month. We can also send the CIS monthly statements to the subbies straight from the Xero software.
Penalties and Compliance:
There are penalties for filing CIS late. The first fixed penalty is £100. After that, there’s a second penalty of £200 at two months. At six months, it’s either £300 or 5% of any liability that should have been shown on the return. There’s a further penalty at twelve months, but the amount will depend on why the return was late. This could be a minimum of £1500 or £3000 or as much as 100% of the liability owed.
If you fail to register as a contractor, you could be fined £3000.
So, as you can see, it pays to get CIS correct!
Common Mistakes & Advice:
The most common mistake we see is in calculating the amount to deduct. The deduction should only be on the labour element, not on materials, and not on any VAT.
We often see business owners miscalculate the percentage they need to deduct, too.
Calculation Example for a 20% Verified Subcontractor:
Labour £500, Materials £200 = £700 +VAT (Total invoice value £840)
CIS would be £500 x 20% = £100 so the total to pay would be £740 (£840 invoice less £100 CIS).
- Never pay a subbie without an invoice, and check that the invoices split out the labour and materials.
- Before paying any subcontractor, verify them for CIS so you can make the correct entries in your records and deductions for tax.
Finally, our number one piece of advice is to take the time to learn how to properly manage CIS or outsource it to someone who can do it for you.
If you need more advice on CIS, we can help. Contact us HERE.