You’ve been offered a contract by a construction company to maintain properties on one of its recently completed sites. As the proprieties are wholly residential will the Construction Industry Scheme apply to the payment you receive?
CIS deductions
The Construction Industry Scheme (CIS) is a 40-year-old anti-avoidance measure. Its works a little like PAYE, but for construction firms and self-employed workers in that industry. There are three levels of CIS deduction that contractors must make when they pay a subcontractor: 30% if the subcontractor isn’t registered with HMRC; 20% if they are registered, but don’t have a CIS certificate; and 0% if they have a CIS certificate.
Deducting and reporting
Where a payment is made for work within the CIS by a person or firm who is also within the CIS, they must send a report to HMRC whether or not they deduct any tax. If they deduct tax they must account for it using the same RTI reporting as employers do for PAYE. If you or your firm carries out work that’s within the CIS, but for a customer who is not, the CIS doesn’t apply. In other words, jobs contracted for directly with a private customer are outside the scheme.
Trap. While direct contracts with individuals and most businesses are outside the CIS, large companies can be within it. For example, if you do some work for the local branch of a bank, it will usually be required to make CIS deductions.
Tax credit
As you probably know, any tax which is deducted under the CIS can be used to set against your or your firm’s tax bill on profits or even set against PAYE or VAT liabilities. The trouble is that HMRC is notoriously slow and awkward at processing this and in the meantime its tax collection department will be hounding you. So if you can legitimately avoid the CIS so much the better. Working for private customers only is one way, but even then you need to take care if you work hand-in-hand with another trader to supply the services.
Joint contracts
You can inadvertently fall foul of the CIS rules if you get involved in a joint contract.
Example. Acom Ltd provides property maintenance services. One of its customers requires construction work that Acom can’t handle. It contacts Bob to do the work it can’t. Acom quotes for the job including Bob’s input. Although Bob will work independently of Acom, to simplify the arrangement Acom invoices the customer including Bob’s work, which it shows separately. When it’s paid it passes Bob his share.
Trap. The arrangement is bad news for Acom and Bob. The payment by Acom is within the CIS and so it should have deducted tax at the appropriate rate and HMRC might take action to recover the tax from Acom. In turn, it may then pursue Bob for the CIS deduction which he wasn’t expecting.
Tip. When working with other contractors, where possible, avoid any joint billing arrangements. It’s OK to quote for work jointly, but make sure that the customer is aware that while you’ll work together, you’re both independent and separate payments will be required direct to each of you.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.