CIS article for clients
There must be all 3 items present to consider CIS scheme!
- Contractor
- The term ‘contractor’ includes any person carrying on a business which includes ‘construction operations’
- Mainstream contractor - is any business where construction is its main business or indeed forms a substantial part of its business. If you are a mainstream contractor, you must register for CIS immediately from day 1, regardless of your level of expenditure.
- Deemed contractor- could be a business not involved with construction such as a supermarket chain, a bank, a group of pubs, a big chemist outlet, breweries etc. They can be a deemed contractor if their expenditure on construction operations (i.e. doing up their own premises) exceeds £3mln in the last rolling 12months
Examples:
Not under CIS scheme:
Under CIS scheme:
- Sub-Contractor
A person is regarded as a sub-contractor, if, under the contract:
- he is under a duty to the contractor to carry out the operations, or to furnish his own labour
- he is answerable to the contractor for the carrying out of the operations by others, whether under a contract, or under arrangements made or to be made by him
The term sub-contractor includes:
- a company, or public body, in addition to any self employed person running a business or partnership
- a labour agency which contracts either to get work done with its own workforce, or to supply workers to a contractor.
- Construction operations
This term is very widely defined and it covers almost anything that is done to a permanent or temporary building, structure, works or civil engineering or installation including:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures
- construction, alteration, repair, extension or demolition of any works forming, or to form part of the land (see the full legislation definition)
- installation (i.e. not repair) in any building or structure of systems ( note it has to be a system) of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation or fire protection
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alterations, repair, extension or restoration
- painting or decorating the internal or external surfaces of any building or structure.
- any works which are integral to, or are preparatory to, or are for rendering complete construction operations.
The legislation states certain operations, which are held not to be construction operations for the purposes of the scheme. These include:
- drilling for, or extraction of, oil or natural gas
- manufacture of building or engineering components or equipment, materials, etc. or delivery of any of these things to site
- the professional work of architects or surveyors
- the making, installation and repair of artistic works
- sign writing and erecting signboards and advertisements
- the installation of seating, blinds and shutters
- the installation of security systems
- carpet fitting
CIS tax responsibilities
- Contractor has to register with HMRC as a CIS contractor
- Contractor has to verify every new subcontractor that he engages
- Contractor has to complete a monthly CIS tax return – send to HMRC within 14 days of the end of the appropriate tax month – i.e. 14 days after 5th so by the 19th of each month
- Contractor must withhold CIS tax as appropriate and give sub-contractors CIS tax deduction statements
- gross
- net (20% deduction); or
- not known to Revenue – 30% deduction
- CIS subcontractor do not have to be registered with CIS Scheme to be paid but he will automatically suffer 30% deductions
How to calculate CIS return
To make a CIS deduction from a subcontractor’s payment, start with the total (gross) amount of the subcontractor’s invoice. Take away the amount the subcontractor has paid for:
- VAT
- equipment which is now unusable (‘consumable stores’)
- fuel used, except for travelling
- equipment hired for this job (‘plant hire’)
- manufacturing or prefabricating materials
- materials (only if they paid for them directly)
Example
Levy Limited, the contractor, is going to pay the following bill, submitted by Nick, the subcontractor, who is registered net.
From which items does Levy Ltd deduct 20% tax?
Answer to Example: Levy Ltd
1) Labour – always deduct tax
2) Deduct tax from the profit element on materials
3) Deduct tax from travelling
4) Cost of tools – deduct tax, because these are not materials
5) Plant hire – pay gross as these are deemed materials
6) Cost cables – these are probably materials, therefore pay gross
7) Subsistence – deduct tax
8) Fuel for machinery- treat as direct materials
Please note
When raising a CIS sales invoices the VAT needs to be calculated from the net amount of Labour and Materials before any CIS deductions!
Domestic Reverse Charge VAT for Construction
Domestic reverse charge (DRC) is a fairly new way of accounting for VAT, it applies to all VAT registered construction businesses in the UK. Put simply, the legislation moves the VAT liability from the supplier (subcontractor) of a service in the construction industry to the customer (contractor).
Example 1
Below is a perfect CIS invoice showing that the subcontractor applied Domestic Reverse Charges at 20% and a CIS deduction of 20%. This invoice should be posted to the CIS 20% Labour (QBO and Xero will deduct 20% of CIS automatically) and the 20% RC VAT should be applied.
Example 2
In the below example the subcontractor did not apply the CIS deduction to the invoice. The invoice is still correct as it is a Contractor’s responsibility to verify this subcontractor and to apply the appropriate deductions. Also, this subcontractor put a lot of information on the invoice, but we can’t see the VAT number. This subcontractor is not VAT registered, therefore there is no VAT to reverse.
This invoice should be posted as follows:
- CIS Labour £400 (this subcontractor has been verified so QBO and Xero will apply CIS rate)
- CIS Materials £100 (no deduction of CIS as materials are exempt)
- Zero VAT not RC.