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The Construction Industry Contractors Scheme (CIS)

Factors to consider

 

The Construction Industry Scheme (CIS) can be traced back to the Income & Corporation Taxes Act (ICTA), 1988 (Chapters IV and VII) and was basically a consequence of the endemic abuse by contractors and sub-contractors of the tax system. In simple terms, contractors (normally limited companies) would sub-contract with individuals or groups of individuals (sometimes under the guise of another limited company) to avoid paying income tax and national insurance contributions to people who would otherwise normally be deemed employee’s of the contractor. The avoidance scheme, was in many ways a ‘win win’ situation for both parties as the contractors avoided having to deduct (and calculate) income tax and national insurance contributions whilst the sub-contractor received their money gross and often failed to declare such income at an individual or corporate tax level if using their own limited company. Obviously, this was not very satisfactory to the Inland Revenue so the government introduced the requirement that all contractors had to register under the CIS Scheme, with either income tax and NI deductions being made by the contractor or paid gross to the sub-contractor depending on whether the sub-contractor supplied a registration card or a tax certificate. Further, before a contractor could pay a sub-contractor, gross sums it would have to show not only that they had complied with the tax obligations of the ICTA 1988 but did so for a period of 3 years before a CIS certificate would be issued. In the leading case of Her Majesty’s Inspector of Taxes v. JDC Services in 2004, it also became clear that the CIS Rules were to be strictly implemented with the ‘minor and technical’ errors exemptions (these allowing companies that had generally followed the ‘spirit’ of the ICTA Act to still be permitted a CIS certificate notwithstanding any ‘minor and technical’ errors) being just that with anything beyond that resulting in a refusal to grant a CIS certificate.

How does the CIS Scheme impact on my selection of an accountant? Yes, it is vital that your accountant has experience of dealing with and applying for CIS certificates, dealing with building contractors and sub-contractors if you are to ensure that you are on the right side of the law. In particular, fines are particularly heavy in this sector with contractors being subject to a penalty of up to £3,000.00 from HMRC if they negligently or deliberately provide incorrect information.

Under the new rules contractors have to make a monthly return to HMRC which:

  • Confirms that the employment of sub-contractors has been considered;
  • Confirms that the verification process has been dealt with correctly;
  • Details payments made to all sub-contractors; and
  • Details any deductions of tax made from those payments

The CIS Scheme - Factors to consider

 

Workers within the construction industry will be deemed to be in receipt of employment income – and, therefore, subject to PAYE and National Insurance - unless one of three simple, clear and easy criteria are met, namely does the worker provide

  • their own equipment (other than customary to the trade)
  • their own materials
  • additional workers to complete the job.