Individuals and companies that either sub-contract construction work to others or spend an average of £1 million a year on construction must register as contractors with HMRC under the Construction Industry Scheme (CIS). These rules apply both to UK resident businesses and to non-resident businesses where construction work is undertaken in the UK.
Registered contractors are required to deduct tax at source from payments they make to subcontractors. These deductions are treated as advance payments of the subcontractor’s tax and National Insurance.
Work included within CIS
The scheme covers most construction work including work to permanent and temporary structures and to civil engineering work such as roads and bridges. The type of work includes:
•preparing the site, e.g. laying foundations and providing access works
•demolition and dismantling
•alterations, repairs and decorating
•installing systems for heating, lighting, power, water and ventilation
•cleaning the inside of buildings after construction work
Architecture and surveying are specifically excluded from the scheme, as are some other ancillary services such as carpet fitting, machinery hire without labour and delivery of materials etc.
Responsibilities of contractors
Contractors are required to check whether their subcontractors are registered with HMRC and if so, what their payment status is. Unless a subcontractor has HMRC approved gross payment status, the contractor must deduct tax at source from the money they pay to the subcontractor and must pay this to HMRC on a monthly basis. They must also keep detailed records to demonstrate that the necessary checks have been made.
The applicable withholding tax rate that the contract or must apply depends on the status of the subcontractor, as detailed below.
Responsibilities of subcontractors
Subcontractors are not required to register for CIS with HMRC, but if they don’t register contractors are required to deduct tax of 30% from any payments made to them. For registered subcontractors the standard withholding tax rate is 20%, unless they have approved gross payment status from HMRC.
A subcontractor can apply for gross payment stat us when they register, or at a later time. In order to qualify, the subcontractor will need to be able to demonstrate that all their taxes are up to date, that they are carrying out construct ion work in the UK and that their turnover exceeds the following amounts:
•£30,000 for a sole trader
•£30,000 for each partner in a partnership, or £100,000 for the whole partnership
•£30,000 for each director of a company, of £100,000 for the whole company