Mat Wray

Symptoms include confusion, difficulty sleeping and fear of fines... Any trade business that uses subcontractors in the United Kingdom is faced with the headache that is the Construction Industry Scheme (CIS). In short, this is where deductions are taken by HM Revenue and Customs (HMRC) as advanced payments towards the subcontractor’s income tax and National Insurance payments.

Providing HMRC with the necessary data relating to CIS every month can be complicated for everyone involved: contractors, subcontractors, and even accountants and bookkeepers. All data provided – subcontractor verification numbers, deduction rates, and deductions – must be accurate, and failure to provide accurate information can result in the higher rate deduction being applied, or worse – fines.

Contractors

Contractors who use subcontractors are obliged to deduct money from subcontractors’ payments to pass to the HMRC. Contractors are consequently faced with administrative burden; they have to make sure they are:

checking the tax status and deduction rate of each subcontractor working for them deducting the correct rate of tax from the labour portion of each invoice reporting and paying the correct amounts to both the subcontractor and the HMRC within the given monthly timeframes. Any administrative errors can result in fines as well as a subcontractor not having the correct amount of tax reported or paid.

Some contractors choose to outsource CIS administration to specialist third parties, which is understandable if they have multiple subcontractors working for them. However, the third party specialist still needs to be provided with accurate data from the contractor to ensure compliance.

Subcontractors

The subcontractor faces not only an administrative burden but a cash flow implication as well.

First, subcontractors must register for the CIS scheme. CIS is then deducted, normally at 20% of their labour portion of their invoice. Consequently, their income tax may be over or underpaid by the end of the financial year. Either way, this can cause significant cash flow implications.

If either the contractor or the subcontractor makes any error, then the burden of proof could reside with the subcontractor or their accountant to claim their tax credits.

Accountants and bookkeepers

For accountants and those advising contractors and subcontractors, justifying the costs involved in preparing HMRC reports can be difficult.

The challenges can lie with establishing whether clients are contractors or subcontractors, and also whether the individuals are employees or self-employed, as CIS is an additional requirement of self-employment accounting and tax returns.

With the help of job management software that can produce accurate CIS reports, accountants can quickly understand when overpayments have occurred, and can obtain the necessary refunds from HMRC. It can also ensure there aren’t any fines incurred for missing the vital deadlines.

Is there a cure?

HMRC made changes to the CIS reporting system in April 2016. This included ensuring contractors lodge their reports regarding subcontractor payments online or through their software instead of paper returns.

HMRC are also encouraging subcontractors to obtain gross payment status, which reduces their deductions to 0% and allows them to pay all their tax and National Insurance at the end of the tax year. While this may be viewed as a positive step towards reducing administrative burdens on businesses, non-compliance could see a subcontractor losing gross status and being fined.

The real key to easing the headache of managing CIS is incorporating it into your everyday workflows and job management, where both contractors and subcontractors can check to see the status of payments at any time.

Job management software with CIS-related features can allow for the everyday management of subcontractors – their work orders, schedules and invoices – to generate CIS reports, as well as other job costing and project management reports.

For the subcontractor, every invoice sent to the contractor should capture the labour and material component in clarity and detail, as well as the amount of CIS to be deducted. This can then be checked against payment summary reports and any discrepancies dealt with before HMRC reporting deadlines.

In the long term, HMRC is working on its digital services which should help ease the CIS headache further.

Mat Wray

Manchester Area, United Kingdom 4K followers 500+ connections

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simPRO Software

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Education

Rishworth School

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NLP

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