Taxes withheld in the Construction Industry
Working in the construction industry has its own tax rules and as with anything tax it can quickly get complicated. In this blog you’ll find a high level summary of some of the stand-outs to be aware of.
The Construction Industry Scheme (CIS) applies to companies and sole traders providing or receiving many services in the construction and installations sector. When providing a service you are known as a sub-contractor and when receiving services you are known as a contractor.
The rules do not apply to you if you are employed by the business operating in the industry, or if you are providing services to an end customer i.e. a home owner directly. Examples of construction work falling within the scheme include doing building work, building alterations, repairs and decorating, installing systems for heating, lighting, power, water and ventilation to name a few. There are a few exceptions to the rules for services like scaffolding rental, carpet fitting and producing and delivering materials used in the industry.
If you are a contractor receiving services from a sub-contractor, you need to verify their status with HMRC and withhold a percentage of the amount due to the sub-contractor, usually 20% of the labour cost. This withheld amount is then paid over to HMRC directly much in the same manner an employer would withhold and pay PAYE to HMRC on behalf of an employee.
If you are a sub-contractor, your contractor will withhold a percentage of your invoice due and pay it over to HMRC which will be noted as as CIS deduction, also known as “CIS suffered”. The contractor will provide you with a “payment and deduction statement” which you need to keep safe for when you do your taxes as CIS suffered should be deducted from your tax bill and can be seen as a prepayment to HMRC.
You can apply for what is know as “gross payment status“ with HMRC and if successful no CIS deductions need to be withheld and 100% of your sub-contractor invoice should be paid.
Specific rules apply for VAT in the scheme, known as the domestic reverse charge. These VAT rules were introduced in March 2021 to combat fraud in the sector and if you are a contractor you could be open to liability if you pay over VAT to a sub-contractor where the sub-contractor shouldn’t have charged 20% VAT per the new rules.
If you fall inside the scope of CIS you must register with HMRC if you are a contractor (receiving services), you have the choice to register as a sub-contractor (providing services) or register for both depending on your situation. If you are a newly formed limited company you can register for PAYE and CIS with HMRC at the same time, otherwise CIS can be added to your profile at a later date. When you register for Self-Assessment as a sole trader, if not done so already, you can register for CIS during that process as well.