What is Construction Industry Scheme? – CIS Tax Simplified

by Abdul Wahab | Nov 24, 2021 | Articles, News

The Construction Industry Scheme (CIS) in the United Kingdom is a nationwide tax-deduction
scheme for British contractors and subcontractors. Contractors deduct money from subcontractor
payments and submit it to HM Revenue & Customs (HMRC) under the Construction Industry Scheme
(CIS).
The initiative attempts to address unethical industry practices such as hiring people on a “cash-in-
hand” basis and failing to comply with tax requirements. This article provides a simplified insight to
look at the scheme, including instructions on how to register with HMRC, file monthly returns, and
define who and what type of work is included.

How Construction Industry Scheme (CIS) Works

If you work as a contractor in the construction sector, you should be aware of your obligations under
the Construction Industry Scheme (CIS). It is essentially a PAYE-like scheme that demands that the
contractor is usually obliged to withhold tax on its payments to the subcontractor and pay the
deduction to HMRC.
Contractors are businesses that work in the construction sector and hire subcontractors to do the
actual job. According to UK law, contractors can be any legal business entity, including companies,
sole traders, and partnerships, which can include real estate developers, construction companies,
and even labour agencies.
CIS covers the following types of work:
• Alterations
• General works related to buildings
• Decorating
• Dismantling or demolition
• Heating, lights, electricity, water, and ventilation works
• Repairs
• Groundworks and preparation of site
If a business that isn’t in the construction sector spends $1 million or more on construction work in
three years, it may be considered a contractor. Housing associations registered in the United
Kingdom or operating in the United Kingdom are examples of this. The scheme does not cover
construction work done outside of the UK. A company headquartered outside the UK that performs
construction work in the UK, on the other hand, is subject to the rules and must register and pay tax.
If you meet the following criteria, you must register with the CIS as a contractor:
• you pay subcontractors to do construction work.
• Your company does not conduct construction work, yet you spend more than £1 million on it
every year.
Before you hire your first subcontractor, you must first register with CIS. Check HMRC’s status
guidelines. You should also consider if the subcontractor should be treated as an employee.
Contractors that perform certain types of construction work must comply with CIS and:
• Register with the scheme before hiring their first subcontractor
• Always check if they should hire individuals instead of subcontracting the work
• Verify with HMRC that subcontractors are registered with CIS
• make necessary deductions from subcontractor payments
• pay the money to HMRC
• give subcontractors with deduction statements
• all CIS deductions must be reported to HMRC on a monthly basis
• maintain complete CIS records
• notify HMRC of any changes to their business
Subcontractors should register for CIS as well. If they are eligible, subcontractors who do not want
any CIS deductions might apply for “gross payment status”. Failure to comply with the CIS
programme might result in penalties for contractors.

Subcontractor Verification

Verify if your subcontractor has registered with CIS and what their payment status is. The method
for verifying that a subcontractor is genuinely self-employed and should not be classified as an
employee of your company for taxation purposes is a critical component of the scheme. It is
important to understand that even though a contractor withholds tax on payments made to you and
may receive paperwork that looks similar to payslips, you are not being considered an employee and
hence will not be entitled to any of the employment rights that come with being an employee.
You should also establish that the subcontractor is self-employed in the contract between your
company and the subcontractor. However, if the contract is for employment, you must regard them
as employees for tax purposes and pay PAYE instead of registering them for CIS.

Who pays the tax under the CIS Scheme?

After properly verifying a subcontractor under CIS and based on HMRC’s response, the contractor is
obligated by law to withhold the following taxes from any payment owed to a subcontractor (they
will be listed in the subcontractor’s Self-Assessment tax return):
• If they are not registered as sub-contractor – 30% from non-CIS-registered subcontractors,
excluding the equivalent of VAT and the cost of plant hire or supplies.
• If sub-contractors are registered at the standard/ net rate – 20% from CIS-registered
subcontractors who are eligible to receive gross payments, excluding the equivalent of VAT
and the cost of plant hire or supplies.
• If the sub-contractor is registered with gross payment status, there are no deductions if a
subcontractor qualifies for gross payments.
The contactors will not deduct amounts from invoices (sent by the subcontractors) for direct
expenses such as material costs. The contractor’s deductions are subsequently remitted to HMRC,
who regards these as advance payments of the subcontractor’s income tax and national insurance
contributions.
The contractor must provide a PDS (Payment Deduction Statement) to the subcontractor within 14
days of the end of the current tax month for any deductions made. The subcontractor should keep
these statements since they will be helpful in completing a Self-Assessment tax return.
A subcontractor may seek a duplicate copy of a PDS document that has been lost or misplaced. The
contractor must furnish it, but it must be properly labelled as duplicate.
You can utilise the CIS online service to submit monthly returns, as well as to verify your list of
subcontractors, view previously filed returns, and alter any data that need to be changed.

CIS Compliance

There should be no outstanding HMRC payments or tax returns. While HMRC frequently overlooks
minor compliance errors, having many failures recorded might result in your gross payment status
being revoked (which is reviewed once per year). HMRC laws require subcontractors to notify any
company changes, including:
• Change in company type, address (private or registered)
• Changing your business name
• Changing the business structure (which necessitates a new gross payment status review)
• Addition of any new shareholders (in the case of companies)
• The core trade has come to an end
A contractor accountant can assist you in staying on top of intricate compliance rules, claiming
overpayment CIS, and ensuring that you are paying the smallest amount possible.

Support from Bloom Financials

This is a brief overview of the processes you’ll need to follow to verify subcontractors and stay in
compliance with CIS.
If you have any questions about the scheme or require assistance with the verification procedure or
tax deductions, our team of experienced professionals would be happy to assist you. Don’t hesitate
to get in touch with us for more information.

A Guide to Correct VAT Errors & Make Adjustments

by Abdul Wahab | Nov 22, 2021 | Articles, News

As with any bookkeeping, errors can happen when completing a VAT return, especially if you’re maintaining a small growing business. VAT is incredibly complicated, and you should always seek advice about the VAT treatment of any transaction if you are uncertain. If you realise you’ve made a mistake once you’ve submitted a VAT return, try not to panic! Although sometimes simple, these errors can lead to significant VAT Penalties. Business owners should seek specialist VAT advice regularly to ensure they do not fall into these traps. The process for reporting and correcting VAT errors is relatively straightforward, and this brief guide explains the steps you should follow. This simple guide explains what to do in both scenarios.

As a VAT-registered business, you must submit VAT returns every three months.

Your VAT online account tells you:

• when your VAT Returns are due
• when the payment must clear HM Revenue and Customs (HMRC) account

When you submit the Return, the figures for the amount of VAT you collected and paid should be accurate and based on the correct rate of VAT. However, suppose you realise after submitting a return that you mistakenly omitted a receipt or a payment, charged a customer the wrong VAT rate, or made an error in your calculations. In that case, you must act quickly to put matters right.

Calculating the net value

To calculate the net value of errors, you must do the following

Add up the additional tax due to HMRC

Adjustments conditions

In certain circumstances, you can correct an error that you made in a previous VAT return by adjusting a future VAT return. VAT Errors come in all different shapes and sizes, but they generally arise where there is an Error on a VAT Return.  It can be where a business:

• Fails to record the VAT on a sale where it should have been
• Reclaims VAT on a cost where it should not have done so
• Makes a calculation error in a VAT return
• had a net error value (any VAT you overpaid minus any VAT you underpaid) below the HMRC reporting threshold of £10,000
• Error was not deliberate (you should notify HMRC of any deliberate mistakes by following the instructions below)
• Error was made in a return for an accounting period that ended less than four years ago

How to Make the Adjustment

You can adjust your next VAT Return if the net value of the errors is £10,000 or less. You can also adjust your next VAT Return if your error amount is up to 1% of your box 6 figure (up to a maximum of £50,000). If it is above the reporting threshold of £50,000, you must report to HMRC regarding the error.

If the error means you owe VAT, add the net value to box 1 of your Return. If the error means you are due a VAT refund, add the net value to box 4 of your Return. It’s essential to keep a record of the date of the error, the date you made the adjustment and the details of the error. You should also adjust your own VAT records to reflect the correct figures.

Reporting an error to HMRC

If you need to report a VAT return error to HMRC because it doesn’t fit the above criteria, you should fill out form VAT652 and send it to HMRC. While it’s possible to make an error report to HMRC without form VAT652, having one should make the process much easier. If you’re unable to access a form, you can write to HMRC directly to report an error.

When you contact HMRC, make sure you have the following to hand:

• details of how each VAT error arose
• the VAT accounting period in which the error(s) occurred
• if the mistake was an input tax or output tax error
• the amount of VAT under-declared or over-declared by your business in each VAT period
• how you calculated this amount
• whether any of the errors reporting resulted in your business paying HMRC an amount that wasn’t due
• the total amount of VAT to be adjusted

HMRC’s VAT Notice 700/45 provides detailed information about correcting VAT errors, but you should consult with your accountant if you have any concerns about your VAT return.

HMRC’s Penalties for VAT Errors

HMRC may charge you penalties and interest if an error is due to careless or dishonest behaviour. You should tell HMRC about careless errors separately in writing, as well as adjust your current VAT Return. It may lead to a reduction in the penalty. If you’re late filing a VAT return or making payments to HMRC, you’ll enter a 12-month probation period. Should you file any further late returns or make late payments within this 12-month ‘surcharge period’, you will incur a default surcharge penalty. The probation period is reset for a further 12 months.

Prompted errors attract higher penalties than unprompted errors, so it’s essential to notify HMRC if you spot an error. In order for HMRC to consider any reduction to a penalty, you should inform them that you have made a careless error or deliberate inaccuracy regardless of its size or value. You need to be aware that HMRC might choose to issue you with a penalty if they consider that you have acted carelessly or dishonestly. The penalty can range from:

• up to 30% if you have been careless
• up to 70% where it’s a deliberate error
• up to 100% if it was is both intentional and concealed

You should receive a reply from HMRC to confirm if your calculations are correct within 21 days. If you manage to convince HMRC that the appropriate action has been taken to prevent these errors from happening again, they may suspend the penalty.

Conclusion

Every business calculates the VAT amount, makes a return and sends it to HMRC. Not every Return but some of the returns may contain errors, and it is best to solve the same by making adjustments as early as possible before sending it to HMRC. However, you mustn’t make any further errors during the period the penalty is suspended. If you would like professional tax advice on any aspect of VAT reporting or error correction or would like confirmation that you are complying with HMRC’s VAT rules, Bloom Financials experienced tax consultants will be glad to help.