CIS deductions – Applying the correct percentage - Landlords Financial | Bookkeeping Services Manchester

The Construction Industry Scheme (CIS) is a tax deduction scheme requiring contractors to deduct tax from payments made to subcontractors working in the construction industry.

Contractors must register for the scheme and verify the tax status of subcontractors that they engage. They are also required to submit monthly returns online to HMRC detailing all payments made to subcontractors in the previous month.

Contractors must deduct a percentage of tax from these payments and remit the withheld tax to HMRC by the 22ndh of the month following online payments (19th of the month for postal payments). The deduction rate is 20% for registered subcontractors and 30% for unregistered. Many subcontractors, however, are unaware that they can apply to HMRC to obtain gross payment status, which allows for no tax deductions.

Gross payment status

When subcontractors initially register for CIS, they are automatically assigned net payment status. Gross payment status can be obtained only after successfully completing three tests:

· The business test

The business must undertake construction work (or provide labour for construction work) and have a business bank account. HMRC will check the application to ensure that these tests are met and will verify the bank account details provided.

· Turnover test

For sole traders, the annual turnover (excluding VAT and materials) must exceed £30,000. In the case of partnerships, each individual partner must have a turnover of £30,000. If the partnership includes corporate members, the turnover limit of £30,000 is multiplied by the number of relevant persons associated with each corporate

partner. For companies, the turnover limit is also multiplied by the number of relevant persons, which includes directors and, for close companies (those with five or fewer directors or beneficial owners), any beneficial owners of shares. An individual is counted only once if they hold both director and beneficial owner status.

· Compliance test

Failing the compliance test is a common reason for rejection by HMRC. Importantly, the requirement for timely compliance is part of the CIS legislation and is applied strictly.

HMRC's Construction Industry Scheme Reform Manual at CISR46060 states that any of the following will result in a failed compliance test:

· “Four or more late submissions of the contractor’s monthly return CIS300, or VAT return within the preceding 12 months where the returns were less than 28 days late

· Any submission of the contractor’s monthly return CIS300, VAT or SA return within the preceding 12 months made later than 28 days after the due date

· A contractor’s monthly return already due but remaining outstanding at the date of application

· Any SA return due in the qualifying period but outstanding at the date of application

· Any Corporation Tax return (CT600) due in the qualifying period but outstanding at the date of application

· Any VAT return due in the qualifying period but outstanding at the date of application”.

Late payments will also result in automatic refusal, for example, if any PAYE, VAT or CIS remittance of £100 or more within the preceding 12 months was paid more than 14 days after the due date. Similarly, refusal will be actioned if more than three remittances of £100 or more are paid late but within 14 days of the due date in the preceding 12 months. Importantly, any late NI contributions will result in an automatic refusal.

Annual review

HMRC will review any gross payment status annually and, should the subcontractor fail any of the tests, gross status will be withdrawn. If the subcontractor is a company, HMRC will review the company itself, rather than individual directors or shareholders.

Practical point

Whether there is any benefit in gross status depends on whether the subcontractor is disciplined enough to put money aside, ensuring that tax payments are made by the correct dates. The benefit of holding gross status is mainly cash flow, but also that such status demonstrates that the business is compliant, possibly giving a competitive edge when bidding for contracts.

CIS deductions – Applying the correct percentage - Landlords Financial | Bookkeeping Services Manchester

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