Construction Industry Scheme - does it apply to me?

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02 July 2020

What is the Construction Industry Scheme and does it apply to me?

It is becoming increasingly important to identify whether the work you do and if the relationship you have with the end user falls within the Construction Industry Scheme (CIS), as it is under current scrutiny by HMRC. There needs to be 3 elements present; the subcontractor, contractor and construction operations. The subcontractor and contractor can be self employed, a partnership, a Limited Company or a LLP.

Self employed status

To be self employed you must be able to demonstrate that you have:

Complete control of your own work - when, where and how you do your work.
Mutuality of obligations - is the contractor obliged to provide you with continual and regular work, are you obliged to accept it? Yes, then you could be an employee. No mutuality of obligations must be present to be self employed.
Substitute - chosen and appointed your own substitute to carry out the work. You still invoice the contractor and your substitute invoices you for the work undertaken.
Insurance - if the contractor won’t accept your substitute then ensure that you have your own public liability insurance, professional indemnity insurance and product liability insurance (if relevant). This is a good indicator of being self employed.
Rate - invoiced by the completion of the work rather than by an hourly rate.
Rectification - rectified your errors within your own time and at your own cost.

Requirements

Before the contracts starts, a contractor must:

Obtain verification from HMRC that the subcontractor is either registered;
Gross (no deductions) - turnover test applies to be eligible
Net (deductions 20%)
Unknown (deductions 30%) no compulsory registration needed
The contractor does not need to verify the same subcontractor at the start of each new contract if they have been engaged in the current or the previous 2 tax years and have been included on the contractors CIS tax return within those periods.
The contractor needs to complete and submit a monthly CIS tax return to HMRC. This return details those amounts paid net or gross to the subcontractors whilst confirming they have been verified. This return must reach HMRC within 14 days after the end of the tax month i.e. by the 19^th. A return must be completed even if no payments have been made under the scheme or unless they do not expect to engage any subcontractors within the next 6 month period.
Statements have to be provided to the subcontractor within 14 days after the end of the tax month i.e. the 19^th. Statements need only be provided if net payments are made, otherwise there could be hefty penalties.

The Construction operations list is widely defined in S74 of the Finance Act 2004. It is important that you identify the type of work being carried out and whether CIS does apply. Other factors which are going to affect the Construction Industry over the coming year: