Uniquely, construction workers are the only self-employed people whose income is subject to tax at source. Every other sector of self-employed workers are trusted to be paid in gross and then settle their fiscal obligations once the tax year has ended. This also extends to limited companies operating in the construction industry, they too are required to forgo 20 or 30 percent of their relevant turnover to HMRC at the point of payment. This blog will explain the history and current operation of the CIS system.

This unusual arrangement creates the environment for an equally unusual set of circumstances when it comes time to submit tax returns. Whereas the majority of self-employed people prepare and submit their tax returns to HMRC each year, declaring their income and expenses, allowing HMRC the opportunity to challenge the figures, for construction businesses the process is different. Construction businesses must prepare and submit their tax returns and hope that their returns satisfy HMRC, so that any excess amounts which have been collected throughout the year are paid back to them.

The leverage in the two situations is completely reversed. For most self-employed people, they retain their hard earned money whilst HMRC lays out any basis for collecting additional funds. For the construction minority, HMRC hold onto the tax deducted on their behalf throughout the year, whilst the taxpayer must provide the basis (to HMRC's satisfaction) for the release of the money they earned.

The History

The basis of the Construction Industry Scheme dates back to the 1970s. HMRC (then called the Inland Revenue) were unhappy with an apparent increase in labourers deciding to classify themselves as self-employed. These workers (known as "the lump") were largely non-unionised and happy to be paid cash in hand. The contractors were happy with this as it avoided the significant taxes and tedious paperwork associated with engaging an employee.

As a result, in 1971 the first set of rules requiring deduction of tax at source for self employed contractors was introduced. These rules were strengthened in 1975 and were similar to the rules of today.

In 1999, the rules were made even more strict and restricted the ability to circumvent the deduction and be paid gross.

Later, in 2007, HMRC set out to improve the scheme by moving away from a paper-based system. They did this by removing what were called "CIS vouchers" from the process and allowing contractors to provide information to HMRC electronically.

Who It Applies To

The Construction Industry Scheme Rules apply to "contractors" carrying out "construction operations" within the UK. These terms are defined differently from how they may be used in general conversation or industry language.

Under the rules, there are two types of contractor. The first is the more easily understood type, and what most people would consider to be a contractor, namely businesses (including sole traders) that undertake construction work or supply labour which will be undertaking construction (this includes 3rd party agencies). The second type are what's known as "deemed contractors", these are individuals or businesses whose trade does not normally involve construction operations but spend more than £1 million annually on average on such operations excluding those that relate to property used by themselves.

Construction operations are defined as "construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations". There are a variety of exemptions to "construction operations" such as the installation of solar panels, golf courses, CCTV security, and any work undertaken by people whom the government considers to be "professional" (architects, surveyors, etc.). HMRC maintain a list of what they consider to be construction operations here, under CISR14330, but this is only guidance, not the law.

How It Works

1. The process begins when a contractor engages a self-employed subcontractor.

2. The contractor must verify with HMRC that the subcontractor is registered. To do this, the contractor requires the subcontractor's name, UTR Number and NI Number (or CRN for companies).

3. HMRC will advise the contractor of the rate at which deductions should be made (either 0%, 20% or 30%).

4. The contractor should make the appropriate deductions and pay the amounts to HMRC. A record of these deductions should be given to the subcontractor each month.

5. At the end of the year, the subcontractor should submit a tax return detailing how much income they received and how much tax has already been paid by their contractor on their behalf. This usually results in a tax refund. Our average refund is £2,550 after our fees.
   
   
   

Gross Payment Status

To avoid CIS deductions, and be paid invoices in gross like businesses in every other sector, subcontractors can apply to HMRC for gross payment status. Over the years, HMRC have made this status more difficult to obtain. To qualify, the subcontractor must meet three tests: the business test, the turnover test and the compliance test.

• The business test states that the subcontractor must conduct construction operations and operate through a UK bank account.

• The turnover test is most complex of the three tests. It states that the business must have had a turnover (from construction operations) of at least £30,000 in the prior 12 months. For companies, this can increase depending on the amount of directors/shareholders involved.

• The compliance test states that businesses must have kept their tax affairs up to date in 12 months prior to the application. This even includes the director's personal tax affairs.

HMRC will undertake an annual review to ensure these tests continue to be met.

We can help clients with their applications for Gross Payment Status. Just get in touch here.

CIS & IR35

Despite all of the rules explained in this blog, IR35 still applies to construction workers. We have written a separate blog which analyses how the two sets of rules apply together here.