The Construction Industry Scheme applies to you if you pay subcontractors to do construction work or if your business doesn’t do construction work but you usually spend more than £1 million a year on construction.
CIS is a tax deduction scheme which involves tax being deducted at source from payments relating to construction work where one party is a contractor and the other party is a subcontractor. If the work is subcontracted again then the first subcontracting party becomes the contractor in respect of its relationship with the new subcontractor. Therefore, the original subcontractor could be both a contractor and subcontractor for the purposes of the CIS rules.
In order to qualify to receive gross payments from the contractor, the subcontractor must pass three tests, known as the business, turnover and compliance tests and it must register with HM Revenue and Customs (HMRC). If the subcontractor is not eligible because it fails one or more of the three tests it can still register with HMRC to ensure that tax is only deducted at the lower rate of 20% instead of the higher rate of 30%.
Business Test – The subcontractor must carry on construction work in the UK, and the business must be run mainly through a bank account.
Turnover Test – This test sets minimum limits on an eligible subcontractor’s annual turnover as follows:
- for an individual/sole trader: turnover from construction work must be at least £30,000;
- for a partnership: the payments the partnership receives under contracts relating to construction operations, excluding the cost of materials, must not be less than the lower of £200,000 and the multiple turnover threshold. The multiple turnover threshold is the sum of each individual in the partnership multiplied by £30,000, plus the sum of the threshold each company in the partnership would obtain if that company were applying on its own behalf;
- for a company: a company’s threshold is the lower of £200,000 and the amount calculated by multiplying the number of directors by £30,000. If the company is a close company for tax purposes – one with fewer than five controlling parties – that company’s threshold is the lower of £200,000 and the amount calculated by multiplying the number of shareholders by £30,000.
Compliance Test – within 12 months ending with the date of application:
- if the subcontractor is a partnership, each partner;
- if the subcontractor is a company, the company and each director; or
- if the subcontractor is a sole trader, the individual
The Construction Industry Scheme applies to all payments made under a construction contract, including payments that are not directly associated with the construction. Therefore, if the contract consists of a number of different elements it would be worth splitting it up to ensure that only the construction related payments fall under the scheme.
Some payments are exempt from the scheme. For example, if a business which is not in the construction industry pays for construction work on a property that it uses itself for the purposes of its business, these payments will not be covered by the CIS, and CIS does not apply to payments made to employees, as these are covered by the Pay As You Earn (PAYE) system.