What construction workers don't know? A few words about CIS
In this article, we describe the problems of a client who, like many others, fell victim to pseudo-accountants. This firm failed to inform the client about their obligations as someone working in construction and the penalties they faced for not complying with tax law.
The client owns a small construction company with a few self-employed 'helpers,' none of whom were registered with CIS (Construction Industry Scheme). Despite the company being newly established, HMRC had already issued them nearly £2,000 in penalties.
The first step was therefore to register the company for PAYE and CIS. A problem arose when the employer informed the workers that a tax deduction had to be taken from each payment, despite them being self-employed.
This is how CIS works and how HMRC protects itself – by deducting advance payments for Income Tax and National Insurance from self-employed individuals working in the construction industry, similar to how it's done for employees on a contract of employment under the PAYE system.
For self-employed individuals registered with CIS, an advance payment is deducted for Income Tax and National Insurance, just as it is for those employed under the PAYE system
If such a subcontractor (subcontractor) overpays tax, these amounts are later refunded at the end of the tax year, after submitting a tax return and completing self-assessment.
Before submitting the CIS return, the employer must verify on the HMRC website whether the worker (subcontractor) is registered with CIS. If not, the employer is obliged to deduct 30% tax from the worker's earnings. However, if the worker has registered, HMRC allows the employer to deduct a lower rate – 20% tax.
Who needs to be registered with CIS?
Not everyone knows that, in addition to construction workers themselves, companies and individuals cleaning on a construction site or after construction work has finished must also be registered with CIS – in which case the employer (contractor) is obliged to check the registration status and deduct a specified amount for tax from the self-employed cleaner's earnings.
All companies and individuals involved in carrying out construction work, site preparation, and assisting with such work must be registered with CIS
It's also important to remember that in different projects, the same person can be both a contractor and a subcontractor, depending on who invoices the end client.
Independent tradespeople working directly for a private client in their home do not need to register with CIS. However, for example, when a tiler or bricklayer asks another self-employed colleague for help with a job and pays that colleague for the help, they become the contractor, and the colleague is the subcontractor (subcontractor) and such an arrangement falls under Construction Industry Scheme.
When a private client pays each tradesperson working on their private property separately, these workers do not need to be registered with CIS.
Example.
Robert is asked to tile Mark's private home and asks Antek, who is self-employed, for help. Mark, as a private client, pays Robert without deducting CIS contributions, after which Robert pays Antek for his help.
Robert should be registered with CIS as a contractor before paying Antek. He should also ask Antek for his UTR number to verify on the HMRC website whether he is registered as a subcontractor with CIS. If Antek is registered and passes HMRC verification, Robert will deduct 20% CIS from his payment; if not, it will be 30%.
Robert, as a registered contractor, will be obliged to report to HMRC by the 19th of each month and pay the amount deducted from Antek to HMRC.
When Antek completes his self-assessment at the end of the tax year, he will be able to reclaim some of the CIS deductions if it turns out he overpaid income tax and National Insurance.
This is how the situation was explained to our client's construction company employees. And this is how they responded to me: "None of my colleagues settle their accounts this way. Nobody does it! Our accountant didn't tell us about it either..."
HMRC penalties for non-compliance
The simplest answer to the construction worker's words above would be: Ignorantia legis non excusat (Latin: Ignorance of the law is no excuse).
And if you know your obligations and consciously decide not to fulfill them because many of your colleagues "got away with it," you'd better reconsider, because if you slip up, the penalties will be severe:
- For not submitting the CIS return by the 19th of each month – a £100 penalty;
- Exceeding the CIS return deadline by more than 2 months – an additional £200 penalty;
- Exceeding the CIS return deadline by more than 6 months – an additional £300 or 5% of the overdue CIS deduction (whichever is higher);
- Exceeding the CIS return deadline by 12 months – a further £300 or 5% of the overdue CIS deduction (whichever is higher);
- Exceeding the CIS return deadline by more than 12 months – an additional penalty of up to £3,000 or 100% of the overdue CIS deduction (whichever is higher).
The amounts above are penalties for not settling CIS for just one month! Failing to submit CIS returns for several months can therefore lead to penalties amounting to tens of thousands of pounds. Is it really worth the risk?
Do you work in construction and aren't yet registered with CIS as contractor or subcontractor? Do you need help? Contact us with our team.
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