If you’re a contractor or subcontractor that gets paid through CIS, you might be wanting to know a bit more about how the scheme works. The importance of understanding CIS statements cannot be understated – they not only help you manage your finances but also ensure that you comply with tax regulations and avoid potential penalties. This blog post aims to shed light on one crucial aspect of the Construction Industry Scheme (CIS) – the CIS statements.
As a breakdown of the deductions made from your payments and serves as an important record for tax purposes, understanding CIS statements is key to managing your finances effectively. Whether you’re a seasoned contractor or just starting in the industry, this guide will help you navigate CIS statements, understand what they should include, how to use them for tax returns.
What is the Construction Industry Scheme?
To understand what a CIS statement is, the first step is to take an in-depth look at the construction industry scheme itself. The CIS scheme is a UK tax deduction system where contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC). The deduction then counts as an advance payment towards the subcontractors tax and national insurance contribution and is represented on a deduction statement- the CIS statement.
Within the CIS, contractor’s are obligated to withhold tax on behalf of the subcontractor depending on their registration status with HMRC. If the subcontractor is registered with the HMRC under CIS, the tax is deducted at a rate of 20%, whereas if they’re not, the rate is 30%.
At the end of each year, the contractor is required to submit a self assessment tax return detailing their total income tax and national insurance liabilities due. If the CIS payment and deduction statements are less than what is due annually, the remainder will be due for payment. But if the CIS deductions exceed the liabilities, then they may be due for a tax rebate. This will involve sending off an employer payment summary along with your CIS statements.
Failure to comply with CIS rules or inaccuracies in CIS statements can result in penalties or financial implications. It is, therefore, crucial to maintain accurate CIS records.
Why was the CIS Scheme Introduced?
Originally, the CIS scheme was introduced in 1971 to help prevent tax evasion within the construction industry. Previously, “only those subcontractors issued with gross payment certificates (714 certificates) by the Revenue could be paid in full for construction work. The remainder had to be paid after deduction of a sum on account of income tax and Class 4 National Insurance contributions.”
This demonstrates the importance of understanding the CIS scheme and accurately managing your CIS statements. In addition to ensuring legal compliance, it also helps you better manage your financial health as a contractor or subcontractor. This was meant to help protect contractors, as well as their employers.
The CIS applies to both mainstream contractors and deemed contractors to ensure that tax deductions within the industry are correct. Mainstream contractors are those who operate within the construction industry, while deemed contractors are typically businesses outside the construction sector but spend heavily on construction activities.
Common challenges that contractors and subcontractors face related to CIS statements include understanding the intricacies of the scheme, maintaining accurate records, and ensuring compliance. Practical ways to overcome these challenges include educating oneself about the scheme, using software to keep track of records, and seeking advice from a tax consultant.
Find out more – CIS Mortgage Advice: The Ultimate Guide
What is a CIS Statement?
A CIS payment and deduction statement is written proof of the tax deductions contractors make from their subcontractors payments. They’re the equivalent of a PAYE pay slip, providing a detailed breakdown of the work carried out, the amount paid, and the tax deducted for a particular period.
It is a legal requirement for contractors to provide a CIS statement to subcontractors every time they make a payment under the scheme. Essentially, they become a record of all transactions between the contractor and the subcontractor, making it an important document for both parties. This can be invaluable when it comes to securing CIS mortgages later on down the line, as these statements are used to calculate your gross income.
What are the Components of a CIS Statement?
A CIS statement will include the following:
The Contractor’s Details
This includes the name and contact information of the contractor, such as their address and possibly their telephone number.
The Subcontractor’s Details
Similar to the contractor’s details, this includes the subcontractor’s name and contact information.
Subcontractor’s Unique Taxpayer Reference (UTR)
The UTR is a 10-digit number that is unique to either an individual taxpayer or a business. It’s used by HMRC to identify the subcontractor for tax purposes.
This refers to the total amount the subcontractor has earned before any deductions have been made in the relevant tax year.
Verification Number (for CIS deductions based on the higher tax rate)
If a subcontractor isn’t registered under CIS, a 30% deduction is made from their payments. A verification number is provided by HMRC to confirm that the contractor checked with them before making the deduction at the higher rate.
CIS Tax Deduction Amount
This is the sum that has been deducted from the subcontractor’s pay by the contractor, as advance payments towards the subcontractor’s tax and National Insurance.
This refers to the cost of any materials the subcontractor has purchased to complete the work. The cost of these materials is subtracted from the gross pay before the CIS deduction is calculated, reducing the amount of tax the subcontractor has to pay.
Whilst there is no set format for a CIS payment and deduction statement, they must include the above. This is an essential part of the tax compliance process to ensure national insurance contributions and income tax contributions are correct.
Issuing & Receiving CIS Statements
When it comes to issuing and receiving CIS statements, contractors should issue these statements following each payment made to a subcontractor. As long as they’re provided within 14 days of the end of each tax month, this will indicate the amount paid and any deductions made for tax and National Insurance.
The process of issuing a statement generally involves verifying the subcontractor’s status with HM Revenue and Customs (HMRC), making the appropriate deductions from their payment, and then documenting these details in the statement. To avoid any penalties from HMRC, contractors should ensure that the CIS tax deducted is correct at all times.
CIS Statements For Subcontractors With Gross Status
A gross status essentially means that the subcontractor is paid the full amount by the contractor, with no deductions made for tax or National Insurance under the Construction Industry Scheme (CIS).
However, contractors must still issue CIS statements to subcontractors with gross payment status. In this type of CIS statement, they should explicitly indicate that no deductions were taken from this payment. If you’re a subcontractor with gross payment status, you’ll be accountable for your own tax payments to HM Revenue and Customs (HMRC) and should diligently review these statements for accuracy and hold onto them.
CIS Deductions and Payments
As mentioned, under the Construction Industry Scheme (CIS), contractors make deductions from the payments they give to subcontractors. This then acts as an advance on national insurance contributions and tax payments, and sits at 20% for registered subcontractors and 30% for those not registered.
The contractor is then responsible for submitting the CIS deductions withheld to HMRC. Any discrepancies can lead to penalties, so it is essential to ensure this is accurate.
Record Keeping and Monthly Returns
Maintaining accurate CIS record is an essential part of working in the construction industry, as without these, you may be keeping inaccurate financial information or not know when/ or if, you’re eligible for a tax refund. These records should include all payments made to subcontractors and the corresponding deductions and must also cover subcontractor verification details provided by HRMC.
These monthly returns to HMRC must be filed by the 19th day of each month following the last tax month. The process of filing can be done online via the HMRC’s CIS online service, the HMRC’s free software, commercial CIS software, or by hiring an experienced accountant to assist with the process.
Changes In Business and CIS
If there are any significant changes such as changes in your business structure, business address, or any important partners, you must inform HM Revenue and Customs (HMRC) as soon as possible. This can be done online through the HMRC’s CIS online service or by post.
Notification of changes ensures your business remains compliant with CIS regulations and helps to avoid potential penalties. It also guarantees that HMRC has the most accurate information to calculate tax liabilities correctly.
We hope that this blog has given you a wider understanding of the CIS scheme and the payment and deduction statements associated with it. As you navigate your journey as a contractor or subcontractor, bear in mind the potential consequences of non-compliance or inaccuracies in your CIS statements. By fully understanding the scheme and your obligations, you can prevent penalties, manage your finances effectively, and overcome common challenges.
As specialist mortgage brokers, we’re here to help you get a mortgage if you’re part of this scheme and can answer any additional questions you may have about the process. For more information, please don’t hesitate to get in touch with us here at Jones and Young today!
CIS Statement FAQs:
We’ve answered some of the most frequently asked questions about CIS statements below:
To mark CIS on your tax return, you’ll need to make the necessary entries on your return and mark self employed. From here, you’ll enter the CIS figure in box 38 which will lead to the total deductions.