Are you in the construction industry? Are you aware of the Construction Industry Scheme? To find out everything you need to know to be compliant read our latest blog bow.
What do I need to know?
The Construction Industry Scheme contributes massively to the UK economy, as it provides jobs for more than 2.4 million people.
The purpose of the scheme is to set out the rules for the payments contractors make to subcontractors within the construction industry.
Who does the scheme affect?
The scheme affects all construction work carried out within the UK.
- Site preparation
The scheme does not cover trades that only do specific jobs such as architects, surveyors, carpet fitters and manufacturers of construction materials.
The scheme does not apply to work that is taking place outside of the UK.
If a business is based outside the UK and carrying out construction work within the UK it must register under the scheme.
What types of businesses are covered in the scheme?
The scheme covers all types of businesses within the construction industry, including companies, partnerships and sole traders.
These can be contractors, subcontractors or both. A contractor is a business that pays subcontractors for construction work.
If you decide to build a bedroom extension on your home, this will not be classed as contractor work by HMRC so the scheme will not apply to you if you carry out work on your own home.
A subcontractor is a business that carries out construction work for a contractor, such as a plumber, that will supply their services to big construction projects.
If a business is treated as a contractor and subcontractor, then different rules for each status will apply. You must ensure that you follow the rules carefully, so you do not get into trouble.
How does it work?
All contractors and subcontractors should register with HMRC for the Construction Industry Scheme.
If you are a subcontractor and do not register you will get a higher-rate deduction.
Contractors will deduct money from a subcontractor’s payments and pass it on to HMRC, and these will be counted as advance payments towards income tax and national insurance, like PAYE.
A limited company will have deductions taken by the contractor from the income due to the company.
Contractors should verify a sub-contractor’s status with HMRC to find out if they are registered and to find out how much tax should be withheld from their payment.
As a contractor you must make sure that you inform the Revenue by the 19th of every month about all payments that have been made under the scheme, or inform them if no payments have been made.
If you do not inform the Revenue on time, you will be faced with a penalty.
Domestic reverse charge VAT for construction services
From 1 October 2019, HMRC’s new domestic reverse charge for construction services will come into force.
Only specified services are included for the domestic reverse charge:
- Painting and decorating
- Civil engineering
- Heating installation
- Lighting and air conditioning
This means that if you are a VAT registered business supplying construction services to another VAT registered business for onward sale, you must issue a VAT invoice stating the service is subject to the domestic reverse charge.
The recipient must also account for VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient can recover the VAT as input tax.
You should be aware that the value of the reverse charge will not count towards your VAT-registration threshold.
How do I prepare?
You must ensure that your construction business is ready for the changes. This means you should test that your accounting systems are able to process reverse charge supplies.
It may be worth reconsidering your payment terms if you are a sub-contractor who relies on VAT from customers as capital, so that your supply chain is not affected with the new changes.
Make sure that you are aware of the changes that are coming and prepare for the affect they will have on your business. If you are unsure of the complexities of the CIS, then ask your accountant as they will ensure that you are compliant.
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