Specialist accountants for all businesses involved in the construction industry

There are various ways in which these credits can be utilised depending on the status of the business. Broadly speaking if an individual operates in the construction industry as a one-man band, then recovery will be made through their annual self-assessment tax return. If the business is a company, then the recovery will be made through their PAYE scheme where the amounts suffered can be offset against the monthly PAYE and CIS liability. To the extent that the CIS suffered exceeds the amount deducted then repayment can be made direct to the company's bank account after the 5 April. Providing the appropriate filings have been made throughout the tax year then the repayment amount should mirror H M Revenue & Customs data, facilitating a speedy repayment.

More often than not we overhear similar conversations and there is always an element of the individual believing "they have got one over on H M Revenue & Customs". However, this is rarely the case (although we are certain that there are many fraudsters making dubious expense claims). CIS deductions are made on the subcontractor’s gross income and do not take into account any allowable expenses that are incurred in running their business to arrive at their net taxable profit. Therefore, on the basis that they are a basic rate tax payer and their only source of income is from working in the construction industry as a subcontractor, then the deduction by the contractor will almost certainly be more than their final tax liability resulting in a repayment for the year.

Following the introduction of Making Tax Digital for Value Added Tax, to the extent that your business is VAT registered you will be required to submit your VAT return through MTD compliant software. This software should have the capability to track your costs in relation to a certain project. In Xero, this is referred to as tracking. When an invoice is uploaded to Xero, if correctly set up, it can be assigned to a tracking category (set by the user). Reports can then be generated to analyse these costs (and income) and determine whether a contract is profit or loss making. (There may be money in the bank, but could there be more!!).

When a contractor states that they do not get CIS deducted from their income, there are two possibilities of why this may be, firstly, the services that they provide could be outside of the scope of CIS, or secondly, they have remained compliant with their tax affairs and have been granted gross status.

Contact us to see if you qualify for gross status.

Vehicles are defined as passenger vehicles or commercial vehicles based on their primary purpose when constructed. If the primary purpose of a vehicle when constructed was for the conveyance of goods and the criteria set out at VAT notice 700/64 is met then the vehicle is likely to qualify as commercial vehicle with full VAT recovery. 

This suggests that, you, as the subcontractor are not correctly registered with H M Revenue & Customs. There are three rates at which CIS tax is deducted.

1) The 0% rate, referred to as gross status for the well-behaved subcontractors.

2) The standard 20% rate for the compliant and correctly registered subcontractors. 

3) The "bad boy" rate of 30% which is applied where the subcontractor cannot be verified by the contractor often as a result of not being correctly registered with H M Revenue & Customs and is designed to force them into registration.

We get it! How on earth is the average UK tax payer (untrained in taxation) able to interpret these rules on their own? The VAT Domestic Reverse Charge for construction services was introduced on 1st March 2021 with the aim of combating missing trader VAT fraud. In a nutshell, company A (contractor) pays £20O (£1200 inc. VAT) of VAT to company B (subcontractor) for works that company B carried out. Company A recovers £200 of VAT from H M Revenue & Customs whilst company B should be paying that £200 to H M Revenue & Customs. The risk is that Company B has failed to pay the VAT to HMRC and have disappeared with the VAT (missing trader) and not handed it over to HMRC. Now H M Revenue & Customs are out of pocket by £200! The introduction of DRC has resulted in only the £1000 moving between contractor and subcontractor meaning that contractor does not claim VAT of £200 on their VAT return and the subcontractor does not declare £200 of VAT on their VAT return reducing the risk of missing trader VAT fraud, unless of course you are working for the end user.

This is often a concern and suggests that your previous contractors were falling foul of their obligations under the CIS scheme. Assuming that you, as the subcontractor are correctly registered with H M Revenue & Customs, and that you are subject to a standard deduction rate of 20%, alarm bells should have rung when you were previously paid without deduction. Your new client/customer appears to be following the scheme correctly and is trying to verify you with H M Revenue & Customs to ensure that the correct amount of tax is deducted from your invoice.

WIP stands for work in progress or amounts recoverable on contracts (we won't go into the difference here!) and is designed to reflect the value of works completed but uninvoiced at any point in time. Work in Progress is essential when trying to accurately report on contract profits or losses as generally speaking the financial statements will include the costs incurred, for instance, you may have engaged a subcontractor to complete the first lift of a new build construction which is not onward billed to the client until after the reporting period. Failure to include an accurate assessment of work in progress could ultimately result in volatile contract profit margins from one period to the next.

Often subcontractors will present an invoice to a contractor for payment with a scribbled 20% deduction of CIS tax. But how do you know that this is the correct rate at which to deduct? It is your responsibility as a contractor to verify that subcontractor with H M Revenue & Customs. By making a verification request with HMRC either directly or via third party software like Xero. Once the verification request is completed, you can be comfortable that you have satisfied your obligation and  deducted the correct rate of CIS tax.