How should a limited company account for construction work in the UK?

This article is intended to be of help as an introduction to what you should do if you run a company involved in construction operations. You should register as a contractor, a subcontractor, or both, under the Construction Industry Scheme (CIS).

The background is that HMRC wants to make sure tax is paid on all labour income from construction work. There has been a big problem in the past with people not paying tax on the income they get from working on construction sites. The CIS scheme is there to reduce tax evasion.

Non-compliance by a company can result in penalties and fines. It can also result in criminal prosecution where non-compliance is deliberate.

CONSTRUCTION OPERATIONS

• Construction operations include constructing buildings, bridges, and other civil engineering
• They also include site preparation (e.g. clearing and cutting vegetation)

BEING A CONTRACTOR

• The business is a contractor if it performs construction operations itself, or if it is a subcontractor to a contract for construction operations, and engages subcontractors to carry out the work
• It is also a contractor if it spends more than £3 million over 12 months on construction operations for other companies’ buildings

REGISTERING UNDER THE CIS

• A contractor must register for the CIS scheme
• A subcontractor does not have to register, but if they don’t, any contractor will have to withhold 30% from their payments

INVOICING

• When acting as a contractor, the company should require invoices from its subcontractors
• When acting as a subcontractor, the company should submit invoices to its contractors
• In both cases, invoices should separate non-labour costs from labour costs

PAYING SUBCONTRACTORS

• A contractor must  check with HMRC whether each subcontractor working for them is registered with CIS
• If a subcontractor is not registered, the contractor must keep back 30% of what they pay the subcontractor in labour costs before VAT, and pass it to HMRC
• If a subcontractor is registered, the contractor must keep back 20% of what they pay the subcontractor in labour costs before VAT, and pass it to HMRC
• If a subcontractor is registered with ‘gross payment’ status, then the contractor may pay the subcontractor without deduction

RECORDS TO KEEP AS A CONTRACTOR

• Each subcontractor’s business name, address, and Unique Taxpayer Reference (UTR)
• The date subcontractor’s status was verified with HMRC, and the unique verification number received
• Copies of all subcontractor invoices
• Date and gross amount (excluding VAT) of each payment invoiced by the subcontractor, split into non-labour and labour, and showing any deductions made at 30%, 20% or 0%
• Copies of all CIS returns
• Copies of monthly payment and deduction statements provided to subcontractors

RECORDS TO KEEP AS A SUBCONTRACTOR

• Copies of all invoices issued to contractors
• Monthly CIS payment and deduction statements from every contractor
• Details of relevant business expenses
• Bank statements

PAYING HMRC AS A CONTRACTOR

• The amounts a contractor has deducted from subcontractor payments should be paid direct to HMRC every month along with other payroll taxes

RECOVERING TAX FROM HMRC AS A SUBCONTRACTOR

• In its monthly PAYE returns, the company should report the total CIS deductions that contractors have deducted
• It can then use those CIS deductions it has suffered to reduce the amount of PAYE and NI it pays each month
• At the year end, if the CIS deductions still exceed PAYE and NI liabilities, the excess can be reclaimed from HMRC