CIS – types of work and businesses affected

The Construction Industry Scheme (CIS) is a set of special rules for tax and National Insurance for those working in the construction industry. 

The CIS covers all construction work carried out in the UK, including jobs such as:

  • site preparation
  • alterations
  • dismantling
  • construction
  • repairs
  • decorating
  • demolition

Exceptions to the definition of construction work includes professional work done by architects and surveyors, carpet fitting, scaffolding hire (with no labour) and work on construction sites that’s clearly not construction. The CIS does not apply to construction work carried on outside the UK. 

The scheme covers all types of businesses and other concerns that work in the construction industry, including:

  • companies
  • partnerships
  • self-employed individuals

Businesses in the construction industry are known as 'contractors' and 'subcontractors'.

New VAT rules for building contractors and sub-contractors came into effect from 1 March 2021. The new rules will make the supply of most construction services between VAT registered construction or building businesses subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector. This means that sub-contractors no longer add VAT to their supplies to most building customers, instead, contractors are obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. 

VAT Reverse charge for construction sector

A further reminder that new VAT rules for building contractors and sub-contractors will come into effect from 1 March 2021. The new rules were originally expected to commence from 1 October 2019, but an initial 12 month delay was announced. The start date was then delayed for a further 5 months until 1 March 2021 due to the impact of the coronavirus pandemic.

The new rules will make the supply of most construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.

This means that from 1 March 2021, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge. However, there is no loss of cashflow as the deemed output VAT can be deducted as input VAT subject to any existing restrictions; in this way the two entries on VAT returns cancel each other out.

This change will mean you that contractors will have to alter the way that supplies from sub-contractors are treated by their accounting software.

HMRC’s guidance states that, for invoices issued for specified supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

  • before 1 March 2021 – the normal VAT rules will apply, and VAT registered subcontractors should charge VAT at the appropriate rate on supplies
  • on or after 1 March 2021 – the domestic reverse charge will apply.

Changes to tackle CIS abuse

The Construction Industry Scheme (CIS) is a set of special rules for tax and National Insurance for those working in the construction industry. Businesses in the construction industry are known as contractors and subcontractors. Under the scheme, contractors are required to deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

It was announced at Spring Budget 2020 that a consultation on measures to tackle abuse of the CIS would be launched. Following the consultation and further meetings with those working in the sector four new changes to prevent CIS abuse are set to come into effect from 6 April 2021. 

  1. CIS set-off amendment power. The measure provides a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information Employer Payment Summary returns.
  2. Cost of materials. The measure makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
  3. Deemed contractors. The measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS.
  4. CIS registration penalty. The measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.

In addition, new VAT rules for building contractors and sub-contractors come into effect from 1 March 2021. The new rules will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.

Proposed changes to CIS abuse rules

The Construction Industry Scheme (CIS) is a set of special rules for tax and National Insurance for those working in the construction industry. It was announced at Spring Budget 2020 that a consultation on measures to tackle abuse of the CIS would be launched.

Following the consultation and further meetings with those working in the sector four new changes to prevent CIS abuse are set to come into effect from 6 April 2021. 

  1. CIS set-off amendment power. The measure provides a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information Employer Payment Summary returns.
  2. Cost of materials. The measure makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
  3. Deemed contractors. The measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS.
  4. CIS registration penalty. The measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS.

Are your construction clients ready for reverse charge changes?

New VAT rules for building contractors and sub-contractors come into effect from 1 March 2021. The new rules will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.

Guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). This will place the onus for dealing with the VAT charge due on subcontractors’ bills, on the main contractor.

There are now less than 5 months until the new rules come into effect and you should ensure that your construction clients are making the necessary preparations.

Affected construction clients should:

  • make sure their accounting systems and software can deal with the reverse charge
  • consider whether the change will impact their cash flow
  • make sure all their staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work

Verifying CIS subcontractors

The Construction Industry Scheme (CIS) comprises a set of special rules for tax and National Insurance for those working in the construction industry. The scheme applies mainly to contractors and sub-contractors involved in construction. However, certain businesses that are not in the business of construction but have a significant amount of annual spend may also count as contractors.

Before making a first payment to a subcontractor the contractor must confirm that the subcontractor is known to HMRC, registered within CIS and obtain details of their payment status. This is known as 'verifying the subcontractor'. A contractor or their appropriate representative can go online to carry out this verification using a number of different methods.

The verification is necessary so that the contractor can ascertain whether or not a deduction should be made from the subcontractor's payment and, if so, at what rate. If the subcontractor is not registered for the CIS, then contractors must deduct 30% from their payments. If the subcontractor is registered, then either a 20% deduction is taken, or the subcontractor can apply for gross payment status. If the subcontractor has gross payment status, they are responsible to pay all their tax and National Insurance at the end of the tax year.

Once verified, the contractor only needs to re-verify the subcontractor if they have not paid the same subcontractor within the current, or two previous, tax years.