How do I  complete a Construction Industry Scheme tax returns Form?

This blog answers the question “How do I  complete a Construction Industry Scheme tax returns Form?” A Record of Amounts set off form is used to evaluate the assets and revenue of a business in the construction industry. This blog also explains the contents of the monthly returns of a construction industry firm.

How do I complete a Construction Industry Scheme tax returns Form?

You need to complete a CIS tax returns form by giving details of the payments made to all subcontractors and contractors as well as information regarding which payments had to be held back. This CIS tax returns form needs to be sent back within 14 days of the end of the month.

A Construction Industry Scheme tax return application consists of Business, Compliance and Revenue tests. The tests are designed to provide an assessment of the company’s business activities and inventories relating to production processes.

While filling out the online form you will notice Business, Compliance and Revenue Tests. These tests on the Construction Industry Scheme form are intended to provide a complete assessment of business activities and amounts related to ongoing projections involving a contractor and subcontractor.

A Construction Industry Scheme,Record of Amounts set off form is used to record VAT returns, income tax returns and insurance contributions paid by the construction firm. It is mandatory to fill out this form and submit it to HMRC to avoid penalties.

What are the Construction Industry Scheme regulations 2007?

The Income tax (Construction Industry Scheme) Amendments Regulations 2007 were passed into law on 6th April 2007. These CIS regulations set the rules for paying subcontractors. 

Three new objectives are mentioned in the new regime include:

• Cutting down on the regulatory burden of companies

• Improving the level of compliance of these companies with HMRC

• Helping them to allocating the correct employee status for workers 

Subcontractors are required to be verified by a contractor who is registered as a subcontractor. The method for this can be by using the Construction Industry Scheme’s online account or through commercial software. In case more than 50 subcontractors are required to be verified it can best be done through using commercial software. 

The scheme requires contractors to withhold money from payments intended for subcontractors. This deducted amount is paid to HMRC as tax returns, The same amount is also entered in payroll tax deductions and used on National Insurance Contributions.

For verifying the subcontractor the contractor needs to have the following details:

• their contractor’s Unique Taxpayer Reference (UTR) number

•  the contractor’s HMRC accounting reference number

• The HMRC Employer reference letter

The subcontractor requires their:

•  Unique Taxpayer Reference number

• Social Security number in case he or is an individual entrepreneur

• Just their legal name and Unique Taxpayer Reference number (in case the subcontractor is a company)

How does the Construction Industry Scheme Work?

The construction industry scheme undertakes operations by adhering to the following principles regarding contractors and subcontractors. A CIS firm needs to be careful about adhering to overall turnover requirements. The firm also must declare monthly tax returns to HMRC on time.

If the contractor is an individual contractor and has a Unique Tax Reference number, the CIS firm can be registered online . 

The subcontractors gross payment status can also be requested using this online service

 If the firm does not have a UTR, it can register online as a new business for self-assessment and outsourcing  by using electronic means or by phone. You can also get registered by making a visit to a local office in person,

 Online CIS return forms are available for corporations and partnerships. Subcontractors are not required to register under the CIS scheme. But in case they choose not to register, they will be withheld from receiving their payments at a higher rate.

Contractors need to register on www.gov.uk by using a Government Gateway ID and password..

The gross payment status can be obtained from a subcontractor by logging into the Government Gateway and navigating to “Other Services” in their tax account. In these other services you need to select “Construction Scheme Subcontractors”.

 To be eligible for gross payments, you need to prove to HMRC that your CIS firm’s earlier tax returns and social security contributions have been paid on time. You also need evidence that the company undertakes construction work in the UK and runs the business through a bank account. 

Overall Turnover needs to be at a minimum of £ 30,000 for a sole proprietorship, at a minimum of £ 30,000 for each partner in a partnership or at a minimum of £ 100,000 for the entire company. The overall turnover must be at least £ 30,000 for each director of a company or at a minimum of £ 100,000 for the whole CIS firm.

When hiring a subcontractor who has not worked for the company for a period of time, the contractor must contact HM Revenue & Customs (HMRC) to:

• Verify that the subcontractor is registered with HMRC

• Verify that it is a self employment contract agreed with the subcontractor

• Determine if the subcontractor is to be made net or gross payments.

The Contractor will make payments to the Subcontractor by complying with the net or gross guidelines given by HMRC. The contractor submits a monthly CIS return statement to HMRC which shows the amount paid as well as the value of materials used and Iin net cases) deductions made for all subcontractors in the firm..

 He must also make a declaration on the monthly statement reading that he has considered on the returns the status of each subcontractor employed by the firm.

If the subcontractor is registered, HMRC will advise the contractor whether to pay the gross amount or to apply a 20% deduction. If the subcontractor is  unregistered, the contractor must deduct a higher rate of 30% from the payment the subcontractor receives for his work each month. 

If contractors were paid with retained earnings, they now receive a payment along with a retainage statement confirming the amount they paid alongwith the amount they deducted. The portion of the remuneration which doesn’t represent the cost of the subcontractor’s materials will be held back.

Large contractors can choose to function as “multiple contractors” under the CIS. This allows the company to operate in multiple sections specifically designed for CIS purposes. 

Tax agents working for Construction Industry Scheme clients have to be licensed.

A subcontractor can be paid gross payments without any deductions. A number of criteria must be met to achieve this and this subcontractor status must be applied for with HMRC.

What is construction work?

As a complement to the actual construction work done on the site, construction work may include:

• preparing a site

• Adjustments, repairs and decorations on the site

• cleaning of the interior of buildings following construction work

• The setting up of heating, lighting, electricity supply, water supply and ventilation systems.

Work which does not require program registration requirements includes:

• Architecture and relief work

• Labourless scaffolding rental 

• Carpet installation

• manufacturing of materials used in construction

• Delivery of materials

• Building work done on non-construction sites

How does a Construction Industry Scheme make a monthly return?

Contractors must send a monthly statement to HMRC including:

• Explanations of payments made to all its sub-contractors

• Details concerning payments made and deductions withheld

• A Code of Practice used for calculating the current employment status of subcontractors

• A statement confirming that the verification process was performed correctly.

Details of all payments made to subcontractors must be given. If the payments have been paid as a gross amount, paid with the usual deduction or paid without the greater deduction. The tax CIS return must be received by HMRC within 14 days of the end of the tax month.

Declarations must be submitted electronically. Contractors can register at www.gov.uk and use their online account for filing monthly CIS returns. CIS tax returns can also be submitted via certain commercial software packages. 

When accessing an electronic or web-based return, entrepreneurs must, for the tax month to which the return relates:When filing an electronic monthly CIS tax return statement entrepreneurs need to do the following:

• Verify all the information already printed on the CIS form

• Add information about any new contractor who is not already visible. Enter details of all payments made to each sub-contractor during the current tax month as well as details of any deductions from these payments made by the contractor.

• Certify this information by using an electronic or web version of the agreement both declarations on the tax returns package.The statement should show the amount actually paid and deducted during the course of the month.

The monthly tax return should be received by HMRC no later than 14 days after the end of the tax month to which it relates. Discussions might still be continuing regarding possible errors on the tax returns.

The tax declaration can be made:

• online by using the Record of Amounts Set Off form

• electronically, through the appropriate third party software

• By using electronic data interchange (EDI) system

All CIS contractors are required to submit an electronic tax return declaration each month. A penalty from HMRC will be charged if the “Record of Amounts Set off form” is not duty filled and returned to HMRC by its due date. 

But if a contractor has no intention to make payments to subcontractors for a certain period of time, they can request HMRC to suspend their returns (for as long as 6 months).Beyond this it is the construction firm’s responsibility to notify HMRC when they can make payments to subcontractors once again.

.Each month, contractors need to send HMRC a tax return payment for each of the deductions made. This remittance must be made within 14 days of the end of the month( or  17 days before if done electronically). 

Payments to HMRC must be made on time even if the requested deduction was not in fact made from the subcontractor’s payment amount.

What are the penalties for non compliance with tax declaration requirements for Construction Industry Schemes?

The new penalty laws for non compliance with tax returns criteria or for not making monthly returns for CIS  (earnings) applicable from 6th April 2021 are as follows:

• A Fixed penalty of £100 applicable if the CIS return is filed after its due date which is the 19th day of each calendar month.

• A second flat penalty of £200 if a return is filed two months late. This penalty is applicable when the return is filed after the 19th day of the following calendar month

• A taxable penalty in case the return has not even been submitted to HMRC in the six months following its due date. This penalty amounts to the value of the top 5% of all deductions shown in the tax return or to a fine of £300

• If the CIS tax return has not been submitted within the elapsing of a period of 12 months beyond the due date a fine of up to £3,000 or a penalty amounting to 100% of the CIS deduction (whichever is larger) is applicable.

If the CIS firm wishes to appeal the fine it can submit a Notice of Appeal to HMRC explaining the matter.

A “Notice of Appeal” (for financial sanctions) can be submitted in writing to :

NIC Employers Office,

HM Revenue & Customs 

BX9 1BX

The penalties for non compliance can be cancelled if the Notice of Appeal proves that no subcontractors have been paid for that month. The Notice of Appeal (for financial sanctions) needs to be made within a time period of 30 days of the penalty notification from HMRC.

What requirements do I need to qualify for clearing the compliance test with the online CIS form?

To pass the compliance test, the company must have passed within the 12 months from the date of gross payment request you need to send in the following documents

• All self-assessment tax returns due completed and returned by the due date
•  All contractor statements due each month are completed and returned by the due date

Industry

•  All PAYE and NIC taxes due by the company as an employer are paid on the due dates
• Due deductions paid by the company as a contractor in the construction industry in a timely manner

During the same 12 month period, when verifying the company’s success in the compliance test, HMRC will not consider any or all of the following:

•  3 late monthly contractor statement submissions made up to 28 days late
•  3 late payment of PAYE/NIC/CIS deductions made  up to 14 days late
•  Any late self-assessment tax returns made up to 28 days late

These tests are known as Business, Revenue, and Compliance tests and are explained in this note.

To pass the function test the company must prove:

• The firm must be able to prove that it carries out construction work in the UK or to provide it with manpower

• That it works through a bank account

What is the Proof of Turnover Test?

The Proof of Turnover Test is a test designed around the “net construction turnover”. It consists of the company’s gross income from construction activities without deducting any VAT or material expenses.

The Proof of Turnover test is used to analyse the net construction turnover recorded in the 12 months following the gross application payment.

In order to pass this test the company needs to be able to exhibit a net construction turnover exceeding £30,000 (or of just £30000) in the 12 month period. In case the company shuts down (in these 12 months) it needs to be assessed on an alternative criteria. 

This criteria is showing a turnover of at least £100,000, for which total company sales from all sources can be used relating to the period before these 12 months (in case the net building sales figure is insufficient to cross £100,000)

When the construction company’s gross compensation claim fails, its construction holdbacks will be 

To pass the standard test, the company must be able to demonstrate a net construction turnover of at least £30,000. If the company is closed, for each beneficial owner in the 12-month period preceding the date of the gross amount payment request. To pass the alternative criterion, the company must have a net turnover of at least

£100,000 over the same period. If the company’s building net sales are not sufficient to pass the sales test, but itsTotal sales from all sources in the 12 months preceding the application exceed the threshold, you may still be able to exceed it

If the company’s gross compensation claim is unsuccessful, its shortfall will be paid by using construction holdbacks (holding back a part of the payment invoice)

Does the Construction Industry Scheme have to make payments to HMRC?

Contractors are required to send all the tax deductions for subcontractors for each fiscal month to HMRC by the 14th day of the next month (this deadline is changed to the 17th day for electronic payments). In case this day falls on a weekend or a public holiday, the payment needs to be made on the next working day.

If the company has its own separate tax returns for payments to the subcontractor, these individual deductions can be offset against the PAYE and NIC returns of the company and also from any Construction Industry Scheme tax returns it is required to submit to HMRC.

Amendments have been made to the 2010 Income Tax Regulations requiring some employers to make payments to HMRC via electronic payment systems. 

Conclusion

This blog post addressed the question “How do I complete a Construction Industry Scheme tax returns Form?” A Construction Industry Scheme Form is used to file monthly returns for a firm and has entries for payments made to contractors and subcontractors. Other tests related to the form such as the proof of turnover test helps to assess the presence of matching between the Construction Industry Firm’s income and expenses.

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Frequently Asked Questions (FAQs) : How Do I Complete a Construction Industry Scheme Tax Returns Form?

Do contractors and subcontractors need to be registered in the CIS?

Yes, all contractors are required to register with HMRC as contractors of the Construction Industry Scheme before hiring their first subcontractor. Contractors can be organized in the form of sole proprietorships, partnerships or limited liability companies.

Contractors can choose to deduct 30% of their subcontractor’s payments (instead of the regular 20%) if they don’t get their subcontractors enrolled in the CIS program.HMRC taxation rules don’t require the subcontractors to be registered under the Construction Industry Scheme program.

What are Contras and Set Offs?

A contract is a fee for the goods or services provided from one party to the other. For instance this may mean that a subcontractor receives an excessive amount of material but is paid lesser than its actual value. Under the CIS scheme a contract does not serve to reduce the payment against which a tax deduction is made but is just  paid as the earnings of the subcontractor.

The deduction is required to be calculated on the total contract value of £250, assuming that no materials are used for construction work.

Settlement is the amount of money unpaid to the subcontractor by the contractor as earnings owing to a (suspected) breach of contract. Under the CIS Scheme a transaction reduces the amount from which a deduction is taken out from and is not a payment from the contractor to the subcontractor.