26 June 2018
The Construction Industry Scheme (CIS) covers most construction work to buildings, including site preparation, decorating and refurbishment. Under the CIS rules there are definitions for ‘mainsteam contractors’ and ‘deemed contractors’. Mainstream contractors are generally builders, whilst deemed contractors could, in theory, be anyone.
A ‘deemed contractor’ for these rules is a business that does not do construction work as its main business but spends an average of more than £1m a year on construction in any three year period. There are two exemptions, as a deemed contractor, to these rules:
- If you undertake work on your own property for your own business
- A construction contract worth less than £1,000 excluding materials.
Again, I sell cars, how can this possibly affect me?
We have seen many examples of dealership refits being undertaken, where an area of the showroom or a separate building, like a workshop or paint shop, have been included within the refit but then sublet to a separate business, like a coffee franchise or an ancillary parts or tyre supplier. In these examples the CIS rules bite.
So what is the problem?
Firstly to operate CIS, you have to register with HMRC as a contractor. Secondly, once registered you need to verify sub-contractors to determine how much CIS tax needs to be withheld from payments. Thirdly, any deductions need to be paid over to HMRC along with your normal PAYE liabilities. Finally, monthly returns about payments made to subcontractors during the previous month must be filed.
So, again what is the problem?
If you get it right, there will be no problem. If you get it wrong, you could face major financial penalties.
So what are the penalties?
Up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return.
Penalties for late returns
| One day late | £100 |
| Two months late | £200 |
| Six months late | Higher of £300 or 5% of the CIS deductions on the return |
| 12 months late | Higher of £300 or 5% of the CIS deductions on the return |
| Over 12 months | As above plus additional higher of £3,000 or 100% of CIS deductions on the return |
The penalties will be cancelled if you let HMRC know that no payments to subcontractors were made in the particular month.
We have seen examples where work has been undertaken and because CIS was - incorrectly - not applied, CIS returns were not filed. In this case they are late and the fines system starts.
If a refurb took six months to undertake but the company didn’t become aware that CIS was an issue until six months later, then potentially the lowest penalty would be £1,800 (6 x £300), but more likely the 5% of the CIS deductions would bite. If it was a contract for £750,000 with CIS applying to £500,000 then the fine becomes £5,000 (£500,000 x 20% x 5%).
The penalty system under these rules is very blunt and so it is always better to keep out of it.
If you need advice in this area then please contact your local UHY automotive specialist in the first instance.
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