The Construction Industry Scheme Ian M Harris Leicester City Council VAT & Taxation Advice Office

1. The Construction Industry Scheme Ian M Harris Leicester City Council VAT & Taxation Advice Office

2. VAT & Taxation Advice Office • Who are we? • Ian Harris: Taxation Officer • Part of Resources Department • Financial Services Division • Where are we? • Room B2.10, New Walk Centre • Extension: (29)7470 (0116-252-7470) • Fax: 0116-255-2443 • Mobile/Text: 07980-339581 • E-mail: vattax@leicester.gov.uk

3. What is the Construction Industry Scheme? • Introduced in 1971 to counter abuse of the self-employment rules by sub-contractors in the construction industry - ‘the lump’ • Under CIS a contractor has to make a deduction in lieu of Income Tax and NIC’s from payments made to sub-contractors for construction services • Unless sub-contractor is verified by Revenue and Customs as eligible to receive payment gross

4. The Contractor • A ‘contractor’ is defined as: • any person carrying on a business which includes construction operations, ie a ‘mainstream’ construction business • any person carrying on any business ifaverage annual expenditure on construction operations over last three years exceeds £1million

5. Contractors in the public sector • A ‘contractor’ can be: • a Government Department • a housing trust, society or association or the Housing Corporation • a development corporation or new town commission or the Commission for New Towns • an NHS Trust or similar public body • a local authority • But only if construction operations average more than £1million pa

6. Contractors not Within CIS • CIS does not apply where the ‘contractor’ is: • a private householder carrying out works to his or her home • a charity carrying out works to its own property • a business (but not a local authority) carrying out works to its own operational property • a local authority school acting under its delegated financial powers

7. The Sub-Contractor • A ‘sub-contractor’ is defined as: • any person carrying out construction operations for a contractor • unless • the ‘sub-contractor’ is an employee of the contractor

8. Employed or Self-Employed • The question of employed or self-employed is crucial to the operation of CIS • Under CIS this has to be expressly certified, • ie that no sub-contractors paid are employees • Revenue and Customs have issued guidelines as to the factors which indicate employed or self-employed status • including an on-line Employment Status Indicator tool • But it is each case on its merits

9. Contractors and Sub-Contractors • A sub-contractor can be a company, a partnership, an individual (including a gang leader), an agency, a public body (such as another local authority), a foreign business • A contractor can often also be a sub-contractor

10. Construction Operations • Construction operations are generally anything done to a building or structure including • construction • extensions, alterations and repairs • dismantling and demolition • Construction operations also include civil engineering works on the land • If there is a mixture of construction and non-construction the whole payment is within the Scheme

11. Operations Within the Scheme • Operations within the Scheme - • site preparation - demolition, site clearance, excavation, preparation of site • construction - laying foundations, building work, installing mains sewers, etc, road surfacing, scaffolding erection • finishing operations - internal cleaning, heating, lighting, air conditioning, power supply, drainage

12. Operations Not Within the Scheme • Operations not within the Scheme - • site preparation - delivery of materials to site, transport of soil from site • construction - making components, delivery of components and raw materials, security systems, hire of scaffolding • finishing operations - external cleaning, manufacture and delivery of heating, lighting, air conditioning or power supply systems

13. Construction Operations • Construction operations include: • building works including extensions, alterations and repairs, renovation and refurbishment • roofing • partitioning • carpentry if it involves work to a building or structure • painting and decorating • glazing • plumbing including installing heating, air conditioning, ventilation, water supply and disposal systems • electrical works including installing computer, power supply, heating and lighting systems

14. Construction Operations • Construction operations include: • damp-proofing • installing lifts • erecting and dismantling scaffolding • removal of asbestos or similar • landscaping • fencing • construction, repair and resurfacing of roads, bridges, tunnels, etc including white-lining

15. Payments Within the Scheme • Payment is defined as anything paid by the contractor to the sub-contractor in respect of the sub-contractor's labour services • It includes payment by cash, cheque or in kind, by way of a loan or advance or by way of discharging a third party liability of the sub-contractor

16. Labour Services • Payments within the Scheme are only those for the sub-contractor's labour services • These include • travel and subsistence payments • sub-contractor's ‘mark-up’ or profit on materials • But excludes • direct cost of materials, CITB levy, VAT

17. Exemption for Small Value Contracts • By concession the Scheme does not apply where - • the labour element of the payment is less than £1,000, and • the work was commissioned by a local manager with delegated budgetary powers, and • the exclusion from the Scheme was agreed by Revenue & Customs • LCC currently has prior agreement to exclude all such payments of less than £1,000 but this is under review

18. Verification of sub-contractors • Before payment can be made to a sub-contractor verification must be obtained from Revenue and Customs • Revenue and Customs will verify that the sub-contractor - • can be paid gross or • must be paid subject to a deduction

19. Verification of sub-contractors • To verify a sub-contractor Revenue and Customs need - • the sub-contractor’s full legal name and address • the sub-contractor’s Unique Taxpayer Reference number (UTR) • the sub-contractor’s NI Number or Company Registration Number as applicable

20. Verification of Sub-Contractors • Verification from Revenue and Customs determines whether - • the sub-contractor can be paid gross • the sub-contractor must be paid subject to deduction of 20% from the labour element • the sub-contractor’s details cannot be matched so they must be paid subject to ‘super-deduction’ of 30% from the labour element

21. Sub-contractors’ Status • Verification status remains valid until: • two complete tax years pass without payment to sub-contractor • or • Revenue and Customs advise otherwise • sub-contractor verified for payment under deduction can now be paid gross • sub-contractor verified for payment gross now subject to deduction • sub-contractor verified as subject to ‘higher rate’ deduction can now be paid gross or subject to ‘normal’ deduction

22. Trading Names • Trading names have no legal status • Revenue and Customs can hold one trading name per sub-contractor • But verification requires sub-contractor’s full legal name • Use of trading name for verification may result in payment being liable to higher-rate (30%) deduction

23. Change of Business Structure or Name • Verification ceases to be valid where: • the sub-contractor’s business structure changes, eg - • sole proprietor joins partnership • sole proprietor or partnership becomes limited company • limited company dissolves • or • the sub-contractor’s business name changes (no matter how minor)

24. Local Authorities as Sub-Contractors • When acting as sub-contractor local authority deemed to be verified for gross payment • no need for contractor to verify • no need for contractor to include on CIS Return • VAT and Taxation Advice Office can provide written confirmation if necessary

25. Three Tests for Gross payment • To be eligible to payment gross a sub-contractor must: • pass the turnover test • and • pass the business test • and • pass the compliance test

26. The Turnover Test • For an individual - turnover on construction operations of £30,000pa or more • For a partnership or company - turnover on construction operations of £30,000pa or more per partner or director • or • Turnover on construction operations of £200,000pa or more in total if this is less

27. The Business Test • The sub-contractor must be genuinely in business with: • proper business records • a business bank account • proper business premises • proper equipment, stock and facilities

28. The Compliance Test • The sub-contractor must have a good record of compliance in their Income Tax/NIC’s affairs • In past 12 months must have: • paid all Income Tax/NIC’s when due • submitted all tax returns, etc on time • Revenue and Customs randomly check • Can result in sub-contractor losing gross payment status with immediate effect

29. Making a Deduction • Where verified for payment subject to deduction, deduction is made from the labour element of the payment; this includes: • travelling expenses, fuel costs, subsistence payments, ‘mark-up’ or profit on the cost of materials • But excludes: • direct cost of materials, stores, plant or plant hire, any CITB levy, VAT

30. Rate a Deduction • The amount deducted is 20% • unless • Revenue and Customs verify sub-contractor as liable to higher-rate deduction when 30% • Regardless of rate basis is same

31. Calculating the Deduction • Example: sub-contractor carries out £4,000 of construction works including £1,000 of materials: • £ • total payable 4,000 • less: materials (1,000) • 3,000 • CIS deduction (20%) (600) • add back materials 1,000 • net amount to pay 3,400

32. Statement of Payment Under Deduction • Each month the contractor must give sub-contractors paid under deduction a statement showing: • contractor’s name and CIS-registration number • tax-month covered by statement • sub-contractor’s name and UTR number • if subject to higher-rate deduction verification number • gross amount payable (excluding VAT) • direct cost to sub-contractor of materials • amount subject to deduction (‘labour element’) • amount deducted • Statement of Payment Under Deduction must be given to sub-contractor by 19th in respect of tax month ending on 5th

33. Contras and Set-Offs • Contras are charges for good or services supplied to the sub-contractor by the contractor • they DO NOT reduce the amount due to the sub-contractor under the Scheme • Set-offs are deductions made by the contractor for breach of contract, eg sub-standard work • they DO reduce the amount due to the sub-contractor under the Scheme

34. VAT and the CIS • Where sub-contractor is registered for VAT, deduction is made from VAT-exclusive amount of labour element • Where sub-contractor incurs VAT on cost of materials and passes this on it cannot be recovered by LCC as it is sub-contractor’s VAT not ours

35. Corrections • Normally corrections cannot be made once a deduction has been made - • the sub-contractor must sort it out with Revenue & Customs • but sometimes a correction can be made if: • payment has not been included on CIS Return • sub-contractor has been verified for gross payment • correction is made in same tax-month as deduction • corrected payment is included on CIS Return

36. Corrections • If a deduction should have been made and wasn’t - • the contractor must still pay over to Revenue and Customs the amount deductible • with no automatic right to recover that from sub-contractor • But if sub-contractor does subsequent work for contractor may be possible to recover amounts deductible from subsequent payment • Remember this is outside of CIS though

37. Returns to Revenue & Customs • Contractor has to submit monthly Return to Revenue and Customs showing for each sub-contractor paid: • sub-contractor’s name and UTR number • if subject to higher-rate deduction verification number • gross amount paid (excluding VAT) • if paid under deduction direct cost to sub-contractor of materials • if paid under deduction amount deducted (from labour element) • Return must be submitted to Revenue and Customs by 19th in respect of tax month ending on 5th

38. Revenue & Customs Inspections • Revenue and Customs is responsible for policing CIS • They visit contractors periodically to examine their records • Where payments are made gross which should have been liable to deduction contractor is liable to make payment with no right of recovery from sub-contractor

39. The CIS at LCC • Most of Scheme is administered centrally at LCC • but you must identify any payments within Scheme and use ‘CON’ indicator when entering invoice onto Accounts Payable • check whether sub-contractor has been verified

40. The CIS at LCC • If verified AP will show: • ‘gross payment’ • ‘net payment’ • ie labour element subject to deduction at 20% • ‘super net payment’ • ie labour element subject to higher-rate deduction at 30% • If payment subject to deduction need to identify labour element and enter using ‘TS’ code ‘CL’ • AP will then calculate and make deduction

41. The CIS at LCC • If not verified contact Corporate Procurement who carry out all LCC verifications (extn: (29)7160) - direct dialling: 0116-252-7160) • Remember, Revenue and Customs need - • sub-contractor’s full legal name and address • sub-contractor’s Unique Taxpayer Reference number (UTR) • sub-contractor’s NI Number or Company Registration Number as applicable

42. Your Responsibilities • Understand the CIS rules • Ensure that sub-contractors have been verified before making payment • Refer to VAT Manual (Appendix K6) and other guidance notes • If unsure seek advice don’t guess

43. The VAT & Taxation Advice Office • If in doubt contact: • THE VAT & TAXATION ADVICE OFFICE • Room B2.10, New Walk Centre • Extension: (29)7470 • Direct dialling: 0116-252-7470 • Fax: 0116-255-2443 • Mobile/Text: 07980-339581 • E-Mail: vattax@leicester.gov.uk