Can construction accounting software help to keep you and your subcontractors compliant? View our useful guide here to CIS.
The Construction Industry Scheme (CIS) is a tax deduction scheme which involves tax being deducted at source from payments which relate to construction work. The scheme was put in place for those working in the construction industry to comply with and ensure that both individuals and companies as a whole cannot get away with employing tax avoidance schemes to try and reduce tax payments. The rate at which tax is deducted depends on the status of the subcontractor, and although a burden to the person making the payments, returns must be accurate and sent on time every month in order for the scheme to run efficiently. If the strict rules are not followed, serious penalties can apply.
Fortunately, construction accounting software such as our own exists to make this mandatory monthly process much easier, but ultimately, it is down to the contractors and subcontractors to know whether they are compliant or not. To help you gain a better understanding of CIS, and the risks of construction non-compliance, we’ve created this brief guide...
CIS - what it means for contractors
The CIS is basically a set of rules for contractors and subcontractors in the construction industry. If you are a CIS contractor, you’ll need to register with HM Revenue & Customs, and make sure you pay your subcontractors within the scheme correctly each month. As a contractor, if you do not follow the certain rules to make sure you pay your subcontractors within the scheme correctly, you could face a substantial penalty fee. To avoid this, you must:
Verify your subcontractors
Before you can give a subcontractor their first payment, you may need to verify them with HMRC. Normally, you will need to verify a subcontractor if you haven’t included them on a monthly CIS return in the current tax year. By verifying them, you are checking if your subcontractor has registered under CIS and what their payment status is. You can do all of this online. HMRC will check the details you have provided online against their own records to confirm whether or not the subcontractor is registered, and will tell you how you must pay them, giving you a verification reference number. This can be a time-consuming task however some construction accounting software packages, like our very own Evolution M, can complete this process automatically in one click from within the system.
Pay your subcontractors & make deductions
HMRC will tell you to pay your subcontractors in one of three ways, either with no deduction, at the standard rate or at a higher rate. It will then be up to you to work out how much you need to pay them. Once you know, you will likely pay it directly to them, or a Factor. You should keep a record of every payment you make to each subcontractor, including details of the gross invoice amount including VAT and any deductions you made. If you are required to show proof of payment and fail to provide HMRC with a Subcontractor Statement or CIS300 Monthly Return, you could incur a sizeable fine. You can keep on top of your statements and monthly returns with the help of construction CIS software, which will also help reduce the risk of human error.
The construction industry is a complex one when it comes to organising accounts and financial affairs. With contractors constantly coming and going and the need to check each one’s employment status, it pays to be able to rely on a system that can not only provide you with the support you need, but boasts the intelligence to keep track of your accounts without your regular input. The risks involved with non-compliance can not only be damaging to a contractor and their business financially, but also to their reputation. Make sure you remain compliant this year with the help of Integrity Software.