The Construction Industry Scheme (CIS) is a tax deduction scheme in the United Kingdom that involves contractors and subcontractors working in the construction industry. Under this scheme, contractors are required to deduct tax at source from payments made to subcontractors, ensuring that HM Revenue & Customs (HMRC) receives the correct amount of tax. Here are the key responsibilities of both contractors and subcontractors under the CIS:
Responsibilities of a contractor:
- Registering with HMRC: Contractors must register for the CIS with HMRC before making any payments to subcontractors.
- Verifying subcontractors: Contractors are responsible for verifying the subcontractors they work with. They must confirm their employment status, whether they are registered with the CIS, and obtain their Unique Taxpayer Reference (UTR) number and National Insurance number.
- Tax deductions: Contractors must deduct the appropriate amount of tax from the subcontractor’s payment, based on their tax status. The deduction rates are 20% for registered subcontractors and 30% for unregistered subcontractors.
- Record-keeping: Contractors must maintain accurate records of all payments made to subcontractors, including gross amounts, deductions, and net payments. They must also retain records of any invoices, receipts, and statements provided by subcontractors.
- CIS monthly returns: Contractors must submit a monthly CIS return to HMRC, detailing all payments made to subcontractors and the deductions taken. This must be submitted by the 19th of the following month.
- Providing payment statements: Contractors must provide subcontractors with a written statement or pay slip within 14 days of the end of the tax month, detailing the gross payment, deductions, and net payment.
Responsibilities of a subcontractor:
- Registering with HMRC: Subcontractors must register for the CIS with HMRC to be eligible for the 20% tax deduction rate. Failure to register will result in a higher deduction rate of 30%.
- Providing accurate information: Subcontractors must provide their contractor with their UTR number, National Insurance number, and any other required information to enable the contractor to verify their CIS status.
- Keeping records: Subcontractors must keep records of all payments received from contractors, including gross amounts, tax deductions, and net payments. They must also keep records of all invoices, receipts, and statements provided to contractors.
- Reporting changes: Subcontractors must inform HMRC and their contractors about any changes in their business, including changes in address, legal structure, or business name.
- Filing tax returns: Subcontractors must file annual self-assessment tax returns, declaring their income and expenses, and claiming any deductions or allowances. They must also pay any additional tax due or claim refunds for overpaid tax.
- Complying with other tax requirements: Subcontractors must also comply with other relevant tax requirements, such as VAT registration and compliance if applicable.
Non-compliance with the Construction Industry Scheme (CIS) in the UK can lead to various penalties imposed by HM Revenue & Customs (HMRC). These penalties may include fines and interest charges. Here are some of the main penalties for non-compliance and non-filing of CIS returns:
- Late submission of CIS returns: Contractors are required to submit monthly CIS returns by the 19th of the following month. Penalties for late submission are as follows:
- £100 for a return if it is one day late.
- An additional £200 if the return is not submitted 2 months after the date it was due.
- An additional £300 or 5% of the CIS deductions on the return (whichever is higher) if the return is not submitted 6 months after the date it was due.
- An additional £300 or 5% of the CIS deductions on the return (whichever is higher) if the return is more than six months but less than 12 months late.
- An additional ‘further penalty’ if the return is 12 months late. The amount will depend on the reason for late return. It can be either £300 or 5% of the CIS deductions on the return (whichever is higher) or a higher penalty of
- up to 100% of any liability to make payments.
- a minimum penalty of £1,500 or £3,000.
- Incorrect CIS returns: If a contractor submits an incorrect CIS return, they may face penalties depending on the degree of inaccuracy and whether it is deemed to be careless or deliberate. The penalties range from 0% to 100% of the potential lost revenue.
- Failure to keep records: Contractors and subcontractors are required to maintain accurate records of payments, deductions, and other transactions under CIS. Failure to do so may result in a penalty of up to £3,000.
- Failure to provide a subcontractor with a payment statement: Contractors are required to provide subcontractors with a payment statement within 14 days of the end of the tax month. Failure to do so may result in a penalty of £300 for each instance.
- Failure to register for CIS: Contractors and subcontractors are required to register for CIS with HMRC. If a contractor fails to register, they may be liable for a penalty of up to £3,000. If a subcontractor fails to register, they will face a higher tax deduction rate of 30% instead of the standard 20%.
- Failure to deduct tax or incorrect deductions: If a contractor fails to deduct tax from a subcontractor’s payment or deducts the wrong amount, they may be liable for the unpaid tax as well as interest and penalties.
Note that HMRC may apply reasonable excuses or special circumstances to waive or reduce penalties. If you believe you have a reasonable excuse for non-compliance or late filing, you should contact HMRC as soon as possible to discuss your situation.
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