This guide to the construction industry scheme (CIS) will help new contractors understand why it was introduced, how it works and how to operate it successfully.

What is the construction industry scheme?

CIS was introduced in 1971 to reduce tax evasion in the construction industry. 

It works by requiring contractors to tax construction workers at the point of payment, rather than waiting for them to declare and pay their own tax and National Insurance after the year-end.

Does it apply to me?

If you carry out construction work and engage others to do some or all of the work for you, you'll need to register as a contractor.

If you work in the construction industry, hiring or selling your services to a contractor, you'll need to register as a subcontractor.

You'll need to register as a contractor and a subcontractor if you fall under both categories.

If your business does not trade in construction but you have spent more than £3 million on construction in the 12 months since your first payment then the CIS scheme will also apply to you.

What is construction work for CIS purposes?

The CIS scheme covers most construction projects, including:

• Site preparation such as foundations and access works
• Demolition and dismantling
• Building work including alterations, repairs, extensions and decorating
• Installing systems for heating, lighting, power, water and ventilation
• Cleaning inside of buildings after construction work
• Any work forming part of the land, e.g. walls, roadworks, power lines and waterways etc

Who is exempt from the CIS scheme?

There are a whole host of exceptions to the scheme.

For example, individuals engaging builders for domestic work in their own homes do not need to operate the CIS scheme. 

Certain trades are also excluded, for example:

• Architecture and surveying
• Scaffolding hire (with no labour)
• Carpet fitting
• Making materials used in the building industry, i.e. manufacture of bricks, plant and machinery
• Delivering building materials
• Work on a construction site that is clearly not construction, i.e. running a site canteen

What if my trade doesn’t fit into the list?

The above are general examples of work that falls inside and outside of the scheme but unfortunately there are plenty of grey areas.

You can visit HMRC's website for more information about what is included in the CIS scheme.

However, if you're not sure if the scheme applies to you, we can help. Get in touch by email to book a discovery call.

What are my responsibilities for CIS as a new contractor?

CIS can be tricky for new contractors so please take the time to understand your responsibilities.

If you determine that you are a contractor, you’ll need to register to let HMRC know BEFORE you take on your first subcontractor.

You also need to ensure that there's a contract for services in place which confirms that the subcontractor is actually self-employed rather than an employee who would have a contract of service.

Once you've established that you do have a genuine subcontractor they'll need to be verified so that you know how much tax to deduct.

You must then deduct the correct amount of tax and declare it to HMRC in a contractor return once a month to HMRC.

You have a legal obligation to give the subcontractor a 'payment and deduction statement' each month. This statement informs the subcontractor of payments made to them and the tax that's been deducted.

It's important to ensure you're keeping full, accurate and up-to-date records. Using a great bookkeeping and accounts system can help with this. We always recommend Xero - check out our previous blog on 'why construction companies love Xero' for more on this.

What rate of CIS should I deduct?

Verifying a subcontractor will tell you what rate of tax to deduct.

To do this you will need to request details of the subcontractors:

• Name, National Insurance Number and Unique Tax Reference (UTR) if they are self-employed
• Company name, company number and company UTR if they're a limited company
• Trading name, partnership UTR and nominated partner details if they're a partnership

You can verify via the CIS service on your HMRC Government Gateway, via software like Xero, or ask your accountant to do this on your behalf.

HMRC will then tell you which rate to deduct - which are as follows:

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% if the subcontractor has gross payment status

We recommend using Xero to easily keep track of your CIS but to understand how the deduction works, here are some easy steps to follow:

1. Start with the subcontractor's total invoice.
2. Take away any VAT (if it is been charged).
3. You can then deduct any materials, equipment hire and fuel (except for travelling) that are included on the invoice.
4. The remainder is the labour from which tax must be deducted.

Worked example

1. The original invoice is £1,200.
2. The invoice is under reverse charge so no VAT is present.
3. Material costs of £200 and hire of £250 are shown on the invoice. As a result, £450 can be deducted. The subcontractor has also shown travelling costs of £50 but these cannot be deducted.
4. The remaining £750 has tax deducted at 20%.

Therefore:

• The tax deduction is £150 (£750 x 20%) which should be declared on your contractor return and paid to HMRC.

• Your subcontractor is paid £1,050 (£1,200 - £150).

Do I actually have to pay the CIS that's deducted to HMRC?

If you suffer CIS on your income then usually no payment to HMRC will be necessary.

You'll need to make sure you keep track of the CIS you've suffered each month and submit the figure to HMRC on an EPS via your PAYE scheme.

The CIS that's been suffered can then be used to offset any PAYE and CIS that's due to HMRC throughout the year.

At the end of the year, if there's still an amount of CIS suffered which hasn't been offset, you or your accountant can apply to have it offset against other taxes or refunded.

If you don't suffer CIS on your income, you'll need to ensure you make the payment on time every month.

What are the CIS deadlines?

You must send your contractor returns to HMRC by the 19^th of every month for the previous tax month (6^th to 5^th) as well as the amount of CIS you've suffered via an EPS.

If you have CIS to pay, it will be due for payment by the 22^nd.

HMRC will charge penalties for missing a filing deadline, starting at £100 if your return is just 1 day late, £200 if a return is 2 months late and increasing to the higher of £3,000 or 5% of the CIS deductions on the return for returns more than 12 months late.

If there is nothing to declare, make sure a nil return is filed by the 19^th to avoid a late filing penalty.

If you know you won't be making any deductions for the next 6 months you can notify HMRC of 'a period of inactivity'. This will mean returns will not be required BUT you must inform HMRC and start making returns again if the inactivity ends before the 6 months finishes.

That's a lot to take in, can you summarise it?

Of course! Check out this quick video which sums up the major points.

How can Clarative Accounting help you?

We know that CIS can be tricky and time-consuming for new contractors, not to mention the problems it causes with cash flow as well as interest and fines if it goes wrong!

But we're here to take that headache away and can help with:

• Registering your business as a contractor and/ or subcontractor
• Monthly processing of returns including verifying your subcontractors, calculating deductions, filing monthly returns and sending payment and deduction statements
• Keeping track of the CIS you suffer and the PAYE and CIS you owe
• Meeting all deadlines on time, every time!

If you'd like to discuss CIS with us further book your free 15-minute discovery call today.

Navigating the various vehicle finance options for your small construction company can be a nightmare. If the different options are leaving you confused check out our blog to help guide you through.

Hire purchase

What is it?

Hire purchase (HP) is a way of financing the purchase of a vehicle.

How does it work?

You pay a deposit at the start of the agreement and acquire a loan for the remainder. Therefore you're effectively hiring the vehicle while paying off the loan in monthly instalments.

The loan is secured against the vehicle which means you don’t own the vehicle until the last payment is made. Whilst you're making payments, you're not allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.

You sometimes have an option to lower the monthly payments by adding a final balloon payment at the end of the agreement.

What about tax?

As you're purchasing the vehicle you can claim capital allowances and get a proportion of the cost deducted from your taxable profits. Different rates of capital allowances can be claimed depending on what type of vehicle it is.

You can claim the finance element as a tax-deductible expense.

As this is a 'contract for goods', the whole amount of VAT is charged upfront and, if recoverable, you can reclaim it all in one go at the start of the agreement.

Contract hire

What is it?

Contract hire is a way of hiring a vehicle, often for a short amount of time.

How does it work?

You hire a vehicle for an agreed duration and make monthly rental payments.

The hirer retains ownership of the vehicle and is responsible for the associated risks. Once the contract has finished, you return the vehicle to the hirer.

What about tax?

The tax works exactly the same as if you were hiring any other plant and machinery for your business. As you don't own the vehicle, it isn't shown on your balance sheet. Instead, you claim the monthly payment as an expense and get the tax relief as you go along.

As this is a 'contract for services', the VAT is charged on each monthly rental and, if recoverable, you can reclaim it on a month by month basis.

There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.

Finance lease

What is is?

A finance lease is a way of financing the lease of a vehicle.

How does it work?

You make payments, including any interest, on a monthly basis. You can usually negotiate lower monthly instalments by agreeing a final 'balloon' payment.

At the end of the agreement, you either:

• Sell the vehicle to a third party and, although you don't own the vehicle, you'll receive the majority of the sale proceeds.
• Pay the final payment and continue to operate the vehicle under the same lease, on a month by month basis, usually at a lower amount.

The finance company retains ownership of the vehicle, but you get exclusive use of it (subject to meeting the terms of the lease).

What about tax?

Despite never owning the vehicle it is added to your balance sheet as an asset, but you can't claim capital allowances as you would if you were purchasing it. Instead, you're allowed to claim the depreciation on the vehicle as a taxable expense.

VAT is charged monthly, and if recoverable, you can reclaim it on a monthly basis. There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.

Personal contract purchase

What is it?

Personal contract purchase (PCP) is a way of financing either the purchase or the hire of a vehicle.

How does it work?

At the start of your PCP contract, a Guaranteed Future Value (GFV) of the vehicle is set which is the vehicle’s expected value when the agreement ends.

Usually, you'll pay an initial deposit followed by regular monthly instalments, up to the GFV, over an agreed time period, with a loan secured against the vehicle.

At the end of the agreement, the GFV will become payable as a single payment, if you wish to purchase the vehicle. You don’t own the vehicle until the last payment is made.

At the end of the agreement, you have four options:

• Pay the final payment to own the vehicle.
• Refinance the final payment with a new loan.
• Hand the vehicle back.
• Part exchange for a new vehicle, if the current vehicle’s value is more than the GFV.

While you are making payments, you aren’t allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.

What about tax?

The tax and VAT implications of PCP depend on the level that the GFV is set at and the anticipated market value at the end of the contract.

If the GFV is set at or above the anticipated market value, the contract will be deemed a 'supply of services' and VAT is charged on each instalment. If recoverable, you can therefore reclaim it on a monthly basis.

The tax treatment is the same as if you were hiring the vehicle.

However, if the GFV is set below the anticipated market value, such that any rational person would choose to buy it, the contract will be deemed a 'supply of goods' with a separate supply of finance. The total VAT is therefore due at the beginning of the contract.

The tax treatment follows that as if you were purchasing the vehicle.

Unsecured loan

What is it?

A loan allows you to borrow a fixed amount over a fixed term at a fixed rate of interest. This in turn means you have the funds available to purchase the vehicle outright.

How does it work?

Purchasing in this way gives you immediate ownership of the vehicle.

You make regular monthly payments during the agreement to cover the amount borrowed plus any interest and fees. The interest rate is fixed so you’ll know exactly how much you’ll be charged from the start.

What about the tax?

The tax and VAT treatment follows that of HP.

Note: Tax and Class 1 A National Insurance will be due if a vehicle is available to an employee or director for personal use. This will apply to whichever vehicle finance option you choose.

If you'd like to discuss the accounting and tax implications of the various vehicle finance options for your small construction company, book your free 15-minute discovery call today.

Are you confused when it comes to calculating mileage claims in your construction company? If you or your employees are using personal vehicles for business travel the company can reimburse for the business miles travelled. But how does it work?

What are mileage claims?

Mileage claims are claims made by directors and employees to the company for using their own private vehicles for business reasons. Examples can include:

• Visiting customers or potential customers,
• Collecting materials,
• Attending training courses.

Travelling to a permanent place of work is a personal expense, not a business one, so mileage cannot be claimed in relation to this.

Directors and employees should always pay for all of the running costs, including fuel, of their own vehicle personally.

What can I pay?

Directors and employees should always keep mileage records. These should record the number of miles travelled in their own vehicle for company business. A mileage rate can then be paid for the total business miles driven.

You can set your own mileage rates, but there are tax implications if the rates exceed the HMRC limits. Any payments in excess of the advised rates may then become taxable.

We, therefore, recommend paying the HMRC mileage rates for diesel and petrol vehicles as follows:

• 45p per mile for the first 10,000 miles in a year, and
• 25p per mile thereafter.

HMRC also provide advisory rates for other vehicles and for additional passengers, which can be viewed here.

The company can also reclaim a small proportion of VAT on each mileage claim paid. 

There are several options for calculating the reduced level of VAT. Watch our below video and request our mileage claim template for our recommended method.

How do I process mileage claims in Xero?

There are three ways to process mileage claims in Xero:

• Using the expenses module (fees apply),
• Raising a bill from the employee,
• Entering as a journal – we cover this example in our video below.

If you'd like to find out more about mileage claims, request a copy of our mileage claim template, or need any other accounting help with your construction company, book a free 15-minute discovery call and we'll be happy to help.

Retentions are a headache for any small construction company. They're very common and often hard to avoid. This blog will ensure that you're accounting for retentions in construction correctly. So at least that's one problem off the list!

What is a retention?

Retentions are a percentage of a construction contract, often 5%, which are held back and not paid until a later date. Main contractors often insist on these as a way of mitigating themselves against snagging and defects in the work that's been completed.

How are retentions accounted for?

Corporation tax

The total amount relating to a contract needs to be included as income on completion. Watch our video tutorial to see our recommended method of recording retentions. This method records the total income but splits the retention into a separate balance sheet code to keep your debtors current and tidy.

Corporation tax will be payable on the full amount even though the retention hasn't been collected. It's therefore important that the retentions account is reviewed periodically but especially at the company year-end.

A bad debt provision could be included in your accounts when it becomes unlikely that a retention will be recovered in the future. This means corporation tax wouldn't be payable on it.

VAT

For VAT, the tax point for retentions is delayed until the earlier of the following:

• A VAT invoice being issued.
• The payment of the retention being received.

This means that you don't pay over the VAT to HMRC until the retention is invoiced/ received at a later date. If you're interested you can check out the HMRC guidance for this here.

If your income is subject to CIS then you'll operate under the reverse charge for construction, which means the VAT position will be irrelevant anyway.

CIS

CIS works on a cash basis and so will only be suffered on monies actually received.

The below table shows how your invoice should be laid out:

If you suffer retentions and use Xero for your accounting, you'll know that there's no specific way of dealing with them. We've put together this video to give guidance on how to account for them.

Note: A slightly different process needs to be followed if you suffer CIS on your income. Please contact us for more information.

If you'd like to speak to us regarding retentions or other accounting issues in your construction company, book a free 15-minute discovery call to find out how we can help.

Are you the director of a small construction company? Are you looking for bookkeeping and accounting software and not sure where to turn? Don't worry we've got you! Here's our list of reasons why construction companies love Xero!

Our top 12 reasons

1. It’s cloud based

This means it’s accessible at any time through the internet, rather than having to be installed on your computer.

There’s no need to worry about security as your data is encrypted and stored in several locations keeping it nice and safe.

What’s more, you don’t have to worry about using valuable computer space and there won’t be any backups to lose sleep over!

2. It’s convenient

You’re able to log in anytime, anywhere and with any device just as long as there’s an internet connection available.

This makes a whole host of accounting functions possible on the go, via the app, including invoicing. Increasing the chances of getting paid quicker – and what could be better than that?

3. It’s collaborative

Xero allows real-time updates, which means we can log in at the same time as you to view and make changes. This makes training and problem solving so much easier, as we can see the same information as you, at exactly the same time.

It also includes unlimited users so you can add as many of your staff as you need to, as well as us. But don’t worry, you can restrict access, so you’ll have control over who can see and do what.

4. It’s progressive

Xero take pride in constantly updating their software and in finding ways to make it smarter.

As it’s a service you subscribe to monthly, rather than downloaded annually, you know you’re always using the most up-to-date version.

5. It’s intuitive

We love that Xero is designed for business owners rather than accountants. It's proven in the language it uses – there’s no mention of dreaded debits and credits here!

It’s easy to navigate around its well laid out system. Yes, it may feel alien to start with but we’re convinced you’ll love it (nearly as much as us) in no time at all.

We often find that construction company owners don’t enjoy this side of things, so it earns massive brownie points here.

6. It’s customisable

You can easily add your logo and company details so that they show on invoices and other documents.

You can also customise and save reports so that you have the ones that mean the most to you available in real-time and at the touch of a button.

7. Its amazing integrations

You’ll be sure to find an app add-on for almost anything you can think of to meet your business needs.

Check out the new Xero app store to view the amazing possibilities. Just let us know if you need any help in deciding which is best for your company.

8. Its automatic bank feeds

Linking your company bank account to Xero enables the statements to be imported effortlessly every day.

This great feature provides you with a view of your bank balance, including cash in and out without having to access your actual bank account.

Not only does this save time, but it’s more efficient and it reduces errors.

9. It helps you go paperless

Who hasn’t dreamt of being entirely paperless? Well, now it’s a possibility!

You can prepare and send your sales invoices directly from the system. This not only reduces paper and postage but speeds up the process, so you’re likely to get paid quicker too.

You can also upload your purchase invoices and link them to the bank payment, keeping them nice and tidy and all in the right place. HMRC have said they're happy for information to be kept in this way. So now you can use your loft space for storing something other than 6 years of dusty old invoices.

10. Its dashboard

This is the screen you’ll automatically see when you log in. Again, completely customisable, you can set it to show the information that really matters to you meaning you know where you stand at any moment.

This makes reviewing the money you owe and what’s owed to you totally effortless. We all know that cash flow is king, which is especially true for construction, so these kinds of insights are really important.

11. Its additional modules and features

There are additional modules in Xero that can be switched on, such as tracking, CIS, payroll and projects. Although you’ll pay an extra subscription for some of these services, they can be highly beneficial and time-saving, if used correctly.

The CIS function, for example, is an easy-to-use module that enables quick verification of subcontractors, calculates CIS deductions and deals with all the required reporting. Reporting CIS deductions to HMRC has never been simpler!

Remember to speak to us before adding modules so that we can ensure they are suited to your specific circumstances and that you're using them correctly.

12. It’s able to auto chase overdue debts

Our busy construction company clients tell us this is one of their favourite features in Xero!

You can set the system to automatically send out chaser emails once a payment deadline has passed. You can choose how often the chasers are sent, as well as how friendly the reminder is.

The great news is there’s no need to remember all those retentions years down the line – Xero can now chase them for you too!

We know that change is scary, but once settled into using the system, our small construction companies tell us they love using Xero. In fact, they have no idea how they lived without it!

So, if you’re ready to integrate Xero into your small construction company, book a free 15-minute discovery call today to find out how we can help you.

‘Tis the season for spreading a little cheer with Christmas parties and gifts. Just be sure your construction company follows the rules to keep them allowable for tax, as well as staying on the right side of HMRC!

Here's a handy video summarising the rules but for more information check out the rest of the blog below.

Christmas parties

Here are the rules you need to follow to ensure your Christmas parties are always allowable for tax:

1. Don't splash the cash ... too much!

Keep the total cost of the party under £150, including VAT, per head and remember that this includes extra costs such as transport and accommodation too.

It's an exemption, not an allowance, so if you go over £150 per head then the whole amount is taxable - so don't make this mistake.

2. Be inclusive ... but not too inclusive!

The event must be open to all employees to qualify as tax allowable.

Other guests, such as clients or partners of employees, may attend but the event must be primarily for staff entertainment.

The share of the costs for employees and their partners to attend is deductible from taxable profits, but the cost for other non-staff such as clients and suppliers is not.

3. Don't take the ... mickey

Although you can split the exemption over several events, they must be annual events such as a Christmas party or summer BBQ.

It doesn't cover multiple trips to the pub just for fun!

How do I work out the cost per head for the Christmas party?

To work out the cost per head just add up the total cost of the event, including extras and VAT and divide by the total number of people attending.

What if the cost of the Christmas party exceeds the exemption?

Unfortunately, it's taxable ... on your employees!

You'll need to either:

• Report it on a P11D so that the company pays Class 1A National Insurance (NI) on the benefit and your employees pay tax on their share; or
• Report it on a PAYE settlement agreement so you pay the NI and tax on behalf of your employees.

What about claiming the VAT?

The VAT is recoverable for your employees but restricted for any clients and employee partners attending.

Gifts

Follow these rules to ensure your gifts are always allowable for tax:

Gifts for employees (including directors)

• They must cost less than £50 (including VAT) each.
• They can't be cash but non-cash vouchers are ok.
• They can't be in recognition of a job well done.
• Employees can't be contractually entitled to receive the gift.

Gifts can be made at any time during the year, not just at Christmas. There is a limit of £300 per year for directors of small companies (up to 5 shareholders).

Gifts for customers, suppliers or subcontractors

Unfortunately, these are only allowable for tax if they meet these strict criteria:

• They must cost less than £50 (including VAT) each.
• They must have a conspicuous advert for your company.
• They cannot be food, alcohol or tobacco.

Always remember that any cash 'bonuses' paid to subcontractors must be treated as income by them and must therefore go through the CIS scheme, where applicable.

What about claiming the VAT?

The VAT is recoverable on gifts to directors and employees.

You can recover the VAT on business gifts made to an individual or business provided the total cost of all the gifts to the same person does not exceed £50 in any 12-month period. 

We hope this blog helps you to have a festive period full of cheer, whilst remaining on the right side of HMRC!

If you'd like to find out more about how working with us can help your construction business to excel whilst staying on the right side of HMRC, book your free 15-minute discovery call today.