To clarify, making the correct Construction Industry Scheme (CIS) deductions is one of the schemes conditions. So, are you doing it correctly?
Firstly are you working in construction? Secondly are you a contractor, subbie, advisor, all of those? If so this article will/should provide some value.
Payments to sub-contractors: travel, subsistence and accommodation
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC). Those deductions at 20% or 30% are made if the sub-contractor is not registered as a gross certificate holder.
Sub-contractors will typically invoice for their time, materials, travel and subsistence. If the sub-contractor is VAT registered, VAT this will also be included.
Many contractors and their advisors incorrectly apply the rules, and only apply deductions to the labour element.
This article was prompted by the worrying fact that there is confusion among many, and sh** will hit the fan if HMRC decide to look at this with more vigour.
We’ll be using the abbreviations FA, which in this case stands for Finance Act. The examples are taken from HMRCs Internal manuals.
The Scheme: contract payments: travel, subsistence and accommodation
Where a construction contract requires a contractor to pay a subcontractor’s expenses (such as travel and accommodation expenses) such payments form part of the overall value of the contract. This by virtue of FA04/s60. As such they will result in a deduction under the Scheme, by virtue of FA04/s61.
An obligation upon a contractor, under a construction contract, to pay a subcontractor’s expenses will fall within FA04/s60. This is regardless of whether the obligation is written, verbal, express or implied.
A payment made in respect of a subcontractor’s expenses will fall within FA04/s60. Regardless of whether the contractor pays or reimburses the subcontractor, pays their expenses directly or pays a nominated third party.
The total amount deducted by the contractor should reflect the gross amount of the payments due under the contract. This will include the payment of expenses on the subcontractor’s behalf. (See examples 1 & 2 below).
When CIS deductions are not due
A deduction will not be due where a contractor allows the subcontractor to use the contractor’s own facilities – such as vehicles or accommodation. A deduction will not be due, even if the contractor is paying a third-party for the facilities. However, these arrangements are not that common.
They may imply the existence of an employer/employee relationship (subject to PAYE) rather than a contractor/subcontractor relationship (subject to CIS). A contract payment will exist where a contractor makes a payment to a supplier for a subcontractor’s travel, subsistence or accommodation. If it a contract payment, a CIS deduction will be due on that payment.
Where the contractor arranges for a third party to provide accommodation to a subcontractor, such as a local hotelier, no CIS deduction is due. This assumes that the contractor pays for that accommodation and at no point passes on all (or some) of those costs of providing that accommodation. The contractor will account for this expenditure in their own records but the subcontractor must not claim any accommodation expenses in their own accounts.
Alternatively, if the contractor passes on all, or some, of the costs of providing the accommodation to the subcontractor, then that amount will be included in the PDS.
Example 1
The value of a construction contract is £10,000, including the payment of the subcontractor’s accommodation expenses. The subcontractor’s hotel accommodation costs £1,000. The contractor pays £1,000 directly to the hotel, leaving £9,000 due to the subcontractor. Therefore, the contractor should make a CIS deduction at the appropriate rate – 20% in this example. The deduction will be £2,000, based on total payments of £10,000. The contractor should give the subcontractor a PDS showing a gross payment of £10,000, with deductions of £2,000 for CIS and £1,000 for accommodation. The subcontractor will receive £7,000.
Example 2
The value of a construction contract is £10,000, including the payment of the subcontractor’s fuel costs. The fuel costs come to £2,000, which the subcontractor pays by credit card. The contractor pays £2,000 directly to the subcontractor’s credit card provider. This leaves £8,000 due to the subcontractor. The contractor should make a CIS deduction at the appropriate rate – 20% in this example. The deduction will be £2,000, based on a total payment of £10,000. The contractor should give the subcontractor a PDS showing a gross payment of £10,000, with deductions of £2,000 for CIS and £2,000 for fuel. The subcontractor will receive £6,000.
Example 3
The value of a construction contract is £9,000. The contractor allows the subcontractor to use accommodation rented by them. The value of the subcontractor’s accommodation is £1,000, and is never charged to the subcontractor. The contractor has rented the property completely independently of the construction contract. The payment of rent does not result in a deduction and does not have to go onto the subcontractor’s PDS the contractor should make a CIS deduction at the appropriate rate – 20% in this example. This will be £1,800, based upon a total payment of £9,000. The contractor should give the subcontractor a PDS showing a gross payment of £9,000, with deductions of £1,800 for CIS. The subcontractor will receive £7,200.
Example 4
The value of a construction contract is £9,000. Hotel accommodation is pre-booked, unconnected to the construction contract with the subcontractor. The value of that accommodation being made available to the subcontractor is £1,000, and is paid in its entirety by the contractor. The payment for the accommodation in these circumstances, does not result in a deduction and does not go onto the subcontractor’s PDS.
The contractor should make a CIS deduction at the appropriate rate – 20% in this example. This will be £1,800, based upon a total payment of £9,000. The contractor should give the subcontractor a PDS showing a gross payment of £9,000, with deductions of £1,800 for CIS. The subcontractor will receive £7,200.
Example 5
A contractor engages multiple subcontractors to work on a 3 month construction job. The nature of the work requires those subcontractors to work away from home during the week . As the contractor prefers to have all their subcontractors stay in the same hotel for convenient pick-ups & drop offs each day. The contractor contracts with a local hotelier to provide the contractor with 20 hotel rooms, Monday to Thursday, for the next 3 months. The arrangement provides that the hotelier will bill the contractor for the rooms, regardless of whether or not those rooms were always fully occupied. The only parties contracting into this accommodation arrangement are the hotelier and the contractor.
When first engaging the subcontractors, the contractor offers them free overnight accommodation at that hotel. The contractor informs the subcontractors that they will not be billed by the contractor nor the hotelier.
Assuming CIS deductions at 20%, and payments of £2,500 each month, the subcontractor would have £500 CIS deducted. The subcontractor would therefore receive a £2000 payment each month.
Next steps
Above all, are you making the correct CIS deductions? If you’re not sure then we’d love to see where we can help you with this. Contact us for more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers