The Construction Industry Scheme (CIS) can be a complex and confusing area for contractors, with intricate rules and regulations that can easily lead to costly errors. This article explores the five most prevalent pitfalls of CIS and offers guidance on how to avoid them. By understanding these potential pitfalls and implementing appropriate measures, businesses can improve their CIS compliance, minimise tax liabilities, and ensure the smooth and efficient operation of their construction projects.
1. Misidentifying works within CIS
Perhaps the most frequent error lies in determining whether specific works fall under the CIS. The legislation is intricate, and seemingly straightforward projects can unexpectedly be subject to CIS rules.
- Landscaping – While typically outside CIS, landscaping becomes subject to the scheme if it’s an integral part of a larger construction project, effectively completing the project.
- Building service repairs – Repairs to building service systems (e.g., plumbing, electrical) might seem exempt, but if they necessitate other remedial works or structural alterations, they fall within CIS.
- Maintenance vs. construction – The term “maintenance” can be misleading. Changing light bulbs is clearly outside CIS, but repairing a building or structure, regardless of the scale, is within the scheme’s scope.
Key takeaway: Carefully assess each project to determine its true nature and whether it falls within the CIS definition. Avoid relying on assumptions or general perceptions.
2. Neglecting changes to subcontractor payment status
GPS changes
Loss of GPS or unregistered status
If a subcontractor loses GPS or is no longer registered, failing to adjust payment status can lead to significant liabilities for the contractor. HMRC notifies contractors of such changes, but these notifications can be easily missed.
Key takeaway – Implement a system for periodically reviewing subcontractor statuses (e.g., annually or biannually) to ensure all changes are reflected accurately.
3. Mixed contracts: A CIS compliance danger
The CIS focuses on “construction contracts.” A contract becomes a “construction contract” if it even relates to any construction operation, regardless of whether actual construction work happens.
Mixed contracts
If a contract includes both construction-related work (even a small portion) and other types of work, the entire contract is considered a construction contract for CIS purposes.
Example
A contract for general maintenance might include a minor structural repair. Even though the majority of the work is maintenance (outside CIS), the inclusion of the structural repair makes the entire contract subject to CIS.
Key takeaway – Meticulous contract review is crucial. Any clause or provision hinting at construction activity could trigger the CIS application.
4. Inaccurate materials charges
- Direct costs only – When a subcontractor is paid under CIS deduction, the contractor can only deduct from the portion of the invoice representing the subcontractor’s direct material costs.
- Indirect costs – Costs for materials purchased by a higher-tier subcontractor and passed down the chain (e.g., subcontractor B buys materials and sells to subcontractor A, who then invoices the main contractor) cannot be claimed as direct material costs by the main contractor. This means they have not purchased the materials directly themselves.
- Reasonableness of costs –
- While strict proof (like receipts) isn’t always mandatory, the contractor must ensure the material costs claimed by the subcontractor are reasonable in relation to the work performed.
- This requires some level of cost assessment to prevent inflated or unreasonable material charges.
Key takeaway – Implement a system to review subcontractor invoices, assessing the reasonableness of material costs and ensuring they represent direct costs incurred by the subcontractor.
5. Reimbursing subcontractor expenses
Expense reimbursements as income – If a contractor reimburses a subcontractor for any expenses (e.g., travel, accommodation), those reimbursements are considered income to the subcontractor for CIS purposes.
Contractor-paid expenses – Even if the contractor directly pays for an expense (like booking a hotel room for the subcontractor), it’s still treated as an expense reimbursement for the subcontractor, and a CIS deduction must be applied to that payment.
Practical challenges – This creates a practical issue because accommodation providers usually won’t accept payment after applying for a CIS deduction.
Key takeaway – To simplify the process, encourage subcontractors to pay for their own expenses and then submit invoices for reimbursement to the contractor, allowing for proper CIS deductions.
How can Lyel Accountants help?
Dealing with the complexities of the CIS can be difficult for contractors. At Lyel Accountants, we can provide invaluable assistance by:
1. Conducting comprehensive CIS health checks
2. Providing expert guidance
3. Ensuring compliance
4. Representing clients in disputes
5. Minimising potential liabilities
Conclusion
The CIS presents unique challenges for contractors in the UK. By understanding and proactively addressing the common pitfalls outlined in this blog, businesses can improve their CIS compliance, minimise tax liabilities, and enhance their overall financial performance. Implementing robust internal controls, such as thorough contract reviews, accurate tracking of subcontractor statuses, and clear expense reimbursement procedures, is crucial. Seeking professional guidance from an experienced accountancy firm can help in managing the intricacies of the CIS and ensuring that your business remains compliant with all relevant regulations.
