The Construction Industry Scheme

The Construction Industry Scheme requires a business paying subcontractors for construction work to deduct tax from those payments and account for it to HMRC. It applies to contractors in the ordinary sense, and it also applies to businesses that are not construction companies at all but spend enough on construction to be brought in.

Who is caught

• Any business whose work includes construction and which pays subcontractors for it.
• Any business, of any kind, that spends more than £3 million on construction in a rolling twelve-month period. This limb reaches businesses outside the sector: a retailer fitting out stores, a manufacturer building a facility, a technology company with a large office project.

Construction operations are defined widely and include site preparation, alterations, repairs, decorating and demolition, as well as building. Some things are outside it, notably professional work such as architecture and surveying, and the manufacture of materials off site. The boundary is where most disputes happen, which is worth settling before the first payment rather than after.

What the scheme requires

1. Register as a contractor with HMRC before the first payment to a subcontractor.
2. Verify each subcontractor with HMRC before paying them. HMRC returns a deduction rate: 20% for a registered subcontractor, 30% for one that is not registered or cannot be matched, or gross payment status where the subcontractor qualifies.
3. Deduct at that rate from the labour element of each payment. Materials, VAT and certain other costs are excluded from the calculation, and getting that split wrong is a common error.
4. File a monthly return by the 19th of each month, including nil returns. Late returns carry automatic penalties that escalate quickly and are charged per return.
5. Issue a payment and deduction statement to each subcontractor every month, which they need in order to claim credit for the tax you have withheld.

The VAT reverse charge, which sits alongside it

Most business-to-business construction services between VAT-registered parties within the scheme are subject to the domestic reverse charge, which means the customer accounts for the VAT rather than the supplier charging it. It applies to the same work the scheme applies to, and the two have to be handled together or the invoice is wrong twice.

What we do

We establish whether the scheme applies to the UK operation, register the company as a contractor, verify each subcontractor before payment, calculate the deductions with labour and materials split out, file the monthly returns and issue the statements. Where the company is also a subcontractor, we apply for gross payment status where it qualifies, because being paid gross rather than net of 20% is a material cashflow difference.