CIS for contractors: the monthly routine that keeps penalties away

You are a contractor under CIS if you pay subcontractors for construction work, or if your business does not normally do construction but has spent more than £3 million on it in the 12 months since your first payment. Developers, property companies and even some retailers fall into the second group.

Working out a deduction

Start with the gross invoice, take off VAT and the cost of materials the subcontractor bought for the job, and apply the CIS rate to what is left. The deduction is an advance payment towards the subcontractor’s own tax, so the statement you give them matters.

Where penalties come from

Late monthly returns attract penalties even when no payments were made: tell HMRC if you expect to make no payments, or file a nil return. Returns also ask you to confirm the status of each worker. Calling someone a subcontractor when they should be an employee can bring a penalty of up to £3,000.

• Keep verification references with each subcontractor’s record.
• Reverify anyone you have not paid in the current or previous two tax years.
• Ask for invoices that show materials separately.
• If you will not pay subcontractors for up to six months, ask for your scheme to be made inactive.

Most construction services between VAT-registered businesses also fall under the VAT domestic reverse charge, which changes how VAT appears on these invoices.