Construction in the Cloud

Construction in the Cloud

constructionConstruction in the cloud, and in the same sentence! Who would have thought that construction companies were keen to adopt the latest cloud technology to assist with the business operations! For such a heavy paper-led industry, it has come on leaps and bounds over the past couple of years.

Many business owners are equipped with the skillset and experience of the construction industry, but not the ins and outs of HMRC legislation to keep on top of their finances. We utilise cloud technology to ensure companies are up to date with their finances. They have live data on how cashflow is performing as this is very important to this industry.

Blyth Accountants are here to record all of the different taxes correctly for you to ensure you are HMRC compliant. The construction industry for accounting purposes is a highly complex area and we specialise in this sector. We know the ins and outs of the industry from a tax and accounting perspective, we will always keep you right. Give us a hard hat and we’re standing right next to you!

What is the Construction Industry Scheme.

 

Firstly, we need to explain what CIS (Construction Industry Scheme) is. CIS relate to subcontractors, self-employed (either as a sole trader or limited company), and work within a building site. This can be residential or commercial building work. Subcontractors are outsourced to perform the building works and are paid in stages of completion of the work. Subcontractors get paid by the contractors less 20% CIS tax. As the subcontractor is not an employee, the contractor must deduct CIS tax from the payments and report the deduction to HMRC. But don’t worry, the subcontractor can reclaim this back from HMRC at the end of the tax year.

Who We Work With.

 

We work with subcontractors (one man bands), up to small and medium sized limited companies with a turnover up to £10M. At Blyth, we frequently hear the moans and groans from business owners within the construction sector about how complex CIS is. Simply put, they just don’t either have the time or patience to learn or report on CIS. It can be quite an arduous task and can be quite cumbersome for many. Most construction companies just want to do what is best for them, and that is to run their business; and let the financial experts work their magic! We support our clients with:

  • Monthly CIS Suffered and Deductions Reporting
  • PAYE Reporting – for businesses that run a payroll
  • DRC (Domestic Reverse Charge) – for VAT registered businesses
  • Subcontractor Invoicing
  • Tax refunds from HMRC – after 5th April

Get in touch with us if you need support and assistance with CIS reporting!

Contractor or Subcontractor.

 

A company can be a contractor as well as a subcontractor. How can that be, I hear you ask? Well, if your company works for a contractor, and is being paid by a contractor to fulfil the work, you are its subcontractor. However, if you have self-employed subcontractors that work for you, then your company is their contractor. Meaning you are both contractor and subcontractor!

To simplify, below we have created a flowchart on whether you assess you and your business as a subcontractor, contractor or both.

 

Contractors v subcontractor

CIS Tax Rates.

 

CIS tax is either deducted at 20% or 30% off each payment received from the contractor. Although, contractors and subcontractors can apply to HMRC to become gross status. This essentially negates CIS deductions therefore, the amount that you invoice out is exactly the amount you receive. However, most contractors and subcontractors are standard rated at 20%, subject to CIS verification checks. If you are not classed as a subcontractor at HMRC, you are essentially classed as ‘higher rate’ CIS, which will mean you will be deducted 30% CIS tax at source.

If your company is gross status, you never need to reclaim the tax deducted, as it never has been deducted in the first place. However, for standard rated status, each year (annually) from 6th of April, companies will need to reclaim the CIS tax deducted at source from HMRC. This can only happen once all the tax filings have been completed for the year. If your company is a sole trade, you can claim the tax refund through your annual self-assessment tax return. Limited companies must apply via their HMRC account.

 

To recap… there are three options:

  • Standard rated CIS which is deducted at 20% – tax refund due after 6th April.
  • Higher rated CIS which is deducted at 30% – this means your business is unverified (see below) as a subcontractor and you must speak to HMRC to ensure they have the correct details. This allows the contractor to deduct CIS tax at standard rate. Tax refund due after 6th April.
  • Gross status – you are not deducted CIS tax at either standard or higher rate. No tax refund due after 6th April.

CIS Verification and PAYE.

 

To become a subcontractor, you must apply to HMRC for CIS status. Until the business is verified, you will be deducted tax at an emergency rate of 30%. Once verified, this will reduce to 20%, and you will be able to reclaim CIS tax within your personal tax return if you are a sole trader. Or via the limited company method after the Fiscal year has ended (5th April), but only if you have a credit balance remaining.

To become a contractor, you must run a PAYE (payroll) scheme to declare tax deducted at source monthly, via an EPS (Employer Payment Summary). If you have employees on your payroll, you will be able to offset the CIS tax against any PAYE tax owed within any period with the Fiscal tax year.

 

CIS Filing.

 

Contractors must file a monthly CIS return, which will incorporate the period ending the 5th of each month, and not the 1st-31st of the calendar month. The filing reporting period for January is the 6th January to the 5th February; and not the 1st-31st January. Contractors will report CIS suffered and if they have subcontractors, they will also report CIS deducted from their workers. If the business runs a payroll, the CIS tax credit can be utilised against any PAYE tax due.

Subcontractors will receive a monthly statement from their contractors which will show the amount of tax deducted at source. This should be tallied up and reported to HMRC in the subcontractors personal tax return. The subcontractor will receive a tax refund from HMRC shortly after they have submitted their claim.

 

Domestic Reverse Charge Scheme.

 

From April 2022, HMRC changed the way contractors and subcontractors reported VAT. Thus in turn made the system more complex for VAT registered business owners. HMRC introduced the DRC (Domestic Reverse Charge) scheme. DRC allows the end user (the head contractor) to account for the VAT, and the subcontractors will not see the VAT element of their sales invoices. They essentially receive the invoiced amount net of VAT. This means that the physical VAT amount will reduce their cashflow. Furthermore, subcontractors may still need to fork out for their materials for the job – down more cashflow.

Cashflow is a major issue for the construction business and we need to be careful not to run out of cash – no materials, no work! On the plus side, the majority of construction businesses end up in a VAT repayment situation with HMRC. It’s just a waiting game until the next available VAT return submission.

How to Boost Cashflow in Construction.

 

Sometimes, we need to make some changes to how we operate our business. When HMRC change the goalposts, sometimes we need to do this too to boost cashflow and take the stresses away. Below are a few options.

  • Ask suppliers for better credit terms – if you are currently on 30 days, then why not ask for 60-90 days?
  • Ask contractors for better payment terms – if you currently wait 60 days for payment, then why not ask for 30-45 days?
  • VAT – if your business reports VAT quarterly, then why not change to monthly reporting?
  • CIS – if your business is standard rated, why not consider Gross status?

 

At Blyth Accountants, we support construction business ensuring they are HMRC compliant and check in on their cashflow to make recommendations before issues crop up. We focus on cloud accounting to give businesses instant access to your financial data on the move or on site – and on delivering clear advice whenever you need it, or even when you don’t want it!

Many cloud accounting software packages include the DRC scheme as standard. As a Xero Silver Partner, we just love to sing and dance about how great this software is and how adaptable it is for the construction sector. With so many Apps on the market that integrate with Xero, it really is a no-brainer!

Here at Blyth, we are very familiar with CIS for contractors and subcontractors. Why don’t you get in touch to find out how we can help you.

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