Are you running a construction company in the UK? Make sure you’re adhering to the obligations that regulations impose on the construction sector. CIS, reverse charge, and VAT rates for specific groups of your clients are crucial aspects that you cannot ignore. Remember, ignorance of the law is no excuse, and properly managed accounting and tax compliance will help you avoid unnecessary stress and financial penalties.
What is CIS (Construction Industry Scheme)?
The Construction Industry Scheme (CIS) is a regulatory system that applies to the construction sector and governs contractor-subcontractor relationships.
Under the CIS system, the contractor deducts and forwards money to HMRC from payments to the subcontractor, serving as an advance on tax and National Insurance contributions.
If you want to reclaim the tax withheld by the contractor, you must register in the CIS system. This requirement applies to all companies operating in the construction sector in the UK.
Construction Sector: When Must Your Company Register for CIS?
To determine whether you must register for CIS, you need to establish your role—whether you are a contractor, a subcontractor, or both. You must register as a contractor if you:
- Pay subcontractors for carrying out construction work,
- Do not commission or perform construction work, but your construction spending over 12 months exceeds £3 million.
If you carry out work as a subcontractor, register as such. If you fall into both categories, register as both a contractor and a subcontractor.
Taxation of construction companies in the UK applies to most work carried out in the construction sector. This includes preparatory work, construction, excavation, installations, renovations, and repairs. The CIS system also covers demolition, dismantling, finishing, and decorating work.
Some activities are exempt from the registration requirement, such as architecture and surveying, scaffolding rental, supplying and manufacturing materials used in construction, and carpet installation. Non-construction activities (e.g., running a canteen) are also exempt.
Companies Based Outside the UK and CIS
If your company performs construction-related work in the UK but is based outside the country, it is subject to the same tax obligations as those in the UK construction industry. In short, even if your company is based outside the UK, you must still register with CIS if you perform work covered by this scheme.
VAT in the Construction Sector – What Rules Apply?
The VAT rate for the construction sector is typically 20%, but there are some exceptions where VAT may be reduced or even exempted altogether.
0% VAT in the Construction Sector
This applies to work on new buildings or self-contained homes with the appropriate planning permission. For residential buildings, the 0% VAT rate applies only to the residential part, excluding any commercial areas.
Construction companies in England can also benefit from 0% VAT when carrying out work for disabled individuals, but this only applies to specific tasks such as ramp construction, door widening, adapting bathrooms or toilets, repairing and maintaining lifts, and installing or maintaining equipment for disabled persons. To qualify for the exemption, you need to obtain a disability declaration from your client.
When working on some buildings that do not qualify as residential, you may also be exempt from VAT. This includes converting non-residential buildings for housing associations or modernising caravan parks.
5% VAT
In certain cases, you will pay VAT, but it will only be 5%. This reduced rate applies to installing energy-efficient products, work for individuals over 60, and renovating empty homes or converting buildings into homes or apartments.
Reverse Charge – New Tax Rules for the Construction Sector in the UK
From March 1, 2021, a reverse charge applies to VAT on construction services. This affects both standard and reduced VAT rates for individuals and companies registered with HMRC and works alongside the CIS scheme.
This means the way VAT is accounted for has changed.
Reverse charge applies to all construction services, including repairs, installations, painting and decorating, construction, and landscaping. It also applies to internal cleaning during construction or renovation.
Reverse charge introduces a new VAT accounting system. Previously, subcontractors providing construction services to another VAT payer issued an invoice with VAT minus the CIS deduction and accounted for the VAT with HMRC. Now, they must issue an invoice stating, „This invoice is subject to a reverse charge for VAT” without including VAT. The contractor is responsible for declaring both the VAT owed and claimed in their VAT return.
Taxes Don’t Have to Be Complicated – Take Advantage of Professional Help!
The taxation of construction companies in the UK may seem complex. However, you don’t have to face it alone. Rely on expert knowledge and take advantage of tax advisory services. We’ll classify your services in the correct VAT category and handle your tax accounting for the services provided in the construction sector. We’ll take care of your accounting, giving you more time to focus on growing your business.
