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The Construction Industry Scheme Ian M Harris Leicester City Council VAT & Taxation Advice Office. VAT & Taxation Advice Office. Who are we? Ian Harris: Taxation Officer Part of Resources Department Financial Services Division Where are we? Room B2.10, New Walk Centre

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The construction industry scheme ian m harris leicester city council vat taxation advice office l.jpg

The Construction Industry Scheme

Ian M Harris

Leicester City Council

VAT & Taxation Advice Office


Vat taxation advice office l.jpg
VAT & Taxation Advice Office

  • Who are we?

    • Ian Harris: Taxation Officer

    • Part of Resources Department

    • Financial Services Division

  • Where are we?

    • Room B2.10, New Walk Centre

    • Extension: (29)7470 (0116-252-7470)

    • Fax: 0116-255-2443

    • Mobile/Text: 07980-339581

    • E-mail: [email protected]


What is the construction industry scheme l.jpg
What is the Construction Industry Scheme?

  • Introduced in 1971 to counter abuse of the self-employment rules by sub-contractors in the construction industry - ‘the lump’

  • Under CIS a contractor has to make a deduction in lieu of Income Tax and NIC’s from payments made to sub-contractors for construction services

  • Unless sub-contractor is verified by Revenue and Customs as eligible to receive payment gross


The contractor l.jpg
The Contractor

  • A ‘contractor’ is defined as:

  • any person carrying on a business which includes construction operations, ie a ‘mainstream’ construction business

  • any person carrying on any business ifaverage annual expenditure on construction operations over last three years exceeds £1million


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Contractors in the public sector

  • A ‘contractor’ can be:

  • a Government Department

  • a housing trust, society or association or the Housing Corporation

  • a development corporation or new town commission or the Commission for New Towns

  • an NHS Trust or similar public body

  • a local authority

  • But only if construction operations average more than £1million pa


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Contractors not Within CIS

  • CIS does not apply where the ‘contractor’ is:

  • a private householder carrying out works to his or her home

  • a charity carrying out works to its own property

  • a business (but not a local authority) carrying out works to its own operational property

  • a local authority school acting under its delegated financial powers


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The Sub-Contractor

  • A ‘sub-contractor’ is defined as:

  • any person carrying out construction operations for a contractor

  • unless

  • the ‘sub-contractor’ is an employee of the contractor


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Employed or Self-Employed

  • The question of employed or self-employed is crucial to the operation of CIS

  • Under CIS this has to be expressly certified,

  • ie that no sub-contractors paid are employees

  • Revenue and Customs have issued guidelines as to the factors which indicate employed or self-employed status

  • including an on-line Employment Status Indicator tool

  • But it is each case on its merits


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Contractors and Sub-Contractors

  • A sub-contractor can be a company, a partnership, an individual (including a gang leader), an agency, a public body (such as another local authority), a foreign business

  • A contractor can often also be a sub-contractor


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Construction Operations

  • Construction operations are generally anything done to a building or structure including

  • construction

  • extensions, alterations and repairs

  • dismantling and demolition

  • Construction operations also include civil engineering works on the land

  • If there is a mixture of construction and non-construction the whole payment is within the Scheme


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Operations Within the Scheme

  • Operations within the Scheme -

  • site preparation - demolition, site clearance, excavation, preparation of site

  • construction - laying foundations, building work, installing mains sewers, etc, road surfacing, scaffolding erection

  • finishing operations - internal cleaning, heating, lighting, air conditioning, power supply, drainage


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Operations Not Within the Scheme

  • Operations not within the Scheme -

  • site preparation - delivery of materials to site, transport of soil from site

  • construction - making components, delivery of components and raw materials, security systems, hire of scaffolding

  • finishing operations - external cleaning, manufacture and delivery of heating, lighting, air conditioning or power supply systems


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Construction Operations

  • Construction operations include:

  • building works including extensions, alterations and repairs, renovation and refurbishment

  • roofing

  • partitioning

  • carpentry if it involves work to a building or structure

  • painting and decorating

  • glazing

  • plumbing including installing heating, air conditioning, ventilation, water supply and disposal systems

  • electrical works including installing computer, power supply, heating and lighting systems


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Construction Operations

  • Construction operations include:

  • damp-proofing

  • installing lifts

  • erecting and dismantling scaffolding

  • removal of asbestos or similar

  • landscaping

  • fencing

  • construction, repair and resurfacing of roads, bridges, tunnels, etc including white-lining


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Payments Within the Scheme

  • Payment is defined as anything paid by the contractor to the sub-contractor in respect of the sub-contractor's labour services

  • It includes payment by cash, cheque or in kind, by way of a loan or advance or by way of discharging a third party liability of the sub-contractor


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Labour Services

  • Payments within the Scheme are only those for the sub-contractor's labour services

  • These include

    • travel and subsistence payments

    • sub-contractor's ‘mark-up’ or profit on materials

  • But excludes

    • direct cost of materials, CITB levy, VAT


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Exemption for Small Value Contracts

  • By concession the Scheme does not apply where -

  • the labour element of the payment is less than £1,000, and

  • the work was commissioned by a local manager with delegated budgetary powers, and

  • the exclusion from the Scheme was agreed by Revenue & Customs

  • LCC currently has prior agreement to exclude all such payments of less than £1,000 but this is under review


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Verification of sub-contractors

  • Before payment can be made to a sub-contractor verification must be obtained from Revenue and Customs

  • Revenue and Customs will verify that the sub-contractor -

  • can be paid gross

    or

  • must be paid subject to a deduction


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Verification of sub-contractors

  • To verify a sub-contractor Revenue and Customs need -

  • the sub-contractor’s full legal name and address

  • the sub-contractor’s Unique Taxpayer Reference number (UTR)

  • the sub-contractor’s NI Number or Company Registration Number as applicable


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Verification of Sub-Contractors

  • Verification from Revenue and Customs determines whether -

  • the sub-contractor can be paid gross

  • the sub-contractor must be paid subject to deduction of 20% from the labour element

  • the sub-contractor’s details cannot be matched so they must be paid subject to ‘super-deduction’ of 30% from the labour element


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Sub-contractors’ Status

  • Verification status remains valid until:

  • two complete tax years pass without payment to sub-contractor

  • or

  • Revenue and Customs advise otherwise

  • sub-contractor verified for payment under deduction can now be paid gross

  • sub-contractor verified for payment gross now subject to deduction

  • sub-contractor verified as subject to ‘higher rate’ deduction can now be paid gross or subject to ‘normal’ deduction


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Trading Names

  • Trading names have no legal status

  • Revenue and Customs can hold one trading name per sub-contractor

  • But verification requires sub-contractor’s full legal name

  • Use of trading name for verification may result in payment being liable to higher-rate (30%) deduction


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Change of Business Structure or Name

  • Verification ceases to be valid where:

  • the sub-contractor’s business structure changes, eg -

  • sole proprietor joins partnership

  • sole proprietor or partnership becomes limited company

  • limited company dissolves

  • or

  • the sub-contractor’s business name changes (no matter how minor)


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Local Authorities as Sub-Contractors

  • When acting as sub-contractor local authority deemed to be verified for gross payment

  • no need for contractor to verify

  • no need for contractor to include on CIS Return

  • VAT and Taxation Advice Office can provide written confirmation if necessary


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Three Tests for Gross payment

  • To be eligible to payment gross a sub-contractor must:

  • pass the turnover test

  • and

  • pass the business test

  • and

  • pass the compliance test


The turnover test l.jpg
The Turnover Test

  • For an individual - turnover on construction operations of £30,000pa or more

  • For a partnership or company - turnover on construction operations of £30,000pa or more per partner or director

  • or

  • Turnover on construction operations of £200,000pa or more in total if this is less


The business test l.jpg
The Business Test

  • The sub-contractor must be genuinely in business with:

  • proper business records

  • a business bank account

  • proper business premises

  • proper equipment, stock and facilities


The compliance test l.jpg
The Compliance Test

  • The sub-contractor must have a good record of compliance in their Income Tax/NIC’s affairs

  • In past 12 months must have:

  • paid all Income Tax/NIC’s when due

  • submitted all tax returns, etc on time

  • Revenue and Customs randomly check

  • Can result in sub-contractor losing gross payment status with immediate effect


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Making a Deduction

  • Where verified for payment subject to deduction, deduction is made from the labour element of the payment; this includes:

  • travelling expenses, fuel costs, subsistence payments, ‘mark-up’ or profit on the cost of materials

  • But excludes:

  • direct cost of materials, stores, plant or plant hire, any CITB levy, VAT


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Rate a Deduction

  • The amount deducted is 20%

  • unless

  • Revenue and Customs verify sub-contractor as liable to higher-rate deduction when 30%

  • Regardless of rate basis is same


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Calculating the Deduction

  • Example: sub-contractor carries out £4,000 of construction works including £1,000 of materials:

    • £

    • total payable 4,000

    • less: materials (1,000)

    • 3,000

    • CIS deduction (20%) (600)

    • add back materials 1,000

    • net amount to pay 3,400


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Statement of Payment Under Deduction

  • Each month the contractor must give sub-contractors paid under deduction a statement showing:

  • contractor’s name and CIS-registration number

  • tax-month covered by statement

  • sub-contractor’s name and UTR number

  • if subject to higher-rate deduction verification number

  • gross amount payable (excluding VAT)

  • direct cost to sub-contractor of materials

  • amount subject to deduction (‘labour element’)

  • amount deducted

  • Statement of Payment Under Deduction must be given to sub-contractor by 19th in respect of tax month ending on 5th


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Contras and Set-Offs

  • Contras are charges for good or services supplied to the sub-contractor by the contractor

  • they DO NOT reduce the amount due to the sub-contractor under the Scheme

  • Set-offs are deductions made by the contractor for breach of contract, eg sub-standard work

  • they DO reduce the amount due to the sub-contractor under the Scheme


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VAT and the CIS

  • Where sub-contractor is registered for VAT, deduction is made from VAT-exclusive amount of labour element

  • Where sub-contractor incurs VAT on cost of materials and passes this on it cannot be recovered by LCC as it is sub-contractor’s VAT not ours


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Corrections

  • Normally corrections cannot be made once a deduction has been made -

  • the sub-contractor must sort it out with Revenue & Customs

  • but sometimes a correction can be made if:

  • payment has not been included on CIS Return

  • sub-contractor has been verified for gross payment

  • correction is made in same tax-month as deduction

  • corrected payment is included on CIS Return


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Corrections

  • If a deduction should have been made and wasn’t -

  • the contractor must still pay over to Revenue and Customs the amount deductible

  • with no automatic right to recover that from sub-contractor

  • But if sub-contractor does subsequent work for contractor may be possible to recover amounts deductible from subsequent payment

  • Remember this is outside of CIS though


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Returns to Revenue & Customs

  • Contractor has to submit monthly Return to Revenue and Customs showing for each sub-contractor paid:

  • sub-contractor’s name and UTR number

  • if subject to higher-rate deduction verification number

  • gross amount paid (excluding VAT)

  • if paid under deduction direct cost to sub-contractor of materials

  • if paid under deduction amount deducted (from labour element)

  • Return must be submitted to Revenue and Customs by 19th in respect of tax month ending on 5th


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Revenue & Customs Inspections

  • Revenue and Customs is responsible for policing CIS

  • They visit contractors periodically to examine their records

  • Where payments are made gross which should have been liable to deduction contractor is liable to make payment with no right of recovery from sub-contractor


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The CIS at LCC

  • Most of Scheme is administered centrally at LCC

  • but you must identify any payments within Scheme and use ‘CON’ indicator when entering invoice onto Accounts Payable

  • check whether sub-contractor has been verified


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The CIS at LCC

  • If verified AP will show:

  • ‘gross payment’

  • ‘net payment’

  • ie labour element subject to deduction at 20%

  • ‘super net payment’

  • ie labour element subject to higher-rate deduction at 30%

  • If payment subject to deduction need to identify labour element and enter using ‘TS’ code ‘CL’

  • AP will then calculate and make deduction


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The CIS at LCC

  • If not verified contact Corporate Procurement who carry out all LCC verifications (extn: (29)7160) - direct dialling: 0116-252-7160)

  • Remember, Revenue and Customs need -

  • sub-contractor’s full legal name and address

  • sub-contractor’s Unique Taxpayer Reference number (UTR)

  • sub-contractor’s NI Number or Company Registration Number as applicable


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Your Responsibilities

  • Understand the CIS rules

  • Ensure that sub-contractors have been verified before making payment

  • Refer to VAT Manual (Appendix K6) and other guidance notes

  • If unsure seek advice don’t guess


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The VAT & Taxation Advice Office

  • If in doubt contact:

    • THE VAT & TAXATION ADVICE OFFICE

      • Room B2.10, New Walk Centre

      • Extension: (29)7470

      • Direct dialling: 0116-252-7470

      • Fax: 0116-255-2443

      • Mobile/Text: 07980-339581

      • E-Mail: [email protected]


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