Building projects are the backbone of the UK’s economy, accounting for around 7 per cent of the country’s overall GDP. Changes in tax compliance and material costs has raised interesting questions about the state of the construction sector and its ability to deliver sustainable, high quality infrastructure that is fit for the future.
Property developers also play a crucial role in the construction industry and are included under the Construction Industry Scheme (CIS).
To ensure the continued success of the industry, construction businesses need to have an understanding of the current changes in tax legislation and how this has affected the sector as a whole. It is also essential to recognize the importance of legally binding agreements in construction contracts and their implications under the CIS.
Introduction to Construction Taxation
The construction industry is a complex and highly regulated sector, with various tax implications that can affect businesses and individuals alike. Understanding the tax rules and regulations is crucial to ensure compliance and avoid potential penalties. The Construction Industry Scheme (CIS) is a key component of this landscape, designed to prevent tax evasion and ensure that subcontractors pay their fair share of tax and National Insurance contributions. Additionally, Value Added Tax (VAT) and other relevant taxes play significant roles in the financial operations of construction businesses. Employment status, tax deductions, and compliance tests are also critical factors that construction businesses must navigate to remain compliant and financially healthy.
Changes in Legislation in the Construction Industry
From March 2021, the industry saw some changes to ensure that businesses within construction are adhering to VAT compliance. They were brought into place to support business owners with the long-term impacts of the virus.
The Finance Act has played a significant role in shaping current tax regulations within the construction industry, influencing mechanisms like the Construction Industry Scheme (CIS) to address tax evasion and compliance issues.
HMRC reports that around £110m of revenue is lost every year within the construction sector as a result of fraud. The VAT domestic reverse charge was created as an addition to the Construction Industry Scheme (CIS). It ensures that VAT is being reported correctly and transfers the responsibility to the contractor rather than the supplier.
The buyer will account for the VAT on their VAT return, and the supplier issues a reverse charge invoice to cancel each other out when reviewed by HMRC.
Construction Industry Scheme
The Construction Industry Scheme (CIS) is a tax withholding and reporting scheme that applies to payments made from contractors to subcontractors under construction contracts. The scheme is designed to prevent tax evasion and ensure that subcontractors pay their fair share of tax and National Insurance contributions (NICs). To be eligible for the CIS, contractors must register with HMRC and verify the employment status of their subcontractors. Subcontractors can apply for gross payment status, which allows them to receive payments without tax withholding. The CIS applies to construction operations, including building and civil engineering work, and is governed by the Income Tax (Construction Industry Scheme) Regulations 2005.
CIS Tax Implications
The CIS has significant tax implications for contractors and subcontractors. Contractors must deduct CIS tax from payments to subcontractors and pay it to HM Revenue and Customs (HMRC). Subcontractors can claim back the tax deducted from their payments when they submit their tax returns. The CIS tax rate is 20% for registered subcontractors and 30% for unregistered subcontractors. Contractors must also submit monthly CIS returns and pay CIS deductions to HMRC. Failure to comply with the CIS rules can result in penalties and interest charges. It is essential for contractors and subcontractors to understand the CIS tax implications and ensure compliance to avoid potential penalties.
Employment Status in Construction
Employment status is a critical issue in the construction industry, as it determines the tax and NICs implications for workers. The construction industry is characterized by a high proportion of self-employed workers, who are responsible for their own tax and NICs. However, some workers may be classified as employees, which can affect their tax and NICs liabilities. The employment status of workers is determined by the terms and conditions of their contract, including their level of control, autonomy, and financial risk. HMRC provides guidance on employment status, including the use of the Construction Industry Scheme (CIS) and the IR35 rules.
Rising Cost of Materials in the Construction Industry
These new tax implications need to be taken into account when buying goods both in the UK and internationally. According to the Office of National Statistics, rising tax has had implications on the cost of construction materials, with prices in 2022 rising by 24 per cent.
Under the Construction Industry Scheme (CIS), amounts withheld by contractors as tax deductions are treated as advance payments towards an individual’s income tax and National Insurance contributions. This can impact the overall cost of construction materials, as these advance payments need to be factored into the budget.
The COVID-19 pandemic and war in Ukraine have affected the global construction industry due to supply chain bottlenecks, rising fuel costs and labour shortages.
With Brexit thrown into the mix, the UK is feeling the impact of the European Union’s tariffs and is subjected to rising shipping costs and temporary surcharges. This in turn leads to higher shipping fees and material costs.
Smaller Companies Struggle with Self Employed Workers
Nearly 90 per cent of the construction industry is made up of smaller companies, which will feel the brunt of rising costs. Compared to larger companies that can stockpile resources, smaller-scale projects are being interrupted, delayed, or completely scrapped as prices continue to increase. Determining the employment status of subcontractors engaged directly is crucial for tax compliance, as it dictates whether they should be placed on payroll or managed under the CIS framework.
This is not to say that larger companies aren’t also feeling the pressure. Though they are better at weathering the storm, bigger businesses are experiencing inflationary impacts. Businesses of all shapes and sizes must look to get the best prices and ensure they have their revenue and profits so they know how viable their organisation is. Self-employed workers under the Construction Industry Scheme (CIS) have specific registration processes and responsibilities that must be adhered to for compliance.
Whatever the size of your business, systems such as the CIS are in place to support your tax requirements and help you stay compliant. It is also essential to verify subcontractors’ registration status with HMRC to ensure they are registered for the appropriate tax status.
Limited Companies and Tax
Many construction businesses operate as limited companies, which can provide tax benefits and limited liability protection. Limited companies are subject to corporation tax on their profits, which is currently 19% for small profits and 25% for large profits. Limited companies can also claim capital allowances on qualifying assets, such as plant and machinery. However, limited companies must comply with various tax rules and regulations, including the submission of annual tax returns and payment of tax liabilities. It is essential for limited companies to seek professional advice to ensure compliance with tax laws and regulations.
Housing associations play a significant role in VAT regulations and shared ownership schemes. A ‘relevant housing association’ can benefit from zero-rated services under specific conditions, impacting both the occupier and the association financially.
The Construction Industry Scheme (CIS) imposes potential financial penalties and tax obligations on contractors, with the uncertainty of reducing such settlements with HMRC. It is crucial to understand the implications of construction work undertaken, especially for private householders who do not qualify as contractors under these specific obligations.
Temporary buildings are included within the framework of tax-withholding and reporting schemes related to construction contracts, emphasizing their relevance in the industry. Deemed contractors, which include non-construction businesses exceeding a specific threshold of construction expenditure, must comply with CIS obligations. This highlights the broader implications of the CIS for UK construction businesses and other entities.
Compliance with VAT regulations is essential for construction services, impacting tax liabilities. Non-construction businesses that exceed a specific threshold of construction expenditure are also affected by the CIS. Correct tax deductions are crucial to avoid potential liability for under-deducted CIS tax, which HMRC can recover over several years.
The CIS applies to construction operations conducted in UK territorial waters, extending its reach beyond land-based activities. Apportioning building work according to its qualification status for VAT purposes is important for accurate tax reporting. Understanding the scope of construction contracts for CIS purposes is essential for compliance.
Buildings can qualify for zero rating under multiple provisions, offering flexibility in applying VAT rates. The off payroll working rules impact construction contracts and employment status evaluations, emphasizing the need for compliance. The CIS extends beyond just UK construction businesses and property developers, affecting a wider range of entities.
Self-employed workers in the construction sector must pay tax under the CIS, highlighting the importance of accurate employment status determination. Non-compliance with CIS tax obligations can lead to the recovery of under-deducted CIS tax for up to six years. Contractors and subcontractors involved in construction work have specific roles and responsibilities under the CIS.
The CIS applies to various construction operations, and understanding the relevant tax year is crucial for calculating liabilities and submitting tax returns. Operating through your own limited company offers advantages and challenges related to tax liabilities and compliance with IR35 and the CIS. Accurate record-keeping and timely submission of monthly returns are essential under the CIS.
Potential avenues exist to reduce final settlements with HMRC under specific regulations, but compliance with CIS obligations remains critical. Deemed contractors must understand the implications of exceeding the deemed contractor threshold under the CIS. Specific criteria must be satisfied for certain exemptions or zero-rating to apply, particularly in construction and alterations.
Civil engineering works are included within the scope of construction operations covered by tax regulations. Self-employed individuals in the construction sector face unique tax implications under the CIS. Both permanent and temporary buildings are covered by specific tax schemes, emphasizing their importance in construction projects.
Accurate reporting of gross income and CIS deductions for the relevant tax year is essential. The CIS can apply beyond traditional construction businesses in certain circumstances. Exceeding a certain threshold of construction operations expenditure triggers compliance obligations for contractors under the CIS.
A single contract encompassing both construction and non-construction services has specific implications under the CIS. VAT regulations impact building services, and compliance with the domestic reverse charge is crucial. Agency rules and off-payroll working rules must be prioritized in construction contracts.
Special rules for retention payments affect VAT accounting, and robust procedures are necessary to ensure CIS compliance. The VAT domestic reverse charge applies to building and construction services under the CIS. The deemed contractor threshold imposes compliance obligations on non-construction businesses under the CIS.
A construction contract has significant tax obligations and compliance implications under the CIS. Mixed contracts and VAT regulations impact other services, requiring careful consideration. Mainstream contractors must register under the CIS before making payments to subcontractors.
Subcontractors applying for gross payment status under the CIS must operate through a bank account, highlighting its importance. Site clearance is an essential service covered by construction operations and related tax regulations.
