Introduction
The Construction Industry Scheme (CIS) is a UK tax framework where contractors deduct a set percentage (usually 20% for registered or 30% for unregistered workers) from a subcontractor’s pay and send it directly to HMRC as an advance payment toward their tax and National Insurance. While it primarily covers physical construction, repairs, and demolition, it excludes professional services like architecture or surveying. For subcontractors, these deductions are essentially “tax paid in advance,” which are then reconciled when filing an annual Self Assessment tax return to determine if a refund is due or if further tax is owed.
Setup
To process tax under the Construction Industry Scheme (CIS), you can utilize the Withholding Tax Class and Withholding Tax Returns modules. Follow the steps below to configure and execute the process:
Initial Configuration
- Create a Tax Class: Establish a new record within the Withholding Tax Class module, ensuring the type is set specifically to Construction Industry Scheme.
- Auto-Setup: Use the Auto Setup action to automatically generate the required tax records, saving time on manual entry.
Configure CIS Settings
Navigate to the Tax Return Settings and select the Construction Industry Scheme tab to input your credentials:
- UTR (Unique Taxpayer Reference)
- Accounts Office Reference
Verification vs. Matching
When using the CIS Verify Action Type, it is important to choose the correct method based on your data quality:
Verify: This method does not attempt a strict identification. As long as all mandatory fields are completed, the system will return a tax code. This is a broader check that ensures the process continues even without a “perfect” record match.
Match: This method attempts a precise identification of the subcontractor. If the system cannot find a definitive match, it will return an error. Use this for higher data integrity.
Verification
After the initial set is done, you can verify subcontractors via the Additional tab in the Accounts module. Use the Add CIS Info action to input and save the necessary details. Then, click Verify on the record to obtain a verification number and a withholding tax class code from HMRC.
CIS Purchasing Process
Product Creation: Create products assigned to the CIS withholding tax class (referred to as CIS products).
Triggering the Process: Generate a Purchase Order for a verified CIS subcontractor and include at least one CIS product to represent their work.
Invoice Generation: Create the Purchase Invoice for the subcontractor. The system will automatically:
- Calculate the deduction value within the invoice totals.
- Flag the invoice with the correct withholding tax class.
Categorization of Costs:
- Non-CIS Products: Automatically treated as material costs (not subject to withholding).
- CIS Products: subcontractors work subject to withholding tax.
Payment and Deduction: Every time you make a payment against the invoice, the withholding tax balance is updated. The reduction is calculated proportionally based on how much of the total invoice you are paying off.
Withholding Tax Returns
Generating Return
Once an invoice is paid or partially paid, you can generate a CIS Withholding Tax return in the Withholding Tax Return module. When selecting the CIS type, the period will default to the next available cycle (running from the 6th of the month to the 5th of the following month). Once the return is created the items will be auto generated with the following data based on the bank transactions paid to the subcontractor:
Data Calculations
Base Value: The total amount paid to the subcontractor during that period.
Cost of Materials: The total of all paid items not assigned the withholding tax class.
Tax Value: The actual amount withheld for HMRC.
Grid
By default, the grid is grouped by subcontractor which matches the data sent to HMRC. You can switch to the Detailed filter to view the specific bank transaction linked to each entry. Please note the base value and cost of materials is rounded to the nearest pound in the grouped view.
Submission
Next use the Submit to HMRC action then answer the declarations on the form and click save to post data to HMRC. If necessary, you can use the Unpost action after submission to make corrections.