As a recruitment agency start up, understanding how CIS can affect your new business is paramount. The Construction Industry Scheme (CIS) was set up in 1971 to combat the tax evasion occurring within the construction industry when paying subcontract workers. When we think of CIS Placements for recruitment agencies, the tax system overall has become more digitised for the workforce, the construction sector has continued to use this scheme to ensure that any payments made by clients (contractors) are taxed correctly.
Although the recruitment sector does not provide staff directly to construction clients, the rules of CIS still come into play. Due to the nature of how temporary/contract workers are engaged, there are additional steps that must be taken before the agency can receive funds from the clients (contractors) and before they pay the workers (subcontractors).
HOW DOES CIS AFFECT YOUR RECRUITMENT AGENCY IF YOU ARE A NEW START UP?
The first step for a recruitment agency is to become registered with HMRC under CIS as a “Subcontractor”. This is due to the placements that the client is engaging with the agency may fall within the scope of CIS and may be subject to deductions depending on the CIS status.
THE 3 STATUSES OF CIS
- NOT REGISTERED – If an agency is not registered under CIS and they engage with a CIS registered client where the candidate’s placement falls under CIS, then the client is entitled to deduct 30% from the Net amount shown on the invoice before payment is made.
- UNDER DEDUCTION – If an agency is registered under CIS but has not achieved “Gross Status” and they engage with a CIS registered client where the candidate’s placement falls under CIS, then the client is entitled to deduct 20% from the Net amount shown on the invoice before payment is made.
- GROSS STATUS – Once the agency has completed £30,000 of CIS turnover per director and/or shareholder, then they can apply for “Gross Status”. If they engage with a CIS registered client where the candidate’s placement falls under CIS, then no deduction will be made by the client.
Any deduction made by a client under the “Under Deduction” status, can be offset against the following month’s PAYE payment due when the agency submits their CIS return with their PAYE RTI submission.
The second part for a recruitment agency is that they need to be registered with HMRC under CIS as a “Contractor”. If the client deems the candidate’s placement to fall under CIS, then the agency may need to make deductions depending on the CIS status of the company the candidate is being paid by.
The agency will need to check with HMRC (via the Government Gateway) the CIS status using the UTR number of the self-employed, umbrella or limited company the candidate is being paid via. Based on the determination shown on the Government Gateway, this will determine whether the candidate will be deducted 30%, 20% or nothing from the Net amount on their invoice.
Any deductions made from the candidates’ payments will be submitted via the PAYE RTI submission and paid to HMRC in addition with the PAYE payment.
The issue for CIS placements for recruitment agencies is that they will potentially be deducted funds from their clients until they reach “Gross Status” which can affect early cashflow or result in the invoice finance company providing a lower funding prepayment.
3 RECOMMENDATIONS FOR NEW START UP AGENCIES MAKING CIS PLACEMENTS:
- Register as soon as possible under the CIS scheme to avoid the 30% deduction.
- Consider setting the agency up with one director who is also the shareholder, so the agency only has to do £30,000 of turnover before getting “Gross Status”.
- Look at funding solutions which already have CIS “Gross Status” to avoid any deductions until you have sufficient cashflow and turnover to be able to achieve “Gross Status” within a few weeks.
MAYACHI Ltd has many years’ experience working with new start up agencies looking to place contractors within the construction industry and can provide help and guidance on how CIS works and how it will affect them. We can advise on reputable back office and accounts firms to manage the CIS registration process and returns as well as recommend funding solutions to meet the demands of these types of placements.
If you need help understanding CIS placements, reach out to us via email at stewart@mayachi.co.uk, book your free consultation call or connect with us on LinkedIn.
