Making Tax Digital for builders and CIS subcontractors

Most small builders do both. An extension for a family is paid in stages straight from the homeowner, with nothing deducted, because a householder is not a contractor under the Construction Industry Scheme. A month on a main contractor’s site is paid with CIS taken off, and comes with a monthly statement.

Under Making Tax Digital both sit in the same records, as income of one business. The figure that decides whether you are in is the total before costs, homeowner and contractor work together. For contractor jobs, that means the amount you earned before the CIS deduction, not what reached your bank. Our Wigan page walks through a CIS invoice line by line.

CIS deductions are tax and National Insurance paid in advance. Making Tax Digital does not change that, and contractors carry on sending monthly CIS returns and giving you statements. What changes is that your records are kept in software through the year and summarised every quarter, so each job needs to be recorded at its full value as it happens, with its CIS statement kept alongside, rather than added up from a pile of paperwork in January.

The quarterly updates carry your income before the deductions, and your costs. The CIS deducted does not go in them. It is dealt with on the tax return after the year ends: HMRC adds the subcontractor deductions your contractors have reported, and you check them against your own statements before you submit. Any overpayment is repaid then. The part that is down to you is keeping every statement, so that check takes minutes.

If you are registered for VAT, you are already using Making Tax Digital for your VAT returns. Making Tax Digital for Income Tax adds a second set of quarterly updates, for your income and expenses, on different dates. Good construction software handles both from one set of records.

The VAT domestic reverse charge also applies to many builders. When a VAT-registered subcontractor supplies standard or reduced-rated construction services that fall under CIS to a VAT and CIS-registered customer who will sell them on, the customer accounts for the VAT instead of paying it to the subcontractor. It has applied since 1 March 2021, and it does not apply to work for householders. It changes your VAT invoices and VAT return, but not your Income Tax: the income you record is the same either way.

Sole traders use the cash basis by default, so income counts when it is received. On a six-month extension, each stage payment goes into the quarter it is paid. Materials go in when you pay the merchant, which is often a quarter earlier than the stage payment they relate to, so one quarter can show a loss and the next a large profit. That is normal, and the tax calculator evens it out by working on the year so far.

Retentions work the same way. If a contractor holds back a percentage until the defects period ends, that money is not income until it is released and paid to you, which may be in a later tax year. Keep a list of retentions owed to you, so none is forgotten.

Growing builders often start paying someone else. If that person works as your employee, you need to register as an employer and run payroll. If they are self-employed and you pay them for construction work, you may become a CIS contractor yourself, with monthly returns of your own. Either way, what you pay them is a cost of your business.

None of this changes how Making Tax Digital works for you, but it does change which software you need. A builder with a labourer on payroll and two subcontractors needs something that handles payroll, CIS returns and Making Tax Digital, or an accountant who does.

Ask whether they already look after builders, whether they handle CIS and the reverse charge, and whether software is included in the fee. If you are thinking about moving from sole trader to a limited company, ask them to show you both, since the company would sit outside Making Tax Digital for Income Tax but brings its own costs and rules.

For more on the rules, see MTD for Income Tax and penalties and exemptions. If you need a new van or plant, our van finance page compares lenders.