The construction industry is one of varying levels and size, from large, multi-year contracts to sole traders who are subcontracted out to carry out construction work for a contractor.

IAS11 Construction contracts

A construction contract is a contract specifically negotiated for the construction of an asset or a group of interrelated assets. IAS11 looks at how to account for the revenues and expenses arising from the contracts.

The primary issue in accounting for construction contracts is the allocation of revenue and costs, as the date of which the contract activity is entered and the date of completion often fall in different accounting periods. Usually, the following accounting requirements are applied separately to each contract, although it is sometimes necessary to apply these to identifiable components of a single contract or a group of contracts altogether.

When the outcome of a contract can be reliably estimated (time, revenue, costs etc), then the revenue and expenses will be accounted for using the stage of completion of the project at the end of the relevant reporting period. However, when the outcome of a contract cannot be reliably estimated, revenue is accounted for “only to the extent of contract costs incurred that it is probable will be recoverable”. In this scenario, contract costs will be recognized in the period in which they are incurred.

Construction Industry Scheme (CIS)

The CIS sets out rules for how payments to subcontractors from contractors must be handled. The payment for the subcontractors work must take into account their tax status. Most commonly, the contractor makes a deduction from the part of the payment that does not represent the cost of materials incurred by the subcontractor. This deduction is made to HMRC, and is then reflected as tax already suffered on the individuals’ tax return.

Tax suffered as a result of CIS is not recognized in the accounts of subcontractors; the revenue is recognized as gross rather than net. When completing the subcontractors tax return, the figures used for revenue and expenses will be those accounted for in the year end which lies within the relevant tax year. However, the tax suffered is calculated as the tax suffered during the tax year (year ended 5th April), which is often not in line with the subcontractors year end. If a sole trader or partnership carries out the majority of their work as a subcontractor, they are likely to receive an income tax refund.

Registration & payment

If you, or your partnership or company, meets the criteria for being a contractor, then you must register with HMRC. Subcontractors can choose whether to register themselves with HMRC. Those who are registered have lower deductions from their income from contractors. In order for a contractor to pay a subcontractor, they must contact HMRC to find out if the subcontractor is registered under the scheme, and therefore the appropriate deduction to make. Each month, contractors must send a complete return of all the payments they have made within the scheme to HMRC, along with payment of the amounts deducted.

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