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Despite what you may think, the CIS scheme exists to ensure that the right amount of tax is paid. It’s not there to make your life hell as a construction business owner. But you would be right in thinking that CIS is complex and highly intricate. As a result, mistakes are often made. Sometimes we can smooth out these mistakes, other times you will need to suck up the penalty and move on.
This blog post explores the 5 frequent errors construction companies make when dealing with the CIS scheme for contractors:
Mistake: Separating allowed and unallowed costs
When you register for CIS as a contractor, you become responsible for verifying the materials your subcontractors claim. The catch? They can only claim for materials directly used in the specific job you hired them for.
Often, subcontractors inadvertently include disallowed materials due to a simple lack of awareness about what qualifies. This might involve adding staff facilities, tools, or even charges for unrelated jobs to your cost sheets. Here’s how to avoid this pitfall:
Mistake: not identifying the material source
Construction projects rely on a constant flow of materials, from concrete slabs to bricks to wooden panels to windows. Each material likely originated from a factory or plant that transformed raw materials into usable components.
Here’s where a crucial aspect of CIS comes in – identifying the owner of the material production facility. Sometimes, your subcontractor may own the plant themselves. In other cases, they could be purchasing materials from a third-party supplier.
For CIS purposes, if a third-party supplies the materials, you don’t necessarily need to identify them. However, you do need to indicate that the materials are sourced from an external provider.
Remember, clear communication with your subcontractors is key. Understand the origin of the materials before processing invoices, ensuring accurate reporting to CIS.
Mistake: getting the scope of what is CIS wrong
CIS can appear all-encompassing at first glance, but understanding its limitations is crucial. A common mistake lies in assuming the scheme covers a wider range of jobs than it actually does. After all, you don’t want NOT to put through something which should be CIS.
Before registering, take the time to thoroughly review the CIS terms and conditions. Familiarise yourself with the specific industries and types of work that fall under the scheme’s umbrella. This ensures you accurately classify your subcontractors and avoid unnecessary registrations for ineligible personnel like designers. We can help you with this. In fact, part of our service can include checking over your contracts for CIS.
Mistake: Ensuring all eligible subcontractors are registered
Sometimes, contractors might overlook subcontractor registration because it’s a one off project or just a tiny part of a build. However, if the subcontractor performs construction work, regardless of the duration or scope, registering them under CIS is likely mandatory.
Remember, failing to register eligible subcontractors can lead to financial penalties for your company. This is why at the start of a project have a standard process to identify and register all subcontractors engaged in construction work, irrespective of project size or duration.
Mistake: Muddling up PAYE and CIS
Subcontractors operate as independent businesses providing services to your company. A common mistake involves incorrectly registering them under PAYE (Pay As You Earn), a tax system designed for employees.
Distinguishing between the two is critical. Working with someone for an extended period can lead to the misconception that they’re an employee. However, in reality, they operate as a separate entity. Misclassifying a subcontractor as an employee can significantly impact your CIS claim.
To avoid this confusion:
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Growing your business is great, but let’s be honest, once you start adding people, office and expensive plant it costs an absolute fortune. We’d all love to be able to just go to the bank and walk back out with a wad of cash. But, unfortunately it’s not as easy as that.
Securing the necessary funds to drive your business growth requires careful planning and strategic financial management. It’s like aiming for a hole-in-one at golf. You need to map out your course, consider the obstacles, and make strategic decisions to achieve a successful outcome. It’s not just about luck or who you know at the bank or finance business.
Banks, while essential for many businesses, aren’t always the most flexible lenders. They want to see your life story and, what can feel like, your dog’s birth certificate before they give you a penny. But there are ways around it, and failing that, you do have other options.
It’s all about getting your business in shape to impress even the most sceptical lender. Banks are pretty sceptical these days! If you want to increase your chances of securing the funding to help grow your business, you need to be able to present a strong financial profile.
Now, without giving my age away too much, I have to admit I have decades of accounting experience under my belt. So it’s fair to say, I know a thing or two about what lenders look for. I’m going to use that to take you through the necessary steps to become a more appealing applicant to a lender.
Before we get into the nuts and bolts of financial planning, let’s start with the basics. You need a bit of cash in the bank to look good to lenders.
Now, it’s time to get your business looking good for the bank. It’s all about showing them that you know your stuff and you’ve got a solid plan.
Sometimes, lenders might ask for a guarantor. If this isn’t you personally, this is basically someone who promises to pay back the loan if you can’t. It’s a big ask, so choose wisely.
Make sure to keep in mind that guarantors aren’t philanthropists – they have got to protect their own interests. This means they will probably ask for some form of security, such as a personal guarantee or even a share in your business. It’s important to understand what’s at stake and be aware of all the potential implications before involving a guarantor in your finances.
There are other options other than banks that you could consider when it comes to financing your growth.
If you have been diligently putting money aside to pay your corporation or VAT bill, this is money that you can use in your business. You may be able to negotiate a payment plan with HMRC and reroute your cash set aside for tax bills to fund your next project. Don’t get me wrong, it’s not ideal and HMRC can be pretty fickle about whether they will do a payment plan. There’s usually interest involved, so by all means it’s not a free ride. But it could free up the finance you need.
Just make sure to weigh up your options carefully. Although a payment plan is better than digging yourself into a deeper hole, it all depends on your circumstances at the end of the day.
Remember: Every business is different. What works for one might not work for another. Sorry to be the bearer of bad news but copying what somebody else is doing just isn’t going to cut the mustard. That’s why it’s important to get advice tailored specifically to your business.
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Running a construction company is not easy. Managing projects, employees and subbies can be a nightmare, not to mention chasing payments. One of the biggest challenges I see is getting hold of the cash needed to keep things moving.
Which brings me on to finance. Now, I know what you’re thinking, “boring”. But stay with me, this could be a game-changer. And I am not exaggerating on this.
One of the biggest hurdles is getting paid on time. You’ve probably experienced those long, painful waits for invoices to be settled. This can put a serious strain on cash flow.
I’ve known construction firm owners to struggle accessing finance. The problem is these traditional lenders, like banks, don’t understand the industry’s specific needs. This is where specialist lenders and finance brokers can be invaluable. However, when raising finance you need to make sure that your books and accounts are in order. I know, boring, but this is the first thing a specialist lender will want to see before they open a line of credit for you.
Invoice finance is where you get paid upfront for work you’ve already done, even if the client hasn’t paid you yet. It’s like having a safety net when those payments are overdue.
There are more options than just invoice finance. Equipment finance can be a lifesaver if you need to upgrade your machinery without breaking the bank. And if you’re looking for a bigger lump sum to fund a new project, there are business loans and development finance options out there.
Of course, there’s always the hope of government grants. But let’s be honest, they can be as rare as me going a week without a Chinese.
Right, let’s talk about this supply chain finance thing. Supply Chain Finance is offered by specialist finance companies. These are businesses that do a lot of financing to construction companies. They pay your invoices to your suppliers and contractors. This means that you can get started on a project before the client pays your first few bills. Sounds alright, doesn’t it?
However, the specialist finance companies will want their pound of flesh. This means you will need to pay them interest on whatever you borrow from them.
Your suppliers get paid faster, and you get a bit more time to pay them back. It’s a win-win, as long as you realise this is not free money and you need to manage it right.
When considering finance options, it’s essential to weigh up the pros and cons of each. Factors to consider include:
It’s also worth thinking about the long-term implications of taking on debt. Make sure you have a clear plan for how you’re going to repay the loan.
Right, let’s touch on getting expert advice. Sometimes you just need a second pair of eyes to sort through the financial mess.
Decent accountants know the ropes. They’ve seen it all before. They can help you figure out what you need, where to get it, and how to pay it back without breaking the bank (and save you the risk of being ripped off).
So, if you’re feeling overwhelmed by it all, don’t be afraid to ask for help. It could be the best decision you make.
A Few Extras to Think About
By thinking about these things, you can make better decisions about your business.
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So, you’re a business owner who wants to see your firm grow profitably and sustainably. But the harsh reality is that growth comes with growing pains.
Even if you’re inundated with work, that cash might not land where you need it. If you are anything like many of our new clients, you’re probably left wondering where it has all gone.
Here’s the thing: without up-to-date books and clear financial insights, you risk cash flow problems that could threaten your whole business. That’s where an accountant comes in handy. After all, I’ve spent the last 30 years supporting people like you to grow and scale their construction and property business.
Cash is the blood flow of your business. It’s all well and good if you’re turning over millions but if your bank account is empty, who is going to pay your suppliers and employees?
Construction operates differently. You often pay for materials and labour upfront, well before you see any return. Plus, you’ll encounter things like retention and VAT reverse charges (I get it, these are a headache).
That’s why tracking your money in and out is essential. You need to see where your cash is flowing and work out where you might need a bit of extra help or possibly negotiate longer credit terms with your suppliers.
Bigger projects are great, but they come with bigger costs. Materials and labour can cost you an arm and a leg these days. That’s why it’s important to include a decent contingency when you price up jobs. You never know when costs for raw materials may suddenly go up. These unexpected changes could eat into your profits and leave you working for free.
You might want to review your costs monthly or for bigger projects have a pricing model to consult before sending out your quote. There comes a point where a ‘back of the envelope’ or ‘finger in the air’ quotation could bear no relation to the actual costs of running the job. This could be a painful lesson!
Higher turnover means higher expenses, which include managing a growing number of invoices. Juggling suppliers, credit card statements, and cash purchases can become a really complex task. To the point where if you are still using your other half to run the office for you, you need to get in a professional to manage it all. Hint: We can help you with this!
But, you’ve got to be careful these things don’t slip through the cracks. The last thing you want, is to be dealing with difficult supplier relationships or left wondering where the profit of your last job has got to. Particularly if that profit was going to fund the start-up costs of your next project!
As more work comes in, you might think about hiring more employees or using subcontractors. Both have their pros and cons:
Building your own team of employees lets you train them to your standards. Top quality, but remember, they come with the full package: holiday pay, sick leave, the whole lot.
Subcontractors are a good choice for short-term projects, but you’re at risk of misalignment of values. Or them disappearing onto another job which pays better.
One of the things I can do with you is help you decide what is better for you, more subcontractors or more employees?
You will want to keep track of your estimated income and expenditures for the year ahead. A good way to do this is to monitor it as you go, so you’ve got something to look back on. It helps you see upcoming challenges and opportunities before they hit. Plus, a lot can happen in three months in the construction world. We mostly use Quickbooks with our construction clients to make it easy to see what money is going where.
Ever got behind the wheel blindfolded? You wouldn’t do it, would you? Not having a set budget is the same sort of thing; you’ll either end up lost or in debt.
Accountants are your right-hand men. We help you build budgets that fit your growth plans. Then, all it takes is a check-in every now and then, helping you keep your head above water.
Running a construction business can be grinding, but anything worth doing is never straightforward.
Interested to find out more?
Call us on 01617 985789
Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb
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