An introduction to the Construction Industry Scheme (CIS)
The Construction Industry Scheme (CIS) is a statutory tax scheme introduced by HMRC that provides for certain payments under 'construction contracts' to be subject to tax deduction by the payer (contractor), unless the payee (subcontractor) is registered with HMRC to receive payments gross, without any tax deduction.
The scheme covers all types of businesses and other concerns that work in the construction industry, including Companies, Partnerships and Self-employed individuals. These businesses can be Contractors, Subcontractors, or Contractors and Subcontractors.
The terms 'Contractor' and 'Subcontractor' have special meanings under the scheme and generally cover more than is referred to in the building industry.
A contractor is a business or other concern that pays subcontractors for construction work.
A subcontractor is a business that carries out construction work for a contractor.
Many businesses are both Contractors & Subcontractors. They pay other businesses for construction work, but are themselves paid by other businesses too. When they are working as a contractor, they must follow the rules for contractors and when they are working as a subcontractor, they must follow the rules for subcontractors.
Private householders are not counted as contractors so are not covered by the scheme.
All contractors must register with HMRC for CIS. Subcontractors who are self-employed, owner of a limited company or a partner in a partnership or trust and work for a contractor should also register with the scheme. You can also register by calling the CIS Helpline on 0300 200 3210.
When you begin working for a new contractor they will ask for your name, unique taxpayer reference (UTR) and your Sole Traders national insurance number (NINO) or your Company Registration Number (whichever is applicable).
Before a contractor can make a payment to a subcontractor for construction work, they may need to verify with HMRC that the subcontractor is registered.
Under CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance liability.
There are two main rates of deduction, 20% and 30%. Most sub-contractors operate on a 20% deduction basis. This means that 20% will be deducted from the labour element of the invoice and paid over to HMRC on behalf of the Subcontractor. If the subcontractor is not registered for CIS then the Contractor will deduct 30%. The deductions are made from the part of the payment that does not represent the cost of materials incurred by the subcontractor.
A subcontractor can also apply for Gross status, which means no deductions will be made from your payment. To register for gross payment status, you must meet certain conditions, including a construction labour turnover of at least £30,000 each year. To retain an agreed gross payment status, you must be on time with your tax return and payments at all times.
CIS covers most construction work to:
- a permanent or temporary building or structure
- civil engineering work like roads and bridges
For the purpose of CIS, construction work includes:
- preparing the site, eg laying foundations and providing access works
- demolition and dismantling
- building work
- alterations, repairs and decorating
- installing systems for heating, lighting, power, water and ventilation
- cleaning the inside of buildings after construction work
You are exempt and don’t have to register if you only do certain jobs, including:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that’s clearly not construction, eg running a canteen or site facilities
Each month, contractors must send HMRC a complete return of all the payments they have made within the scheme or tell us that they have made no payments. The return will include:
- details of the subcontractors
- details of the payments made, and any deductions withheld
- a declaration that the employment status of all subcontractors has been considered
- a declaration that all subcontractors that need to be verified have been verified
Each month, or quarter in some cases, contractors must send HMRC a payment for the deductions they’ve made from subcontractors.
Subcontractors will then allow for the deductions made from their payments as part of their own tax return and this will depend on whether they are a sole trader, partnership or limited company. If you are a subcontractor, please do not hesitate to contact us and discuss how this applies to your circumstances.