Stay Ahead of HMRC: Essential CIS and Employment Status Checks for Construction Companies

Employment status checks for construction

The construction industry is under increasing scrutiny from HMRC, making it more important than ever for contractors to ensure compliance with the Construction Industry Scheme (CIS) and employment status regulations. Whether you’re running a large operation with numerous subcontractors or just starting with a small team, understanding and adhering to these rules is essential to avoid costly penalties and protect your business.

What is CIS?

The Construction Industry Scheme (CIS) is a set of HMRC regulations that governs payments from contractors to subcontractors in the construction industry. Under CIS, contractors must deduct a portion of the payment (20% for registered subcontractors, and 30% for unregistered) to cover the subcontractor’s tax obligations. These deductions are sent directly to HMRC, ensuring that subcontractors’ tax is paid correctly.

CIS covers a wide range of construction activities, including:

  • Building and civil engineering work
  • Site preparation, demolition, and dismantling
  • Building alterations, repairs, and decorating
  • Installing systems like heating, lighting, and ventilation
  • Post-construction cleaning

However, certain jobs are exempt from CIS registration, including:

  • Architecture and surveying
  • Scaffolding hire (without labour)
  • Carpet fitting
  • Manufacturing construction materials
  • Delivery of materials
  • Non-construction site activities, such as operating a canteen

Find out more here in our handy guide to CIS

Is someone a contractor or subcontractor? 

A contractor:

– Pay subcontractors for construction work, or
– Your business, though not involved in construction, has spent over £3 million on construction projects in the past 12 months since your initial payment.

A subcontractor:
Performs construction work for a contractor.

What Are Employment Status Regulations?

Employment status regulations determine whether a worker is classified as an employee or self-employed, impacting their tax treatment and legal protections. 

Misclassifying a worker can result in significant financial liabilities, including backdated taxes, National Insurance, and penalties. Properly understanding these regulations is vital to avoid costly mistakes and ensure compliance.

Why CIS and Employment Status Matter

HMRC’s heightened focus on the construction sector means that even small mistakes in CIS compliance or employment status determinations can lead to significant financial consequences. For many contractors, this could mean backdated tax liabilities, National Insurance contributions, and potential fines that could severely impact cash flow and, in some cases, threaten the viability of the business.

Key Factors in Employment Status Determination

Understanding employment status is crucial for contractors. HMRC uses three main factors to determine whether someone is an employee or genuinely self-employed:

  1. Personal Service
    Is the worker required to provide services personally, or can they send a substitute?
  2. Mutuality of Obligation
    Is there an obligation for the worker to accept work and for the employer to provide it?
  3. Control
    How much control does the contractor have over how the work is done?

If all three conditions are met, HMRC is likely to consider the worker an employee, not a self-employed contractor. Misclassifying a worker can result in substantial financial liabilities, so it’s essential to have written contracts in place that clearly outline the nature of the working relationship. These contracts should be regularly reviewed and updated to reflect any changes in working arrangements.

CIS Compliance: Avoiding Common Pitfalls

CIS compliance is another critical area where contractors need to exercise caution. One of the most common areas where contractors fall short is in the correct treatment of payments to subcontractors. Here are some key points to consider:

Material Costs
Contractors can reimburse subcontractors for materials without deducting CIS, but only if they have receipts proving the actual cost. Without proper documentation, HMRC could demand the full amount in unpaid tax, along with interest and penalties.

Fuel Expenses
Only fuel used for site equipment can be reimbursed without CIS deduction. Fuel for travelling between sites does not qualify and must be deducted accordingly.

Plant and Machinery Hire
If a subcontractor hires plant and machinery without an operator, this can be paid without deduction. However, if the hire includes an operator, the entire payment must be subjected to CIS deduction.

Failing to comply with CIS rules not only results in financial penalties but can also jeopardise your gross payment status, leading to even more significant tax liabilities.

Filing Monthly Returns

As a CIS contractor, you must file monthly returns to HMRC to ensure compliance and accurate reporting. Here’s a brief overview:

What to IncludeSubcontractor Details – List all subcontractors paid during the month.

Payment Information – Report total payments and CIS deductions withheld.

Declarations – Confirm you’ve reviewed subcontractor employment status and verified those who need it.

How to File

You can submit your returns online through HMRC, or we are happy to help you ensure that everything is in order, to avoid any penalties. 

Deadlines – Returns are due by the 19th of each month for the previous month’s activities. If the 19th falls on a weekend or bank holiday, the deadline extends to the next working day.

Payment of Deductions – Pay the CIS deductions by the 22nd of each month if paying electronically, or by the 19th if using a cheque.

Avoiding Penalties – Ensure accurate and timely submissions to avoid penalties and interest. 

How CRM Can Help 

Given the risks, it’s essential to take proactive steps to ensure compliance. At CRM Accountants, we offer comprehensive CIS and employment status health checks to help you identify and rectify any potential issues before HMRC comes knocking. Our expert team will review your contracts, payment processes, and employment status determinations to ensure you’re fully compliant with current regulations.

A skilled accountant plays an important role in ensuring compliance by accurately calculating CIS deductions, verifying subcontractors, and maintaining necessary documentation. They also help you understand HMRC’s criteria for classifying workers and assist in drafting compliant contracts to prevent misclassification risks.

At CRM Accountants, we go beyond managing your accounts and tax returns. We partner with you to maximise your earnings, ensure compliance, and support your business’s growth. By providing expert guidance and helping you measure what truly matters, we give you greater control over your business, work-life balance, and financial future. 

Don’t wait for HMRC to find the issues—get ahead of the curve. Find out more about our CIS services here and protect your business from unnecessary financial risk.

Next steps

For expert advice and tailored assistance with your money matters, you can count on CRM. Get in touch by completing our contact form or give us a call at 01865 379272. We’re here to simplify your financial journey.