If you’re a contractor or subcontractor in the construction industry, you might already be aware of the Construction Industry Scheme (CIS).
The scheme sets out rules which deal with paying construction subcontractors, so if you’re not sure how it all works, we’ll help you get up to speed so you can ensure that your business is compliant.
- What is the Construction Industry Scheme?
- How does CIS work?
- Who does the Construction Industry Scheme apply to?
- When do you need to register for CIS?
- How do I register for CIS?
- What are my obligations as a CIS contractor?
- What happens if I don’t register for CIS
What is the Construction Industry Scheme?
The Construction Industry Scheme, or CIS for short, is an initiative put in place by the government to standardise the way contractors pay their subcontractors, and reduce the potential for tax evasion within the construction industry.
Under the rules of the scheme, contractors must deduct tax from the payments they make to subcontractors. These deductions are known as CIS tax, and contractors will report and pay them to HMRC using a CIS return.
The payments are then recorded towards the subcontractor’s tax and National Insurance (NI), a bit like the way that employers deduct tax for their employees.
How does CIS tax work?
In a nutshell, the scheme determines how a subcontractor pays their tax and National Insurance contributions. Registered contractors deduct these payments from their subcontractor’s earnings and send it directly to HMRC, meaning this portion of the subcontractor’s income is taxed at source.
So how much do contractors deduct under CIS? Well, this depends on whether or not the subcontractor is registered for CIS.
- 20% if the subcontractor is registered under the scheme
- 30% if they’re not
- 0% if they meet the criteria for Gross Payment Status. Eligibility for this depends on strict criteria, such as minimum turnover and the size of the business.
When a subcontractor is eligible for gross payment status, the contractor will pay their invoice in full without making any deductions. Instead, the subcontractor will pay all of their tax and National Insurance at the end of the tax year.
Checking a subcontractor’s CIS registration
Because their CIS registration status determines how much tax they must deduct from the invoice amount before paying it, contractors must check whether or not a subcontractor is registered for the scheme before they start work.
So that the contractor can verify them with HMRC, the subcontractor will need to share their details, depending on what sort of business structure they operate:
- Sole trader: Unique Taxpayer Reference (UTR) number (this is the unique reference that HMRC issues to identify a business’s tax records) and National Insurance (NI) number
- Limited company: The company name, registration number, and UTR
- Partnership: The partnership’s name and UTR, and the details of the nominated partner
The contractor can then use this to verify the subcontractor, and tell HMRC that they plan to take deductions from the subcontractor’s earnings under CIS.
It’s important to note here that subcontractors are different from employees, even though contractors will make deductions from both!
Always double check that deductions are being made and reported through the correct scheme.
Does CIS tax have any benefits for subcontractors?
It might seem like being part of the scheme is just another hassle that you could really do without, but registering for CIS can actually bring a number of positive benefits, including:
- Deductions will be made at the lower rate, so it’s easier to manage and plan cash flow
- More security that you will get paid by contractors for work you carry out
- It helps you manage your tax and National Insurance payments in advance
Who does the Construction Industry Scheme apply to?
The Construction Industry Scheme applies specifically to contractors and subcontractors working in construction-based jobs or within the construction industry.
This includes sole traders, partnerships, or companies and encompasses things like labour agencies, property developers, builders and gangmasters, but it doesn’t apply to every type of job.
|CIS might apply||CIS does not apply|
When do you need to register for CIS?
If it isn’t clear by now, the Construction Industry Scheme only applies to contractors (and subcontractors) offering applicable services in the construction industry. So, if this doesn’t apply to you, you won’t need to worry about anything related to CIS.
- As a contractor, you are legally obliged to register for the Construction Industry Scheme before you start paying subcontractors for construction-related work.
- Subcontractors don’t have to register for the scheme, but those who don’t will have deductions made at a higher rate.
Some businesses that aren’t in the construction industry are also required to be CIS-registered too. This applies to any businesses or organisations that spend over £1 million annually on construction work within any given three-year period.
This could be a housing association, an arm’s length management organisation (ALMO) or a local authority, for example.
How to register for CIS
You can register as a CIS contractor on the gov.uk website and you’ll need the following pieces of info to hand in order to complete the registration process:
- Legal business name and/or trading business name
- The business’s UTR (Unique Taxpayer Reference)
- National Insurance number
- VAT number if you are VAT-registered
It’s important to point out here that you will need to register your business as an employer before you can register for CIS, so make sure you’ve got that all sorted first.
The way that you register depends on whether you’re a sole trader, a limited company, or another kind of business such as a partnership.
If you are already registered as a sole trader, you can simply log in with your Government Gateway ID and go through the CIS registration process via that. If you’re not yet registered as a business, you can register for Self Assessment and CIS at the same time during the setup process.
Other useful points to consider
- If you live overseas but complete construction work in the UK, you will still need to register for CIS.
- If you are both a contractor and a subcontractor, you will need to register as both separately in order to correctly comply with the scheme’s regulations.
- Subcontractors aren’t legally required to register for CIS, but it’s recommended to do so before completing work for any contractors.
Subcontractors register for CIS online using a similar process and again, which form you use depends on the legal structure of the business.
What are my obligations as a CIS contractor?
As a contractor taking on subcontractors in the construction sector, you’ll need to register for CIS before making your first payment (and deductions) to a subcontractor. You must also:
- Make sure you treat the person working for you in the right category (that is, as an employee or as a subcontractor). Getting this wrong is an easy mistake to make, but it can lead to issues and penalties later on if you aren’t accurate.
- Check whether or not the subcontractor is CIS-registered using the HMRC website, and then make deductions at the correct rate.
- Submit monthly CIS returns to HMRC and maintain thorough CIS records. These run from the 6th of each month to the 5th of the next month, with a deadline of the 19th to submit and pay.
- Report the gross payment made to all subcontractors (excluding VAT) and the sum of related deductions, and make sure this information is available for a minimum of three years.
- Provide your subcontractors with statements showing the payments and deductions you make. They’ll need these for their own accounting and record keeping.
What happens if I don’t register for CIS?
Failure to register for CIS as a contractor when you should will result in hefty financial penalties from HMRC. In fact, HMRC can request to see CIS records at any time, and if a contractor is unable to produce these, they could face a fine of up to £3,000, plus additional late filing fees.
Subcontractors aren’t legally obligated to register with CIS, but it can be useful, particularly to avoid deductions being made at a higher rate. You’ll be able to reclaim any tax overpayments at the end of the year, but for some people it’s simply easier to manage it as they go.