Construction Industry Scheme (CIS): How To Navigate The Construction Industry

If you’re arriving at this page, you’re probably looking for information about the Construction Industry Scheme - or the CIS.

Perhaps you’re wondering what CIS is and how it works.

Maybe you’ve got a more advanced question, perhaps regarding a specific CIS payroll challenge you’re facing. Or maybe you’re curious about the IR35 legislation and how - or whether - it applies to you.

Whatever it is, this extensive guide to the CIS almost definitely has the answer. Our aim when putting this resource together was to cover as many bases as possible, from the simple through to the advanced, and all with the goal of giving contractors and subcontractors in the construction industry the information they need to move forward.

This is what our guide will cover - 

• What the CIS is
• How the CIS works
• The rules you must follow under CIS
• What CIS payroll is
• Whom CIS payroll applies to
• Who is covered by CIS
• How to tell whether your organisation needs CIS payroll
• How CIS fits with other laws and rules
• Key factors to consider when employing CIS payroll services
• Remedies to common payroll challenges
• What IR35 is
• What you need to know about IR35
• How to be compliant with IR35

Let’s get to it.

First and foremost, let’s introduce CIS. If you’ve only just encountered the scheme, this section will be a good primer. Otherwise, take a read through if you need to remind yourself of core concepts.

What is the Construction Industry Scheme (CIS) 

The Construction Industry Scheme - abbreviated to CIS - is a scheme that sets the rules for payments from contractors to subcontractors in the construction industry. The rules define contractors, subcontractors, and the process for payments made between them.

Odds are that if you run operate as a contractor in the construction industry, you'll be required to register for the Construction Industry Scheme or CIS.

As an HMRC-designed tax deduction scheme, CIS makes provisions for income tax, national insurance contributions, and other deductions to be made automatically and at-source from a subcontractor’s paycheck, where relevant. It is a way for HMRC to receive an upfront payment for tax and national insurance while simplifying the administrative burden on subcontractors, 

The scheme is designed to streamline the tax affairs of contractors and subcontractors in the construction industry, and also to reduce some of the administrative burden placed on them.

CIS covers the majority of construction work involving buildings. Everything from site preparation to decoration, to full refurbishments, is included in CIS' remit. 

There are exemptions, too. Surveyors and architects do not need to enrol in CIS if that is the extent of their work on a project involving construction. If you consider yourself to be a freelance builder, it's worth your while finding out whether you need to enrol.

How does the construction industry scheme work?

Firstly, you must determine whether your work requires enrollment to the CIS. Then you must register if required. 

You must register for CIS if you're a contractor. It is not optional. At a top-level, you qualify as a contractor if -

• You use subcontractors, or,
• Your business spends £1 million or more on construction over a three year period.

There are more criteria and a full breakdown can be found in section 2.2 of the CIS guide on the HMRC website.

As a contractor, you must first register as an employer with HMRC if you aren't already. Registration can be completed online, and you’ll receive an accounts office reference and a PAYE employer reference that you can use to register for CIS, also online.

If you are already registered as an employer and enrolled in PAYE, HMRC will update this to PAYE/CIS. Your deductions must be paid monthly or quarterly. 

Registration is not mandatory for subcontractors, but there are tax benefits for being enrolled - you'll pay lower tax than you would outside of the CIS: 20% versus 30% for registered versus non-registered subcontractors.

A percentage deduction is made on the value of a subcontractor’s labour, and not on materials or VAT. This will be 20% if they’re registered, and 30% if they’re not registered, as outlined above. The HMRC website gives further detail into the calculation used to arrive at the total required deductions.

Any deductions are considered an advanced payment of income tax and national insurance contributions.

Registered subcontractors you work with may be eligible for gross payment status. There are some conditions -

• Their business is conducted in the UK and payment is made through a bank account.
• Their business has been timely with previous tax and national insurance payments.
• Their business meets minimum turnover limits.

In this scheme, deductions are not made at the source, which carries positive implications for cashflow. This scheme is useful for contractors with subcontractors of their own, who need cash available to make payment.

If your subcontractors meet these criteria and their applications for gross payment status are successful, no deductions will be made from their paycheck.

Regardless of registration status, HMRC will calculate any outstanding tax and national insurance balance at the end of the tax year, taking into account deductions made throughout the year.

Rules you must follow 

If you're a contractor you must register for CIS. 

There are certain rules you must then follow. Firstly you must check that your subcontractors are registered with HMRC. Then you must pay them according to HMRC rules - gross and with no deductions, net of 20% deduction, or net of 30% deduction depending on their status and registration. 

Payment and deductions statements must be issued to any subcontractors who require deductions. Deductions are paid to HMRC. Finally, you must report to HMRC each month with information on subcontractor payments and deductions, and keep records of all of the above. These returns are completed online and give details on which subcontractors you've employed, and the deductions made. All of these actions must be completed within 14 days of the end of the month. You get an additional 3 days to pay if electronic payment methods are used.

If you're a subcontractor you must decide whether to enrol. It's definitely advisable to do so because there are tax benefits.

As a subcontractor, registration for CIS is done online. They'll take your Unique Taxpayer Reference (UTR) or National Insurance number, along with your employing company's registration number if applicable.

If you're not sure what you qualify as under the scheme, and by extension, which rules you must abide by, then give HMRC a call or drop us a line.

CIS: A Summary

The Construction Industry Scheme is an HMRC-operated tax deduction scheme designed to deduct upfront tax and national insurance contributions from the paychecks of subcontractors.

Contractors and subcontractors alike have different obligations under CIS, and the HMRC CIS guidelines clearly define each role, along with what’s expected of them.

It’s possible to be a contractor, a subcontractor, or both at the same time.

Next, we dig a bit deeper into the concept of CIS payroll. This refers specifically to how payment is processed within the CIS system.

CIS payroll refers to the payments made between contractors and subcontractors under the government’s CIS.

Contractors and subcontractors may encounter CIS payroll service companies through the course of their professional lives. This article looks to introduce some of the roles and relationships between contractors, subcontractors, and specialised CIS payroll companies.

After reading you should have a firmer understanding of these relationships.

What is CIS payroll?

CIS is the construction industry scheme, and CIS payroll refers to the processing of payment from contractors to subcontractors under the scheme. CIS payroll can be done in-house by a contractor, our outsourced to a payroll company specialising in this scheme.

Contractors paying their own subcontractors process CIS payments at the same time as the rest of their payroll. Any deductions under CIS are paid to HMRC. A return is then submitted showing what was paid to subcontractors.

It's possible for an employer to be registered with PAYE, and to also be registered as a contractor under CIS. A dual PAYE/CIS payroll system allows an organisation to pay different types of staff in line with HMRC requirements.

Whom does CIS apply to? 

The CIS applies to contractors and subcontractors in the construction industry. 

You may be wondering whether you qualify as a contractor, a subcontractor, or neither. Well, here's how to tell -

If you have subcontractors of your own, or if you spend over £1 million on construction in any three year period, you qualify as a contractor.

If you complete work on a project under the employment of a contractor, you’re a subcontractor.

CIS stipulates legal and tax obligations for contractors and subcontractors alike, and thus applies to individuals and organisations at both ends of the spectrum. 

Who is covered with CIS? 

Contractors and subcontractors in the construction industry are covered with CIS.

As a rule of thumb, if you consider yourself to be a freelance contractor in the construction - as a builder or decorator, for example - then you're probably covered by CIS.

It's important to understand whether you're covered. Sole traders, partnerships, or companies who meet the criteria for contractors are required by law to enrol in the CIS. Those who qualify as subcontractors are not legally obliged to enrol, but may enjoy certain benefits if they decide to do so.

At a top-level, you're a contractor if -

• You use subcontractors, or,
• Your business spends £1 million or more on construction over a three year period.

If you do not meed these criteria but work in the construction industry, you're likely considered a subcontractor under CIS. Subcontractors work on larger projects under the employ of a contractor.

Bear in mind that there are exceptions. Certain roles in the construction industry - like architects and surveyors, for example - are exempt from the CIS. The full list of exemptions is available on the HMRC website

You can also qualify as both. For example, if you agree to do work for a contractor, but work with subcontractors of your own.

If it all feels a bit confusing and inconsistent, that’s OK. It’s a tricky scheme to get your head around, especially if you’re new to it. There is a dedicated CIS hotline at 0300 200 3210, and a wealth of information on the government’s website.

You can also run through these questions with a CIS payroll services company to ensure you're compliant with any and all of your CIS obligations.

How do I know if I need CIS payroll? 

First, you need to determine whether or not you need to enrol in CIS. 

As a contractor, once you've established this information, it's up to you to decide whether CIS payroll services are a worthwhile investment for you. Some contractors decide to keep their payroll services in-house - perhaps they already have a payroll department who can take on the workload.

Here are some factors that might suggest outsourcing your CIS payroll would be beneficial -

Costs of Closing a Skill Gap

If an in-house team is trained in PAYE, they may need additional training to familiarise themselves with the idiosyncrasies of CIS. The costs of this up-skilling may cause some contractor firms to look at outsourcing instead, in which case they hand over the responsibility of their CIS payroll to a company specialising in this industry.

This situation can arise when a company becomes eligible for CIS after having only had employees who were eligible to be paid through PAYE.

Strained Internal Resource

Perhaps a contracting firm doesn’t have a dedicated in-house payroll team at all, or the team they do have is at full capacity. In such situations, delegating some of the administrative burdens to experts can relieve the workload and allow for a more streamlined internal resource.

Change in Eligibility

If someone operating as a subcontractor also becomes eligible as a contractor by hiring subcontractors of their own, they may decide to involve a CIS payroll company to manage payment and payroll processing of their new subcontractors.

This situation can arise when an individual doesn’t expect to operate as a contractor frequently enough to warrant hiring and retaining dedicated staff and does not have the inclination or expertise to manage CIS payroll themselves.

What Else Should I Consider?

CIS payroll is a wide umbrella that involves various other legal and financial obligations. When considering whether CIS aligns with your need, keep these in mind -

• Minimum wage: All subcontractors must be paid at least the legal minimum wage. CIS does not change this.
• Pension contributions: Some Subcontractors earning over £10,000 per year are automatically enrolled into a government-mandated pension scheme, but they are eligible to leave after a month. Employing contractors do not have to match contributions.
• Statutory benefits: CIS does not make provisions for sick pay, holiday pay, maternity pay, or paternity pay. Government schemes may be able to assist people enrolled in CIS who need such support.
• Employment law: The legislation defining and surrounding CIS is in frequent flux, so you need to keep abreast of changes and how they will affect you. Working with a specialist CIS payroll companies hands over this responsibility.

A summary of CIS payroll

The CIS has many implications for contractor and subcontractor payroll. Involvement in the construction industry often makes you eligible for CIS, although this does depend on the nature of your work and the relationship through which you employ or are employed.

Depending on whether you qualify as a contractor, a subcontractor, or neither, CIS will affect you differently. Some contractors decide to outsource their CIS payroll obligations to an external payroll company with CIS speciality. This removes some of their administrative burdens while freeing up internal resources to focus on other aspects of their business.

If you think working with a CIS payroll service would be a good choice for your organisation, the next section outlines a few considerations for finding the right company. This information will help you make an informed business decision, rather than going into a partnership blind.

As a contractor, your payroll requirements are likely to be fairly complex. Subcontractors work in different locations, have different pay levels, and are probably paid on different schedules.

With these complexities in play, some contractors look to construction payroll services as a way to outsource things, and to tap into industry-level expertise.

Key Factors to Consider when Employing a Payroll Service 

Keep these questions in mind when identifying, evaluating, and deciding between prospective construction payroll service companies to partner with.

What are your company's needs?

Do you need to free up time or internal resources? If you feel that internal resources are strained by trying to manage payroll in-house, then an outside agency with dedicated staff can help.

Similarly, if your in-house team aren't familiar with CIS, then tapping into the expertise in a construction payroll service could be quicker and more cost-efficient than training internally.

Are they industry specialists?

This article is about construction payroll services specifically, so we're assuming that people reading are working somewhere in the construction industry.

In this case, specifying that you want to work with a construction payroll company is a good starting point. This stipulation should whittle down potential options to companies who are experts with the Construction Industry Scheme (CIS) and all other relevant HMRC schemes and legislation that directly impact or sometimes overlap work in the construction industry - like IR35, for instance.

What will it cost to retain their services?

Will you be paying a flat rate based on your company size, or does the cost depend on the specific services you require? 

Once you've got an idea of how the cost is arrived at, you can cross-reference the number with what the equivalent amount would get you in terms of internal resources, whether through hiring new staff members or upskilling existing ones.

This is a classic tradeoff when outsourcing business processes to a third-party. There's always the argument that bringing things in-house is a better investment in the long term, but when you add up the financial and administrative costs, outsourcing quickly becomes an attractive option.

How do costs weigh up against benefits?

Let's be honest, the main reason most businesses work with a dedicated construction payroll service provider is to reduce their workload and streamline their practices.

When retaining the services of qualified professionals with the latest software and systems, and who keep abreast of all developments in the ever-changing tax landscape, the tradeoff between cost and benefit is a no-brainer. 

How experienced are the companies you're considering partnering with?

The tax landscape is always changing. New legislation is brought in, employment case law redefines how things are done, and numerous other pressures exert themselves on the industry.

Amongst these shifting sands, it's easy to fall behind. Payroll service companies that don't invest the proper time and energy in keeping abreast of changes and developments usually don't last too long.

Check out how long your prospective companies have been trading for. Durability is a good top-level indicator in this industry.

But also spend time looking at their credentials: Which ones do they have, and how recent are they? Then take a look at their testimonials: Are customers broadly satisfied or unsatisfied? And are their customers representative of the needs and demands of your industry?

Weighing up these factors should give a good idea of whether the companies you're looking at are long-term players with the expertise and credentials to deliver success, or whether they're just cowboys.

Where does liability lie?

With in-house payroll, you're responsible for any errors. And when you're dealing with HMRC and tax, errors can get expensive quickly.

Some construction payroll companies accept responsibility for errors arising from their work as part of the service you're paying for. This carries a huge amount of peace of mind, because the risk of getting caught out by a nasty surprise a few months, or even a few years down the line is reduced.

What's their customer service like?

This is last, but it is absolutely not least. Working with a construction payroll services company involves outsourcing a huge chunk of your business admin, and you want to have any questions answered or concerns addressed as quickly as possible.

Partnering with a company who doesn't value your time and just see you as a monthly source of income will add more stress and hassle to your business than they remove.

On the other hand, partnering with a company who offer dedicated account management and quick support over the phone will take a weight off your shoulders and allow you to rest easy.

Spend time understanding what sort of customer service you can expect as a paying client, as this can (and should be) a dealbreaker.

If you’re not yet at the stage where you’re considering partnering with a CIS payroll company, the next section outlines some challenges your organisation may be facing, and how these may signal the need for outsourcing your CIS payroll.

When it comes to managing CIS payroll, there are two things that no organisation wants.

The first is a disgruntled workforce, and the best protection against this is making payment on time, in full, every time.

The second is to attract the attention of HMRC. Here, the best protection is compliance and diligence throughout the payroll process.

If you encounter any combination of the following eight issues in your business, this could be a good indication that working with a CIS payroll company could be a good move.

1. Human error 

An old saying goes, “to err is to be human.”

With human employees at the heart of every business, the risk of error is always present. This is especially true when recording hours worked, resource allocated, payments made, and deductions taken.

By implementing tailored payroll solutions that link together and have streamlined inputs, you can reduce - or even remove - the threat of human error from your processes. Working with a CIS payroll specialist provides access to their systems and processes, which have been designed to be as efficient and error-free as possible.

2. Late or incorrect payment arising from human processing error

When errors are made, they’ll likely impact payment in some way. This can occur from a subcontractor recording their hours worked incorrectly, a member of payroll entering the wrong information resulting in incorrect payment, or one of many other factors.

Whatever the cause, late or incorrect payment quickly sows discontent between contractors and subcontractors. Avoiding such issues is an essential part of maintaining good relations on-site and within projects.

Again, partnering with a CIS payroll specialist offers a clear resolution to this problem, hopefully before it arises. 

3. Late or incorrect payment arising from cash flow issues

In the construction industry, large amounts of money move around frequently. Amongst the streams of incoming and outgoing cash, a contractor’s obligation to pay their subcontractors can sometimes suffer from not having the relevant funds on hand when required. 

Well-implemented CIS payroll management software, whether internal or via an external agency, offers an elegant solution to this problem by giving clear visibility of outgoing cash flow. This means you’ll have a clearer understanding of upcoming costs, and can plan accordingly to ensure payment is possible.

4. Loss of respect and reputation after errors

As we’ve alluded to in the previous points, getting paid incorrectly is frustrating, and damages the relationship between contractor and subcontractor. This is especially if back-charges and other withholdings are necessary to redress the balance.

By implementing systems and processes that reduce the likelihood of human error, the hope is that loss of respect or any damage to the contractor/subcontractor relationship will be prevented. 

Because, as another old saying goes, “prevention is better than a cure.” If you can prevent a problem from happening in the first place, you don’t need to worry about resolving it.

5. Being proactive and staying current with legislation

Tax legislation is by no means fixed, and staying up to date requires ongoing investment in training and education of CIS payroll management staff. When these staff members are in-house, responsibility for this investment - of both time and money - falls at your feet. There’s the chance of falling behind with developments and, when this happens, of risking not being compliant with the new legal obligations on your organisation.

When an external CIS payroll company employs these staff members, however, you can enjoy the peace of mind of knowing that training costs and the onus for ensuring compliance are external. 

6. Keeping your payroll software up to date

As changes to tax law and payment processing inevitably occur, payroll systems need to be updated accordingly. The same relationship as above exists here, too: If your payroll is managed in-house, the responsibility to invest in updated software is on you. If you outsource, on the other hand, everything is managed externally. The obligation to update software and accompanying processes falls upon the CIS payroll specialists.

7. Combining different payroll schemes within one organisation

As a contractor, you may employ staff who don’t qualify as subcontractors within CIS. In this situation, you’ll need to operate multiple payroll schemes concurrently.

This situation can also arise when a company hires individuals who qualify as subcontractors under CIS to join their non-subcontractor workforce. 

In both cases, operating two payroll schemes - PAYE and CIS, perhaps - can lead to additional confusion for an in-house team, especially if team members are not trained in CIS. By working with external CIS specialists, you remove this potential skill gap entirely. 

8. Keeping records in case of an audit

When dealing with HMRC, the stakes are high. If they suspect that your tax affairs are not in order - whether intentionally or otherwise - you may be placed under audit and investigated. This process is costly, both in terms of time and money.

Keeping a watertight paper trail of all payments and deductions for your staff is essential, for two reasons. Firstly, it reveals errors and issues before they compound enough to warrant attention from HMRC - prevention is better than cure, remember.

Secondly, it gives you recourse if an audit were to take place. Being able to prove which payments you made and when provides HMRC with the information they need to determine whether your affairs are in order.

When outsourcing CIS payroll management, your provider will keep comprehensive records. They may assume liability for mistakes, too, meaning that any compensatory measures will be their responsibility, rather than yours.

A summary of issues

As we said earlier if you regularly encounter one or some of the above issues, then moving your CIS payroll to an outside organisation could be a good move.

The next and final section of our guide details IR35 compliance. If you’re not familiar with IR35 and how it might affect you, now is the perfect time to get acquainted.

As a contractor or subcontractor in the construction industry, you’ve probably heard of IR35. Perhaps you’re already enrolled in CIS and want to understand how - if at all - IR35 will impact you. Or perhaps you’re just looking for clarification on how IR35 works.

Here we’ll explore IR35 and how it interacts with CIS. 

After reading this section you should have a better idea of what changes you need to make - if any - to ensure you’re not falling afoul of any rules.

What Is IR35?

IR35 refers to the Intermediaries Legislation introduced by Gordon Brown when he was Chancellor of the Exchequer. The legislation pertains to intermediaries like partnerships and personal service companies, and it looks to prevent one route of tax avoidance whereby individuals can operate as directors while servicing their clients very similarly to how they would if they were an employee.

IR35 applies freelancers and contractors in the UK. It sets out the differences in tax obligations between full-time employees and limited company directors.

The IR35 is broadly designed to ensure that people can't switch and change their employment status to make their situation more tax favourable. 

Its ultimate goal is to ensure the right amount of tax is paid to HMRC for an individual's status, and that a potential channel of tax avoidance is closed.

IR35: What You Need To Know 

The first thing to say is that IR35 isn't as complicated or intimidating as it's often made out to be. So if you're worried about IR35 compliance, you can breathe a sigh of relief.

Secondly, there's a lot of jargon. So if you're reading this and feeling a bit overwhelmed by the concepts and terminology, don't worry.

IR35 sets out key differences between tax obligations for full-time employees and limited company directors.

As a full-time employee, your tax will be - 

• Out of your hands: Your employer takes care of it.
• Fairly rigid: Certain exemptions are taken into account, then deductions are made based on your tax code.

As the director of a limited company, your tax will be a bit more flexible: You have more wriggle room in deciding how to take money from your business

IR35 makes sure that you can't be working as a full-time employee while registered as a director of a limited company, or vice versa. This is achieved by determining whether you are in legitimate self-employment as a contractor, or whether you're essentially an employee working under the director banner. The latter is known as being a 'disguised employee,' and is severely frowned upon.

If you're found to be a disguised employee - that is, working in a way that IR35 defines as full-time employment while being registered as the director of a limited company - you're considered to be "Inside IR35."

Conversely, if your registration aligns with the terms of the work you're doing, you're considered to be "Outside IR35."

Being Inside IR35 opens up the possibility of an HMRC investigation into your business affairs. Such investigations can be long and costly, and they can result in you having to pay back all of the tax you would have paid had you been registered as an employee under PAYE. Because of the different tax obligations for employees and directors, this amount can grow quite large. 

HMRC uses "hypothetical contracts" to evaluate the relationship between a worker, a limited company, and a client. Depending on working practices and contractual terms, the contract will either be deemed to be between a limited company and their client (Outside IR35) or an employee and their client (thus Inside IR35 if the person deemed to be an employee is operating as a director).

How to be compliant with IR35 

IR35 compliance is assessed for each assignment you work on, meaning that your IR35 status can vary between projects. 

The best vehicle for compliance is understanding the rules and striving to work within them. 

Here are the three main criteria used by HMRC to evaluate IR35 status - 

• Who has control over the work? As a contractor, are you free to decide when, where, and how you complete the work, or is this determined by the client?
• Are you required to carry out the work yourself, or do you have the option to send someone else instead who operates under the umbrella of your company?
• Are you obliged to accept further work if the client offers it, or is it your prerogative to decide

If you have no control over when, where, and how to complete the work, and are also obliged to carry out the work yourself and accept all further work requests, this sits closer to employment than the provision of a service through a company.

However if you have full flexibility on when, where, and how the work is completed, and by whom, with the option to exit the client/service provider relationship whenever you like, this reads more like service provision.

You can use an IR35 contractor tool to give an indication of whether you are compliant, however, this cannot be accurately determined in all cases.

Your best bet is to work with a payroll services company who can advise on ensuring your business practices are IR35 compliant.

A Summary of IR35

IR35 isn’t as intimidating as it’s made out to be, but the penalties for violating the rules - whether intentionally or otherwise - can be severe. As a subcontractor or contractor, it’s important to understand whether the way you operate brings you under the remit of IR35.

The way IR35 interacts with the Construction Industry Scheme (CIS) is changing, with new legislation set to come into effect in October 2020. As a contractor or subcontractor, it’s your responsibility to keep abreast of these changes and ensure compliance where applicable.

Working with a CIS payroll service provider is one surefire way to make sure that you’re not inadvertently falling afoul of any rules.

Our aim with this guide was to answer as many questions about CIS as possible. After reading you should be much more acquainted with the core concepts, as follows -

• What CIS is
• How CIS works
• The rules you must follow under CIS
• What CIS payroll is
• Whom CIS payroll applies to
• Who is covered by CIS
• How to tell whether your organisation needs CIS payroll
• How CIS fits with other laws and rules
• Key factors to consider when employing CIS payroll services
• Remedies to common payroll challenges
• What IR35 is
• What you need to know about IR35
• How to be compliant with IR35

At Optimum Pay Group, we offer comprehensive CIS payroll services. We work with many satisfied clients in the construction industry, and we’re confident that our experience and expertise could benefit your business.

If you’d like to learn more about us, check out the resources below -

• About OPG - our guiding ethos, and our company history
• About our team - meet our CIS payroll experts
• Our blog - our extensive bank of payroll-related content

If you’re looking for information on our CIS payroll services, you can check out our service page here.

And we’re always available to answer questions or talk through ways we could work together. You can contact us here, at any time.