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.
In this article, we’ll outline the nature and process of the Construction Industry Scheme, and introduce you to the rules you’ll need to follow as a contractor.
After reading you’ll have a firm understanding of how your role is defined, how this fits into CIS, and which obligations you need to take care of.
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.
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 pay check, 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 enrolment 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 pay check.
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.
The Construction Industry Scheme is an HMRC-operated tax deduction scheme designed to deduct upfront tax and national insurance contributions from the pay checks 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.
This article has been a quick primer into how the CIS works for contractors. We’ve covered some of the key questions around this topic, hopefully giving you a good starting position to learn more about how CIS might affect your business.
If you have any questions, we'd like to hear from you.