If you work within the construction sector, you should already be aware of the Construction Industry Scheme. But if you’re new to the space or want clarification on what working under these regulations might mean for you, then read on!
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax deduction scheme implemented by the UK government to ensure that contractors and subcontractors in the construction industry meet their tax obligations. The CIS applies to:
- Contractors: These are businesses or individuals who pay subcontractors for construction work. This includes builders, property developers, and other entities who engage the help of subcontractors. Government departments and local authorities can also count as contractors. “Construction work” refers to site preparation, building work, repairs, decorating, and demolition – but some activities, like architectural work and surveying, are not covered.
- Subcontractors: These are businesses or individuals who perform construction work for contractors, as described above.
CIS applies to self-employed subcontractors, not employees. If a subcontractor is deemed an employee, different tax rules apply.
Who needs to register for the Scheme?
Contractors must register for CIS with HMRC. They are responsible for deducting money from subcontractors’ payments and passing it to HMRC.
While subcontractors don’t have to register, it’s beneficial for them to sign up, because unregistered subcontractors face a higher deduction rate.
Some businesses that are primarily involved in construction, but which spend significant amounts on construction work, might still need to register as contractors under the CIS. If you believe you fall into this category, talk to your accountant to double check.
How do tax deductions work under the Scheme?
For registered subcontractors, contractors deduct 20% from payments (excluding VAT, materials costs, and certain other expenses). If the subcontractor in question is unregistered, then this deduction will rise to 30%.
Some subcontractors qualify for gross payment status, meaning they receive their payments in full without any deductions. To qualify, they must meet specific turnover and compliance criteria. For example, amongst other things, they will need to prove to HMRC that they:
- Have paid their tax and National Insurance contributions on time in the past and complied with all their tax obligations
- Do indeed provide construction work or labour for the UK construction sector
- Run their business through a UK bank account
- Have a net construction turnover of £30,000 per year for each director or shareholder, or at least £100,000. This is called the turnover test
- Meet the requirements of the compliance test, which involves completing and returning all relevant tax returns and PAYE and National Insurance contributions on time
It’s relatively easy to lose gross status, so once you’ve got it, you need to stay on top of your duties to make sure you don’t fail your review!
What are a contractor’s responsibilities?
Contractors must:
- Verify each subcontractor’s status with HMRC to determine the correct deduction rate (20%, 30%, or gross)
- File monthly CIS returns with HMRC, detailing payments made to subcontractors and the deductions taken
- Pay the deductions to HMRC by the 19th of the month following the month in which the payment was made
- Provide subcontractors with a deduction statement, showing the gross amount paid, the amount deducted, and any other relevant information
And what do subcontractors need to do?
Subcontractors must:
- Include the CIS deductions in their annual tax returns as pre-paid tax. This could result in a refund or reduced tax liability at the end of the tax year
- Register for the CIS, which in turn will reduce the deduction rate from 30% to 20% and ensure better cash flow
You can learn more about automating your bookkeeping here.
If credit control is an ongoing problem, you might find the advice in my recent blog useful.
What happens if you don’t comply with the CIS?
Contractors and subcontractors who fail to comply with CIS requirements can face penalties, which typically include fines for late returns (starting at £100 for returns that are one day overdue and rising exponentially as time goes by), incorrect deductions, or failing to register full stop. So, as you can imagine, it’s super important to get up to speed with what’s required of you, and make sure your affairs are in order!
Ultimately, the CIS is designed to prevent tax evasion in the UK construction industry by making sure tax is deducted at source. It simplifies tax collection and ensures that subcontractors are less likely to evade paying income tax.
