The Construction Industry Scheme (CIS) in the United Kingdom is a nationwide tax-deduction scheme for British contractors and subcontractors. Contractors deduct money from subcontractor payments and submit it to HM Revenue & Customs (HMRC) under the Construction Industry Scheme (CIS).
The initiative attempts to address unethical industry practices such as hiring people on a “cash-in-hand” basis and failing to comply with tax requirements. This article provides a simplified insight to look at the scheme, including instructions on how to register with HMRC, file monthly returns, and define who and what type of work is included.
How Construction Industry Scheme (CIS) Works
If you work as a contractor in the construction sector, you should be aware of your obligations under the Construction Industry Scheme (CIS). It is essentially a PAYE-like scheme that demands that the contractor is usually obliged to withhold tax on its payments to the subcontractor and pay the deduction to HMRC.
Contractors are businesses that work in the construction sector and hire subcontractors to do the actual job. According to UK law, contractors can be any legal business entity, including companies, sole traders, and partnerships, which can include real estate developers, construction companies, and even labour agencies.
CIS covers the following types of work:
- General works related to buildings
- Dismantling or demolition
- Heating, lights, electricity, water, and ventilation works
- Groundworks and preparation of site
If a business that isn’t in the construction sector spends $1 million or more on construction work in three years, it may be considered a contractor. Housing associations registered in the United Kingdom or operating in the United Kingdom are examples of this. The scheme does not cover construction work done outside of the UK. A company headquartered outside the UK that performs construction work in the UK, on the other hand, is subject to the rules and must register and pay tax.
If you meet the following criteria, you must register with the CIS as a contractor:
- you pay subcontractors to do construction work.
- Your company does not conduct construction work, yet you spend more than £1 million on it every year.
Before you hire your first subcontractor, you must first register with CIS. Check HMRC’s status guidelines. You should also consider if the subcontractor should be treated as an employee.
Contractors that perform certain types of construction work must comply with CIS and:
- Register with the scheme before hiring their first subcontractor
- Always check if they should hire individuals instead of subcontracting the work
- Verify with HMRC that subcontractors are registered with CIS
- make necessary deductions from subcontractor payments
- pay the money to HMRC
- give subcontractors with deduction statements
- all CIS deductions must be reported to HMRC on a monthly basis
- maintain complete CIS records
- notify HMRC of any changes to their business
Subcontractors should register for CIS as well. If they are eligible, subcontractors who do not want any CIS deductions might apply for “gross payment status”. Failure to comply with the CIS programme might result in penalties for contractors.
Verify if your subcontractor has registered with CIS and what their payment status is. The method for verifying that a subcontractor is genuinely self-employed and should not be classified as an employee of your company for taxation purposes is a critical component of the scheme. It is important to understand that even though a contractor withholds tax on payments made to you and may receive paperwork that looks similar to payslips, you are not being considered an employee and hence will not be entitled to any of the employment rights that come with being an employee.
You should also establish that the subcontractor is self-employed in the contract between your company and the subcontractor. However, if the contract is for employment, you must regard them as employees for tax purposes and pay PAYE instead of registering them for CIS.
Who pays the tax under the CIS Scheme?
After properly verifying a subcontractor under CIS and based on HMRC’s response, the contractor is obligated by law to withhold the following taxes from any payment owed to a subcontractor (they will be listed in the subcontractor’s Self-Assessment tax return):
- If they are not registered as sub-contractor – 30% from non-CIS-registered subcontractors, excluding the equivalent of VAT and the cost of plant hire or supplies.
- If sub-contractors are registered at the standard/ net rate – 20% from CIS-registered subcontractors who are eligible to receive gross payments, excluding the equivalent of VAT and the cost of plant hire or supplies.
- If the sub-contractor is registered with gross payment status, there are no deductions if a subcontractor qualifies for gross payments.
The contactors will not deduct amounts from invoices (sent by the subcontractors) for direct expenses such as material costs. The contractor’s deductions are subsequently remitted to HMRC, who regards these as advance payments of the subcontractor’s income tax and national insurance contributions.
The contractor must provide a PDS (Payment Deduction Statement) to the subcontractor within 14 days of the end of the current tax month for any deductions made. The subcontractor should keep these statements since they will be helpful in completing a Self-Assessment tax return.
A subcontractor may seek a duplicate copy of a PDS document that has been lost or misplaced. The contractor must furnish it, but it must be properly labelled as duplicate.
You can utilise the CIS online service to submit monthly returns, as well as to verify your list of subcontractors, view previously filed returns, and alter any data that need to be changed.
There should be no outstanding HMRC payments or tax returns. While HMRC frequently overlooks minor compliance errors, having many failures recorded might result in your gross payment status being revoked (which is reviewed once per year). HMRC laws require subcontractors to notify any company changes, including:
- Change in company type, address (private or registered)
- Changing your business name
- Changing the business structure (which necessitates a new gross payment status review)
- Addition of any new shareholders (in the case of companies)
- The core trade has come to an end
A contractor accountant can assist you in staying on top of intricate compliance rules, claiming overpayment CIS, and ensuring that you are paying the smallest amount possible.
Support from Bloom Financials
This is a brief overview of the processes you’ll need to follow to verify subcontractors and stay in compliance with CIS.
If you have any questions about the scheme or require assistance with the verification procedure or tax deductions, our team of experienced professionals would be happy to assist you. Don’t hesitate to get in touch with us for more information.