The Construction Industry Scheme (CIS) was implemented by the government to help simplify and standardise how sub-contractors are paid by contractors, and how they pay tax and deductions.
Who does CIS apply to?
The scheme relates specifically to contractors and sub-contractors in the construction industry. In some instances, it might also include housing associations, government departments, arm’s length management organisations (ALMOs) and local authorities.
It encompasses building works such as site preparation and decoration. What the CIS doesn’t apply to are things like hiring scaffolding, carpeting, delivery of materials, surveying, and management of site facilities (e.g., on-site food provision).
Contractors are required to register for the Construction Industry Scheme if:
- They pay sub-contractors to perform construction work.
- Their business doesn’t fall under the category of construction, but they have spent in excess of £3 million on construction in the 12 months after making their first sub-contractor
Sub-contractors aren’t legally required to register for the scheme but those who don’t register will have their deductions calculated at a higher rate.
How does the Construction Industry Scheme work?
The scheme dictates how a sub-contractor pays tax and National Insurance to HM Revenue & Customs (HMRC). Contractors working within the scheme will deduct money from what they pay their sub-contractors, and this is then passed directly to HMRC on behalf of the sub-contractor, towards their obligated payments.
This isn’t an automatic process; however, contractors and sub-contractors will need to register themselves before they can qualify to work under the CIS (according to the criteria summarised above).
What is a contractor required to do under the Construction Industry Scheme?
As a contractor registered to work under the scheme, there are some rules and regulations that you will need to adhere to. You will need to:
- Register ahead of making your first payment to a sub-contractor.
- Ensure that you can recruit the person as a sub-contractor, rather than as a contracted employee. Getting this incorrect can lead to penalties so it’s worth doing your research and getting it right from the beginning.
- Check whether or not the sub-contractor has registered under the CIS via the HMRC website.
- File monthly returns and keep up-to-date CIS records. Even if don’t plan on making any payments in any given month, you will still need to document this for the benefit of HMRC.
You will need to keep a record of the gross amount of each payment made to subcontractors (not including VAT) and the sum of deductions made from these payments. You’ll need to make sure that this information is accessible for at least three years.
How does the process work for sub-contractors?
When a sub-contractor starts working with a new contractor, they will be asked to share their Unique Taxpayer Reference (UTR) number. The contractor uses this to let HMRC they’re going to be taking deductions from the sub-contractor’s pay under the CIS, and HMRC will let them know which deduction rates to apply.
As we touched on above, these deduction rates differ depending on circumstance. This can be broken down into three basic categories:
- 20% tax deduction rate – Applies to those sub-contractors who are registered under CIS
- 30% tax deduction rate – Those who aren’t registered for CIS. The subcontractor will be able to reclaim the overpayment once they submit their Self Assessment tax return.
- Gross payment – No tax deduction applies, according to strict criteria around factors such as minimum turnover.
You’re not legally required to have one, but a good accountant will be able to help you comply with your obligations under the Construction Industry Scheme, as well as dealing with payroll and CIS reporting.
This guide was kindly written by The Accountancy Partnership – Providing online accountancy services nationwide for a low, fixed monthly fee.