This guide to the construction industry scheme (CIS) will help new contractors understand why it was introduced, how it works and how to operate it successfully.
What is the construction industry scheme?
CIS was introduced in 1971 to reduce tax evasion in the construction industry.
It works by requiring contractors to tax construction workers at the point of payment, rather than waiting for them to declare and pay their own tax and National Insurance after the year-end.
Does it apply to me?
If you carry out construction work and engage others to do some or all of the work for you, you'll need to register as a contractor.
If you work in the construction industry, hiring or selling your services to a contractor, you'll need to register as a subcontractor.
You'll need to register as a contractor and a subcontractor if you fall under both categories.
If your business does not trade in construction but you have spent more than £3 million on construction in the 12 months since your first payment then the CIS scheme will also apply to you.
What is construction work for CIS purposes?
The CIS scheme covers most construction projects, including:
- Site preparation such as foundations and access works
- Demolition and dismantling
- Building work including alterations, repairs, extensions and decorating
- Installing systems for heating, lighting, power, water and ventilation
- Cleaning inside of buildings after construction work
- Any work forming part of the land, e.g. walls, roadworks, power lines and waterways etc
Who is exempt from the CIS scheme?
There are a whole host of exceptions to the scheme.
For example, individuals engaging builders for domestic work in their own homes do not need to operate the CIS scheme.
Certain trades are also excluded, for example:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in the building industry, i.e. manufacture of bricks, plant and machinery
- Delivering building materials
- Work on a construction site that is clearly not construction, i.e. running a site canteen
What if my trade doesn’t fit into the list?
The above are general examples of work that falls inside and outside of the scheme but unfortunately there are plenty of grey areas.
You can visit HMRC's website for more information about what is included in the CIS scheme.
However, if you're not sure if the scheme applies to you, we can help. Get in touch by email to book a discovery call.
What are my responsibilities for CIS as a new contractor?
CIS can be tricky for new contractors so please take the time to understand your responsibilities.
If you determine that you are a contractor, you’ll need to register to let HMRC know BEFORE you take on your first subcontractor.
You also need to ensure that there's a contract for services in place which confirms that the subcontractor is actually self-employed rather than an employee who would have a contract of service.
Once you've established that you do have a genuine subcontractor they'll need to be verified so that you know how much tax to deduct.
You must then deduct the correct amount of tax and declare it to HMRC in a contractor return once a month to HMRC.
You have a legal obligation to give the subcontractor a 'payment and deduction statement' each month. This statement informs the subcontractor of payments made to them and the tax that's been deducted.
It's important to ensure you're keeping full, accurate and up-to-date records. Using a great bookkeeping and accounts system can help with this. We always recommend Xero - check out our previous blog on 'why construction companies love Xero' for more on this.
What rate of CIS should I deduct?
Verifying a subcontractor will tell you what rate of tax to deduct.
To do this you will need to request details of the subcontractors:
- Name, National Insurance Number and Unique Tax Reference (UTR) if they are self-employed
- Company name, company number and company UTR if they're a limited company
- Trading name, partnership UTR and nominated partner details if they're a partnership
You can verify via the CIS service on your HMRC Government Gateway, via software like Xero, or ask your accountant to do this on your behalf.
HMRC will then tell you which rate to deduct - which are as follows:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% if the subcontractor has gross payment status
We recommend using Xero to easily keep track of your CIS but to understand how the deduction works, here are some easy steps to follow:
- Start with the subcontractor's total invoice.
- Take away any VAT (if it is been charged).
- You can then deduct any materials, equipment hire and fuel (except for travelling) that are included on the invoice.
- The remainder is the labour from which tax must be deducted.
- The original invoice is £1,200.
- The invoice is under reverse charge so no VAT is present.
- Material costs of £200 and hire of £250 are shown on the invoice. As a result, £450 can be deducted. The subcontractor has also shown travelling costs of £50 but these cannot be deducted.
- The remaining £750 has tax deducted at 20%.
- The tax deduction is £150 (£750 x 20%) which should be declared on your contractor return and paid to HMRC.
- Your subcontractor is paid £1,050 (£1,200 - £150).
Do I actually have to pay the CIS that's deducted to HMRC?
If you suffer CIS on your income then usually no payment to HMRC will be necessary.
You'll need to make sure you keep track of the CIS you've suffered each month and submit the figure to HMRC on an EPS via your PAYE scheme.
The CIS that's been suffered can then be used to offset any PAYE and CIS that's due to HMRC throughout the year.
At the end of the year, if there's still an amount of CIS suffered which hasn't been offset, you or your accountant can apply to have it offset against other taxes or refunded.
If you don't suffer CIS on your income, you'll need to ensure you make the payment on time every month.
You must send your contractor returns to HMRC by the 19th of every month for the previous tax month (6th to 5th) as well as the amount of CIS you've suffered via an EPS.
If you have CIS to pay, it will be due for payment by the 22nd.
HMRC will charge penalties for missing a filing deadline, starting at £100 if your return is just 1 day late, £200 if a return is 2 months late and increasing to the higher of £3,000 or 5% of the CIS deductions on the return for returns more than 12 months late.
If there is nothing to declare, make sure a nil return is filed by the 19th to avoid a late filing penalty.
If you know you won't be making any deductions for the next 6 months you can notify HMRC of 'a period of inactivity'. This will mean returns will not be required BUT you must inform HMRC and start making returns again if the inactivity ends before the 6 months finishes.
That's a lot to take in, can you summarise it?
Of course! Check out this quick video which sums up the major points.
How can Clarative Accounting help you?
We know that CIS can be tricky and time-consuming for new contractors, not to mention the problems it causes with cash flow as well as interest and fines if it goes wrong!
But we're here to take that headache away and can help with:
- Registering your business as a contractor and/ or subcontractor
- Monthly processing of returns including verifying your subcontractors, calculating deductions, filing monthly returns and sending payment and deduction statements
- Keeping track of the CIS you suffer and the PAYE and CIS you owe
- Meeting all deadlines on time, every time!
If you'd like to discuss CIS with us further book your free 15-minute discovery call today.