The Construction Industry Scheme (or CIS as it’s affectionately known) is aimed at countering fraud within the construction industry and putting an end to undeclared earnings. Under the scheme, anyone deemed a Contractor has to deduct a portion of any payments made to Subcontractors and pay it directly to HMRC. The deducted amount then counts as an advance payment towards the Subcontractor’s tax and national insurance liabilities.
Who Does the CIS Affect?
Essentially, a Contractor is any business, person or organisation who undertakes “construction work” and employs others (Subcontractors) to undertake parts of this for them. Contractors can include traditional engineering contractors, property developers, gang leaders employing self-employed workers and even your local Council! Luckily though, employing someone to undertake work on your own home doesn’t make you a Contractor.
“Construction work” is a broad term and covers most work carried out to temporary or permanent structures. It can include anything from repair work or building an extension to a new bridge. However, there are certain types of service that don’t fall within the scope, e.g. the CIS doesn’t apply to the hire out of scaffolding, but it does apply to the erection of the same scaffolding.
Depending on the nature of your business you can be both a Contractor and a Subcontractor at the same time. For example, if you won a construction contract from a developer you’d be a Subcontractor. If you then employed a piling Subcontractor, you’d also be a Contractor!
Contractors have to register with HMRC and we strongly recommend that Subcontractors do so as well to avoid deductions being made from their payments at a higher rate.
Your Responsibilities as a Contractor
As a Contractor, before you pay a Subcontractor, you have to verify with HMRC whether they’re registered for CIS. HMRC will give you a verification number for that particular Subcontractor, which is valid for the current and two following tax years.
HMRC will also confirm the correct rate of deduction. They may instruct:
- A gross payment (no deductions need to be made),
- Deductions to be made at the standard rate (currently 20%),
- Deductions to be made at the higher rate (currently 30%) – this rate will generally apply if a Subcontractor has NOT registered with HMRC.
Contractors have to give each Subcontractor a written statement of the deductions made by the 19th of each month for the tax period ending on the 5th of that month, e.g. by 19th April for the tax period from 6th March to 5th April. They must also make a monthly return to HMRC by the same deadline stating whether they have paid any Subcontractors and detailing the deductions made.
Contractors are responsible for paying any deductions due to HMRC whether or not they’ve made them. This means that if you don’t make a required deduction from a subcontractor’s payment, for whatever reason, you still have to pay HMRC that amount! You can also end up paying penalties if you don’t pay the amounts due on time and in full.
CIS as a Subcontractor
If you’re a Subcontractor, it’s always worth applying to be paid Gross as it means the money is in your bank account rather than HMRC’s for longer! The conditions for this are:
- you’ve paid your tax and National Insurance on time in the past
- your business does construction work (or provides labour for it) in the UK
- your business is run through a bank account
HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:
- £30,000 if you’re a sole trader
- £30,000 for each partner in a partnership, or at least £200,000 for the whole partnership
- £30,000 for each director of a company, or at least £200,000 for the whole company
As a Subcontractor, you can offset any deductions made under CIS against amounts payable monthly or quarterly for PAYE, national insurance contributions and student loan repayments from your employees. You can also offset deductions against payments made to your own Subcontractors.
The CIS is explained in full in the HMRC guide CIS 340 available at https://www.gov.uk/government/publications/construction-industry-scheme-cis-340.
If you believe that you fall within the scope of the CIS as Contractor, Subcontractor or both or would just like more information, we’d love to hear from you!