The Construction Industry Scheme – or CIS – has existed in various forms since the 1970s; but it still trips up plenty of professionals and property developers in the industry each year.
What is CIS, and how does it affect your tax liability as a contractor or subcontractor? Read on for a brief guide to the system.
What is CIS?
The Construction Industry Scheme is a HMRC system designed to tackle tax fraud within the construction industry and help construction workers pay the correct amount of tax.
Under the scheme, contractors are responsible for deducting tax from payments made to subcontractors.
The contractor then sends the withheld tax money straight to HMRC, where it contributes towards the subcontractor’s tax and national insurance contributions.
This is similar to the Pay As You Earn (PAYE) system for employees, but it’s specifically designed for the relationship between contractors and subcontractors; where the latter are not employees on the payroll of the former.
At the end of the year, the subcontractor completes a self assessment and includes their total CIS deductions for the year. HMRC then works out how much the subcontractor still owes in taxes (if anything) or sends them a refund if the deductions cover more than the total tax owed.
What types of construction works are affected by CIS?
Most types of construction work require CIS registration, but there are a few exceptions; including (but not limited to):
- Architectural planning work
- Manufacture and delivery of materials and components
- Running of non-construction facilities at construction sites; such as accommodation, catering or on-site traffic control
- Installing data cabling within pre-existing building ducting
- Scaffolding hire (minus any labour)
- Installing fire safety and security systems (minus any site preparation work, such as setting up concrete posts for CCTV cameras)
- Assembling temporary exhibition displays
- Drilling/extracting oil
- Fitting carpets and flooring materials
Who counts as a contractor under CIS?
If you pay subcontractors for construction work, you’ll need to register with CIS as a contractor.
You’ll also need to register if your business has spent more than £3mil on construction in the last 12 months, even if your company isn’t otherwise related to the construction industry.
In both cases, the same rules apply if your business is based outside the UK but involved in construction work within the UK.
Your business may be operating as both a contractor and a subcontractor. In this case, you’ll need to follow CIS contractor procedures when working as a contractor, and follow CIS subcontractor procedures when working as a subcontractor.
(Homeowners who hire builders for decorations, extension construction or other amendments to their own properties are not considered contractors under CIS; although contractors who hire subcontractors for domestic decoration/extension work will likely be subject to CIS rules.)
Who counts as a subcontractor under CIS?
Simply put, if you provide any work for a contractor, HMRC considers you to be a subcontractor. Don’t forget, if you work as both a contractor and subcontractor, you’ll need to follow the procedures for each.
Subcontractors do not have to register with CIS, but their payments are still subject to deductions under CIS either way; and as covered in the section below, there are advantages to registering for subcontractors…
How much tax should be withheld from subcontractor payments?
It depends on whether the subcontractor has registered with CIS:
- If they have registered, then the contractor must deduct 20% from their payments.
- If they haven’t, the contractor must deduct 30%.
Under CIS, subcontractors can bill contractors for the cost of materials, but the contractor must not deduct anything from this cost. Only the labour costs of the subcontractor are liable for CIS deductions.
Subcontractors who have registered with CIS can also apply for gross payment status, which HMRC grants to select subcontractors who meet their criteria. Payments made to subcontractors with gross payment status should be paid in full with no tax deductions.
In other words, if HMRC trusts a subcontractor to take care of their taxes themselves via self-assessment, they may allow them to receive their payments from contractors in full with no tax deductions at source.
It’s also important to note that achieving gross payment status can help subcontractors build their reputation within the industry; since if HMRC trusts them, you probably can too.
It’s the subcontractor’s responsibility to provide the contractor with all the necessary info for them to verify their CIS registration status.
I’ve recently discovered that I should have registered for CIS a while ago. What should I do?
You’re not alone. Many businesses – especially those who aren’t in the construction trade, but still meet the CIS threshold of over £3mil spent on construction in the past 12 months – realise too late that they should have followed CIS procedures.
We’d recommend registering as soon as possible. You might be issued a financial penalty for late registration, but you may be able to reduce the penalty or have it waived completely if you can convince HMRC it was an honest mistake.
In any case, if you purposefully delay in registering for CIS when you should, the fines for intentional failure to register can be much higher; and far more difficult to wiggle out of.
I’m a subcontractor and I don’t think my contractor is following correct CIS procedures. What should I do?
It’s ultimately the contractor’s responsibility to ensure they’re taking the correct deductions from their subcontractors and sending them to HMRC. Under CIS, they should also be supplying subcontractors with a ‘payment and deduction statement’ every time they pay them.
If your contractor isn’t sending a deduction statement with your payments, ask for them. If they still won’t provide statements, it’s best to contact HMRC and explain the situation.
Ensure that you’re sending invoices to your contractor, and keep records of all your invoices, bank statements, the deductions the contractor should be taking and any correspondence with the contractor which might be relevant.
When it’s time to fill in your self-assessment, complete it as normal with your deductions total included.
HMRC will be able to identify any discrepancies between your accounts and your contractors’ accounts and will likely investigate; if you have the paperwork to back up your side of the story, your tax should be processed as normal while your contractor may be hit with a fine for non-compliance.
What is the VAT reverse charge?
This change to CIS rules was introduced in 2021, but it’s still causing some confusion within the industry.
Previously, subcontractors usually charged VAT on their invoices and were then required to return the VAT amount to HMRC at the end of the tax year.
Now, subcontractors providing CIS-applicable labour or labour and materials must not include the cost of their VAT on their invoices to contractors. Instead, they must make a note of the VAT amount on the invoice, and the contractor is then responsible for sending the VAT straight to HMRC.
There’s also recent changes to off-payroll working rules which affect construction industry payments. We’ll be covering this in a later blog post, so keep checking back!
And if you need help with tax and accounting as a property developer or construction professional, GNS Associates can offer tailored financial and tax advisory services as part of a complete accounting package.
Arrange your free consultation today; call GNS Associates on 0208 090 2604 or email firstname.lastname@example.org today.