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The Construction Industry Scheme (CIS) is a government initiative that applies to construction contractors and subcontractors or businesses that are involved in the construction industry. This can include property developers, builders, tradesmen or agency supply workers and so on. It can also apply to businesses that spend over £1 million or more over a period of three years or more.
CIS is a tax deduction scheme which involves taking tax being deducted at source from payments relating to construction work. The payments are not taken from employees, but contractors deduct from their subcontractors and pass to HMRC. The deductions then count as advance payments towards the subcontractor’s tax and National Insurance.
In order to take advantage of the scheme, contractors and subcontractors must register.
Register for a contractor if either:• you pay subcontractors for construction work• your business doesn’t do construction work but you spend an average of more than £1 million a year on construction in any 3-year periodRegister as a subcontractor if you do construction work for a contractor.
If you are a construction worker employee, you are not eligible for CIS.
CIS applies when one party is a contractor and the other a subcontractor.
Contractors include builders and property developers and are businesses which are not in the construction industry but have spent an average of £1 million or more on construction operations over the past three accounting periods.
Subcontractors are the people receiving payments under a construction contract and is carrying out the construction operations, provide the staff or who subcontracts operations to another party.
If your business is based outside of the UK but you work as a construction contractor or subcontractor in the UK, the scheme still applies.
There are exceptions and you do not need to register for CIS if you perform certain jobs:• architecture and surveying• scaffolding hire (with no labour)• carpet fitting• making materials used in construction including plant and machinery• delivering materials• work on construction sites that’s clearly not construction, eg running a canteen or site facilities
How CIS payments workContractors must make a 20% deduction from the value of their invoices that they pay and give this to HMRC. At the end of the year, HMRC may ask for additional amounts when your actual tax year has been finalised. The deductions are held on account for your eventual tax and national insurance contributions liability.
A contractor must inform HMRC of every payment made to a subcontractor via a monthly return. Therefore, it is vital that you keep accurate records of all your payments and invoices. Even if no payments have been made, a return needs to be filed.
If a subcontractor does not register for CIS, the contractor is required to deduct tax at a rate of 30% from payments made to the subcontractor.
If a subcontractor decides to register to receive gross payments, the contractor will not make any deductions and the subcontractor is liable for tax payments through their annual tax return.
However, if tax is deducted, a subcontractor who is a sole trader or a partnership can treat this tax as income tax on profits. If the subcontractor is a company, the tax deducted can be treated as relevant liabilities which are amounts due to HMRC in regard to the company’s obligations as an employer, i.e. National Insurance Contributions or PAYE.
If you’d like further advice on CIS and how you as a contractor can benefit, feel free to get touch.