How Does CIS Work?

The Construction Industry Scheme (CIS) is a framework established by HM Revenue & Customs (HMRC) to regulate tax payments within the UK construction sector. The primary aim of the CIS is to minimise tax evasion and ensure that subcontractors in the construction industry pay the correct amount of tax.

Purpose of the Construction Industry Scheme

The CIS was introduced to:

• Improve tax compliance within the construction industry.

• Simplify the process of tax deduction at source.

• Ensure that taxes are collected more efficiently from subcontractors.

• Reduce the risk of tax evasion by subcontractors who are often self-employed and might otherwise under-report their income.

How the Construction Industry Scheme Works

The CIS applies to payments made by contractors to subcontractors for construction work. Under the scheme, contractors must deduct money from a subcontractor’s payments and pass it on to HMRC. These deductions serve as advance payments towards the subcontractor’s tax and National Insurance contributions.

Key Participants in the CIS

1. Contractors: Businesses or organisations that pay subcontractors for construction work. This includes mainstream contractors and even non-construction businesses that spend an average of over £1 million a year on construction over a three-year period.

2. Subcontractors: Individuals or companies that carry out construction work for contractors. Subcontractors can be sole traders, partnerships, or companies.

Contractor Responsibilities

Contractors have several responsibilities under the CIS to ensure compliance with HMRC regulations:

1. Registration: Contractors must register for the CIS with HMRC before they hire their first subcontractor.

2. Verification of Subcontractors: Before making any payments to subcontractors, contractors must verify them with HMRC to determine if deductions should be made and at what rate. Verification is typically done online.

3. Making Deductions: Contractors are required to deduct a specified amount from the subcontractor’s payments and pass this deduction on to HMRC. The deduction rates are:

   • 20% for registered subcontractors

   • 30% for unregistered subcontractors

4. Monthly Returns: Contractors must file monthly CIS returns with HMRC. These returns should detail all payments made to subcontractors and the deductions taken.

5. Payment Statements: Contractors need to provide subcontractors with a payment and deduction statement each month. This statement should detail the gross amount paid, the cost of materials (if any), and the amount deducted.

6. Record Keeping: Contractors must keep detailed records of all CIS transactions, including verifications, payments, and deductions. These records should be retained for at least three years.

Subcontractor Expectations

Subcontractors should be aware of the following under the CIS:

1. Registration: While subcontractors are not required to register for CIS, doing so typically results in a lower deduction rate (20% instead of 30%).

2. Deductions: Subcontractors will have a portion of their payments deducted by the contractor and sent to HMRC. These deductions are considered advance payments towards their annual tax and National Insurance contributions.

3. Payment Statements: Subcontractors should receive a monthly payment and deduction statement from the contractor, detailing the amounts involved.

4. Tax Returns: Subcontractors must include the details of CIS deductions when filing their annual self-assessment tax return. Any overpayments of tax can be claimed back from HMRC.

CIS Deadlines

Monthly Returns: Contractors must file their monthly CIS returns by the 19th of each month following the end of the tax month. For example, the return for payments made in June must be submitted by July 19th.

Payments to HMRC: The deducted amounts must be paid to HMRC by the 22nd of the month if paying electronically, or by the 19th if paying by post, following the end of the tax month.

Penalties for Non-Compliance

Failure to comply with CIS regulations can result in significant penalties:

• Late Returns: A penalty of £100 for late submission of the monthly return, increasing if the return is more than two months late.

• Incorrect Returns: Penalties for incorrect or false information on returns.

• Failure to Verify Subcontractors: Penalties for failing to verify subcontractors with HMRC, leading to incorrect deductions.

Benefits of the Construction Industry Scheme

1. Enhanced Compliance: The CIS helps ensure that subcontractors pay the correct amount of tax, improving overall tax compliance within the construction industry.

2. Reduced Tax Evasion: By requiring contractors to deduct tax at source, the CIS reduces the risk of tax evasion by subcontractors.

3. Simplified Administration: The scheme standardises the deduction process, making tax administration simpler for contractors and subcontractors alike.

Conclusion

The Construction Industry Scheme is a vital regulatory framework designed to ensure tax compliance within the UK construction sector. While it introduces several responsibilities for contractors, such as verifying subcontractors and filing monthly returns, the benefits of enhanced compliance and reduced tax evasion are significant. Subcontractors, on the other hand, must understand their obligations and the deductions made to ensure smooth operations and proper tax reporting. For both parties, understanding and adhering to CIS regulations is essential to avoid penalties and ensure compliance with HMRC requirements.