What is the Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) is a tax deduction scheme that applies to the construction industry in the UK. It was introduced by HM Revenue & Customs (HMRC) to reduce tax evasion and improve tax compliance within the construction sector. Under this scheme, contractors are required to deduct money from subcontractors' payments and pass it to HMRC. These deductions count as advance payments towards the subcontractors' tax and National Insurance contributions.

Overview of the Construction Industry Scheme

The CIS sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry. It covers most construction work carried out in the UK, including site preparation, alterations, dismantling, construction, repairs, decorating, and demolition.

Key Participants in CIS

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

2. Subcontractors: Businesses or individuals that carry out construction work for a contractor. This includes sole traders, partnerships, and companies.

The Workings of CIS

The CIS requires contractors to register with HMRC. Subcontractors can also register with HMRC, although they do not have to. However, registration usually results in fewer deductions from their payments.

Steps for Contractors

1. Register with HMRC: Contractors must register for CIS before they take on their first subcontractor.

2. Verify Subcontractors: Before making any payments, contractors need to verify each subcontractor with HMRC to determine whether deductions should be made and at what rate.

3. Make Deductions: Contractors must deduct the correct amount from the subcontractor’s payments and pass it to HMRC. The standard deduction rates are:

   • 20% for registered subcontractors

   • 30% for unregistered subcontractors

4. File Monthly Returns: Contractors must send monthly returns to HMRC detailing payments made to subcontractors, including any deductions.

5. Provide Payment Statements: Contractors need to give subcontractors a payment and deduction statement each month, detailing the gross amount paid, the cost of materials (if any), and the amount deducted.

Steps for Subcontractors

1. Register with HMRC: Subcontractors should register for CIS to benefit from a lower deduction rate.

2. Receive Payments: Payments from contractors will have the appropriate CIS deductions made.

3. Keep Records: Subcontractors must keep records of payments and deductions to claim back any overpaid tax or to cover their tax and National Insurance liabilities.

CIS Deductions and Payments

Deduction Rates

• Standard Rate: 20% for registered subcontractors.

• Higher Rate: 30% for unregistered subcontractors.

Calculation of Deductions

Deductions are made from the subcontractor’s gross payment (excluding VAT and the cost of materials). For example, if a registered subcontractor’s invoice is £1,000 (excluding VAT and materials), the contractor must deduct £200 (20%) and pay the subcontractor £800.

CIS and Employment Status

It’s crucial to determine whether the subcontractor is genuinely self-employed or an employee. The CIS only applies to payments made to self-employed workers. If HMRC considers a subcontractor an employee, the contractor may need to operate PAYE (Pay As You Earn) on their payments instead.

Monthly Returns

Contractors must file monthly CIS returns to HMRC. These returns should include details of all payments made to subcontractors and the deductions taken. The return must be submitted by the 19th of each month following the end of the tax month.

Penalties for Non-Compliance

HMRC imposes penalties for late or incorrect CIS returns, as well as for failing to register or verify subcontractors. Penalties range from £100 for a first offence to substantial amounts for repeated failures.

CIS and VAT

Contractors need to consider VAT when dealing with CIS. Deductions should be made on the amount excluding VAT. Both contractors and subcontractors must be aware of their VAT obligations under the CIS.

Benefits of the Construction Industry Scheme

• Improved Tax Compliance: CIS helps ensure that subcontractors pay the correct amount of tax.

• Reduced Tax Evasion: The scheme makes it harder for subcontractors to evade taxes.

• Simplified Administration: By standardising the deduction process, CIS simplifies tax administration for contractors.

Challenges of the Construction Industry Scheme

• Administrative Burden: The requirement to verify subcontractors, make deductions, and file monthly returns can be time-consuming.

• Cash Flow Issues: Subcontractors might face cash flow problems due to deductions being made from their payments.

• Complexity: Navigating the CIS can be complex, especially for smaller contractors and subcontractors.

How Contractors Can Apply for the Construction Industry Scheme

1. Register Online: Contractors can register for CIS online through the HMRC website.

2. Verification: Use HMRC’s online service to verify subcontractors before making payments.

How Subcontractors Can Apply for the Construction Industry Scheme

1. Register Online: Subcontractors can register for CIS online or by calling HMRC.

2. National Insurance: Ensure you have your National Insurance number and business details ready when registering.

Conclusion

The Construction Industry Scheme is a crucial framework designed to improve tax compliance within the UK construction sector. While it introduces several administrative responsibilities for contractors and subcontractors, the benefits of enhanced compliance and reduced tax evasion are significant. Both parties must understand their roles and responsibilities under the CIS to ensure smooth operations and avoid penalties. For more detailed information and specific guidance, contractors and subcontractors should consult the HMRC website or seek professional advice.